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The PSD2 mirror. Are you really customer focused?

20th Dec 2017

Ask anyone, in any business, and most will tell you that they are absolutely focussed on the customer. In recent years we’ve been coached that it is the secret to successful business. Of course, it seems to make sense. Give your customers what they want and they’ll keep coming back and word will spread. So far, so obvious. However, it becomes an awful lot harder when it forces you to question current, lucrative business models. 

 

PSD2 is forcing UK Banking to look in the mirror

The current UK banking market is a great example where putting the customer at the top of the priority list hasn’t been as straightforward as it sounds. Since the financial crisis, almost all large UK banks have had some kind of wording that puts customer-focus at the centre of their mission statements. Now PSD2 regulations are forcing banks to open up transactional data and payment capabilities. This regulation change has forced leaders to ask whether the customer truly has been at the heart of their strategy. Let’s not forget, the whole reason EU and UK regulators have put so much weight behind these changes is because they don’t think customers are getting a great deal. So if they’re right, how did the customer focussed banks not create open banking left to their own devices? 

 

The customer argument for PSD2

On one side of the debate are those that believe these regulation changes are a good thing. These people are the advocates of disruption. They think this is an overdue catalyst for change, in one of the few industries yet to be really disrupted in the last 20 years. One only has to look at Retail (Amazon, eBay), Travel (AirBnB, Uber), Media (Apple, Netflix) and Office Space (WeWork – from where I write this blog) to see evidence of the possibility of this. The heart of this argument is that customers are currently served relatively poorly by the current incumbents in banking. Customer-centric thinking has only ever been paid lip service in their cultures. Once the legacy and unfair advantage of owning the data and controlling the payment channels has been broken down, risk-averse cultures and organisations won’t be able to compete with nimbler, truly customer-oriented businesses. 

 

The customer argument against PSD2 

On the other side of the debate are those that believe these regulation changes are largely an irrelevance in a sector that has, is, and will continue to be dominated by a handful of large, historic organisations. Whilst a few people may take the risk of sharing data and payment details, the majority won’t. At the heart of this argument is the belief that what banking customers really want is security, and that nobody is more trusted than large, long-established organisations. Yes, they are risk-averse and can be slow to change, but ultimately controlling risk is what banking is all about. The banking crisis was a result of risk-taking going too far. When it comes to the crunch, people are well-served today with the service they receive from the big banks. The market is already competitive, and most people will never have the appetite to risk putting their finances outside a proven and trusted brand.

 

The stakes are high

If a major bank calls what they think their customers want wrong, they could lose billions. If some of the FinTechs counting on the a wholesale revolution are wrong then that’s hundreds of millions of sunk investment at risk.

 

My prediction 

My personal opinion is that the reality will lie between complete disruption and negligible impact. I think there’s a fundamental difference between the UK banking market and previously disrupted markets. Even the most sceptical banking leaders don’t seem totally convinced that disruption won’t happen. It has happened to too many other markets, and companies like PayPal, Stripe and Transferwise have already carved out big businesses in domains previously dominated by the banks. There doesn’t appear to be the same indignation towards the possibility of disruption that other disrupted markets all suffered from.

I think how banking works will change quite significantly (and for the better for customers), but it will be today’s established organisations who will still dominate the market. 

 

Digital only challengers will simply be smaller banks

I don’t expect many, if any, of the ‘digital only’ challenger banks to become a hugely significant force for change. Those that do succeed will be those that are happy to be part of more open business models, and who aren’t brand-obsessed. Many of the current ‘digital’ challengers seem primarily focussed on building their own customer bases to monetise them in future (admittedly through commercialised ‘open’ marketplaces in some scenarios). This seems remarkably similar to the current business model employed by the present incumbents. “Get people locked into a brand, and then monetise through fees, cross-sales and large cash balances”. The only striking difference is the brand positioning. Their business model doesn’t feel disruptive, and the fees, rates and profits don’t seem markedly different. For that reason, I can’t see them being more than a smaller scale version of the current players at best, rather than huge drivers of disruption. 

 

A rejigging of the established order

I think what will emerge is that some of the incumbents will show themselves to be more effective than others at embedding a customer-centric culture. Open banking will accelerate the rate of change in the market. Those organisations that are most successful in creating a customer-centric ethos will show themselves to be far more open-minded and able to experiment with new business models. They will be more prepared to work and partner with FinTechs in search of better ways to offer their customers financial services. They will be more prepared to try different approaches and discover those that work, rather than waiting for proven market trends before acting. As a result, they will be the ones in front as the pace of change picks up. This will lead to the creation of some new FinTech unicorns that support the new financial markets. 

 

Exciting times

Whichever way it does actually pan out, it has never been more exciting to be in banking to find out.

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