Why challenger banks are third in line to benefit from PSD2

David Beach spoke to Genpact, who lead digital enterprise transformation for a number of Tier One banks in the UK and globally. We spoke to Alex Bray who is asst. vice president of consumer banking at Genpact and is heavily involved in Genpact’s digital transformation services for consumer banking. Originally published on bobsguide.

How are banks reacting to Open Banking?

I think the real challenge lies for the way it will be deployed and how banks react to the concept. We’re seeing very specific reactions from incumbent banks with established business models, whereas younger models are reacting quite differently. I think PSD2 offers tremendous opportunity to the end customer. It’s also worth mentioning that it also opens up the financial industry to new risks.

Which risks would those be?

There’s a number of risks for different people. From a customer’s perspective, the risk is that the easier transfer of financial data will lead to less reputable organisations preying on vulnerable customers to get access to their data and hitting them with products that are certainly not in their best interest.

From the bank’s perspective, there’s risk around who’s liable for transactions initiated by third parties as well as the risks around disintermediation. That last one is a very serious risk as we could see the creation of new aggregator relationship holders to simply access a bank services to their own UI. For instance, it wouldn’t be a giant leap for an organisation like MoneySavingExpert, with that existing customer base, to create a UI and leverage Open Banking; banks would have a very serious competitor on their hands.

There seems to be this assumption that disruption will come from a start-up, but there is no reason that an incumbent bank couldn’t drive disruption. If they do, I think they are best positioned as they hold all the cards in terms of data and customers.

Do you think that when a few start-ups have matured and grown a customer base that they’ll be in a position to challenge the status quo?

I agree with you in part. However, the question I would ask is do any of these start-ups in the UK have the business stamina to take it to the next level and genuinely challenge the banks? They would have to build an entirely new relationship and presence with customers – that’s no easy feat.

In any case, the majority of start-ups with game-changing technology have had to partner with banks, and I strongly believe they’ll be incorporated and bought out; that’s how many innovation firms have gone. I think a more real risk to the incumbent banks comes from those existing players who have a customer base, have access to their own data and now all they need to do is invest in the technology.

Should we be exclusively talking about existing players within the financial space? Would it be inconceivable for the likes of Facebook and Amazon to make forays into finance?

That’s a very good question. It reminds me of my very first project in banking. I was working in a specialist team tasked with investigating the enormous threat posed to banking by telcos. We were absolutely convinced that BT would disrupt the banking model. They had all the infrastructure and relationships – and yet the challenge never materialised.

Exactly the same conversation is being had around Google and Amazon but again, I’m yet to see strong evidence that these companies want to displace banks. I’m a little sceptical about how much the tech giants want to get into banking. PSD2 makes it easier, but they’ve had many opportunities before now and they haven’t taken them.

I think it will be an existing player that will make the most success of PSD2 and Open Banking. The question is, will the other banks be able to fend them off, and who will become the Kodak of banking?

We often compare banking to the proliferation of internet services. Back in the days of dial-up you’d often only have one service provider but now you can choose different rates from six or seven.

Absolutely, and getting new to franchise customers will be absolutely critical for banks. Consider the lending process – the banks are sitting on your information. If you tried to shop around for loans, you’d be quickly frustrated by having to input all your details for every new provider. Banks have capitalised on that inertia as it was much easier for the customer simply to stay put. Removing inertia will improve competition around loan offers which is great news for the customer.

Let’s play out PSD2. How long until Open Banking becomes mainstream?

I think it will be a lot easier for the mainstream to adopt than people think. That is mainly because I don’t believe customers really need to pay much attention to what they’re doing when it comes to Open Banking. I expect we will see forms which ask customers to – ‘click here to let us offer you more personalised offers’. That is much more likely to be given consent than ‘click here so we can analyse all your personal and financial data to recommend you other products’. You look at how far Facebook has chipped away at our personal details. Users happily give away access to their social graph – their details and friend lists – just to do a quiz.

What will the banking landscape look like in seven years’ time?

In seven years’ time, we’ll have the same big banks today. If we don’t it won’t be because of PSD2, it’ll be Brexit or something else.

I think we will have a few successfully scaled challenger brands who will have taken a minor share of the customer market, aided by PSD2. I don’t necessarily think those brands have launched yet.

I’m also sure that many challenger brands will be acquired by incumbents who see the value to their customer experience design and their technology – and they may be kept as subsidiaries. I think there’ll be more shopping around, particularly for loans, and that’s where the likes of MoneySupermarket will snap up the opportunity.

I’m sure start-up technology will disrupt the market, but ultimately the banks can win through by either buying or replicating them; that will be the UK market.

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