With Europe’s Second Payment Services Directive (PSD2) and the UK’s Open Banking initiative now in place, banks have the basic wherewithal to meet regulators’ demands. But that’s just the beginning of the journey. Now, banks need to identify the business models that will deliver the products, services and experience their customers demand.
“The purpose of PSD2 was to increase competition, introduce consumer choice and improve security after the financial crisis, breaking the monopoly of the ‘too big to fail’ banks to avoid the risk of having to bail them out again,” says Richard Peers, EMEA banking industry director at Microsoft. “The UK in particular picked up on that and extended those factors of competition, choice, security and transparency beyond the regulatory context, to create additional rules applying to its top nine banks.”
Putting the required measures in place created a headache for many traditional banks, whose data was locked away in legacy on-premise applications. “Basically, the traditional banks had locked their data away behind the castle walls, but now they were being asked to share that information with a third party outside,” says Peers. “While that initially seemed like a simple request, banks quickly realised that a broad spectrum of things needed to be done to deliver it. They needed a safe and secure way to open the drawbridge, access the information and allow it to be used by somebody else. That meant looking beyond the gateway, providing signposting and portals, security checks, consents and permissions to ensure that third parties could only access the data they were allowed. It also meant having a scalable system that could handle authentication and deliver the appropriate information to millions of people accessing the system.”
Many banks leveraged the cloud through Microsoft Azure API Management to address these challenges while gaining powerful analytics to generate insights into the data and its usage. “We worked with Accenture Avanade to create a sandbox, which enabled banks to try out the system without having to expose their data,” says Peers. “We’ve also leveraged our strength in security and identity to enable banks to implement Secure Customer Authentication and the European Banking Authority’s Regulatory Technical Standard, putting them ahead of the game.”
With the basics in place, the big question for banks today is, what’s next? “Now that they have the architecture in place to comply with the rules, banks are looking at the other side of the coin,” says Peers. “The regulations effectively put a moat around the bank’s stronghold, taking away many of the business models that have helped it to build profits and customers. With old business models gone, banks need to look at how they can make money in the future, and who they should engage with to do it.”
Competition is also coming from new quarters as the likes of Google, Amazon, Facebook and Apple (GAFAs) present a serious challenge to banks. “GAFAs engage with users daily, whether it’s for e-commerce or social media,” says Peers. “All those users are sharing data about their life that enables the organisation to pick up on their behaviour and serve up relevant adverts or create intuitive, personalised deals. As that engagement builds, the organisation can build a ‘thin credit file’ that gives them insight into whether the user is a good credit risk. While a bank only has information provided on formal written applications to go on, GAFAs can gain a more personalised insight into users’ financial behaviour. That also goes for businesses that sell through these organisations – for example, if an Amazon seller is struggling to meet a spike in demand, Amazon could step in and offer a business loan based on its insight into the seller’s behaviour, demand for the product and so on.”
As GAFAs enter payments, credit and other markets with sophisticated apps, they are gradually picking away at the business banks have relied on. A bank that has built a strong castle to house its data and services simply doesn’t have the flexibility to create new services that can compete with that. But open banking brings another opportunity for banks to respond: the marketplace.
“Marketplaces offer a competitive response to the GAFAs,” says Peers. “To extend the castle metaphor, the bank creates a marketplace outside the castle walls but under its banner of protection. In that marketplace, customers have a choice of new, interesting and nimble products and services offered by third parties, secure in the knowledge that the bank has approved those providers and is protecting sensitive information.”
Crucially, the marketplace enables the bank to play to its strengths while putting forward a brand proposition that gives customers exciting new experiences. By engaging with trusted third parties such as fintechs and putting a seal of approval on their offerings, banks can transform a perceived disadvantage – rigid castle walls – into that all-important ingredient of competitive advantage: trust.
After that, the possibilities are endless. “The marketplace prompts banks to think about how they can move beyond loans and deposits and start to offer an entirely different set of services by partnering with third parties,” says Peers. “For example, a bank might team up with an estate agency app such as Zoopla. When someone uses the app to look at schools, travel links and so on local to a house they’re interested in, with their permission their data could also be exchanged with the bank. So while the user is looking at the house, the bank can let them know in real time whether they can afford it, or offer them a personalised mortgage deal.
“This means that the bank’s integration with its customers’ major life moments becomes much more immediate, personalised and simple,” says Peers. “While that integration might at first focus on traditional banking activities such as mortgages and loans, it holds countless possibilities. For example, an IoT service provider that provides scanners and locks to monitor the security of the house might link the insurance capability of the bank, which then gives the homeowner better rates.”
Harnessing the elastic capacity of the cloud is essential to providing these modern, secure, agile and integrated experiences. “The marketplace creates countless new business models for banks,” says Peers. “However, a lot of the innovation that needs to be done – building new marketplaces, better customer experience, real-time data analysis and so on – really only works in the cloud. That’s where Microsoft and its partners come into play, providing a secure way to bridge the moat between the castle and the new, agile, born-in-the-cloud market outside.”