Open banking is a double-edged sword for setting up financial institutions (FIs). Banks are required underneath PSD2 to develop API portals that provide their customers’ facts to fascinated 0.33 parties, for this reason enabling such entities to construct and offer competing services and products.
Collaborating with FinTechs manner FIs can create innovative tools and purchaser-dealing with capabilities. However it also throws the mounted banking global into flux. The ways banks method those relationships and expand new merchandise is hastily converting as PSD2 solidifies its grip within the EU, in keeping with Markos Zachariadis, associate professor of control and information structures at Warwick Business School.
“The large query is how banks might be using technology like APIs to create ecosystems and profitable business models as a way to benefit them within a long time,” he explained. “They are [already] being challenged via a lot of the FinTechs and the bigger technology businesses.”
Zachariadis predicts banks can also need to undertake revenue fashions like the ones of generation businesses within the future, generating earnings via presenting get entry to and taking more benefit in their users’ records. In the latest interview with PYMNTS, he defined why FIs have to trade their operating processes to stay competitive with FinTechs.
Open Banking and the Customer Service Shift
PSD2 and open banking have brought about something of a paradigm shift for banks, dropping mild on a rising and vital trouble: The legacy FIs that have to percentage records cannot believe that consumers will get right of entry to bank products through their very own branded offerings.
“Banks sense threatened that they’re going to lose the customer experience layer, which may additionally gradually flow to the third parties,” Zachariadis referred to. “The third events will [then] have loads of the data that we keep [and give] to the stop customers. This can be essentially a huge shift in how a bank makes money if they’re to compete with newer corporations.”
Banks still currently get hold of the bulk of such facts, however, which places them in an excellent position to start experimenting with new sales models which are extra similar to the ones of technology agencies. These corporations will then make money by competing on data and person revel in preference to thru pricing and hobby fees, he delivered.
Institutions with the vital infra
Shape and license to maintain the coins and value being transmitted are nevertheless required, of the path, and Zachariadis believes that role will still likely be held by way of conventional banks — notwithstanding the possibilities open banking presents 1/3-celebration providers or FinTechs seeking to enlarge in the more monetary surroundings. Traditional FIs also is probably to continue to be responsible for legal responsibility as open banking expands its attain, he stated, an approach comparable currently used within the card business.
SCA and the Future of Banking
Open banking’s growth is also creating clean opportunities for cybercriminals to target FIs and they’re give up clients. That approach banks are nevertheless tasked with maintaining fraudsters out of the ecosystem.
“That’s one in every of the most important discussions right now in open banking — the safety and liability trouble,” Zachariadis said. “The regulation is currently geared [so] that the banks will pay for it [if a breach occurs with a third-party provider or FinTech]. The financial institution is a form of responsible even though the FinTech become the only who become hacked; then the financial institution will want to are seeking for payback.”
Modern banks nevertheless have the huge stability sheets, in the end, and are thus extra capable of taking that threat than their less-established opposite numbers.
“The question [here] is [always whether] the FinTech could have the stability sheet and the coins to pay everyone again,” he added, “and what sort of assurances can they provide to customers, i.E., Having insurance, and many others.”
This liability dialogue is continuing as banks, and FinTechs brace for strong customer authentication (SCA), which is ready to take impact in September 2019, even though postponing the deadline similarly is also a possibility. SCA will create new patron authentication rules aimed at preserving fraudsters at bay. However it additionally would possibly add friction to customers’ reviews.
“Some human beings have raised concerns approximately the purchaser experience [with SCA], that it is probably a bit too much to think that [they will be required to] authenticate [themselves] each time [they engage in a transaction],” Zachariadis explained. “I don’t understand if that’s going to be problematic within the destiny or now not. It’s an exchange-off [of more steps for more security] however, steps may be included higher in the future the use of newer technologies to make it more seamless.”
Whatever the result of SCA, banks will want to keep close tabs at the evolving open banking environment to ensure that their patron experience remains relevant. APIs are probable to emerge as significant components of future banking models, however, whether FIs will hold their traditional patron relationships or turn out to be easy API custodians remains to be seen.