Artificial intelligence technology could help banks retain the important link with customers when open banking arrives in Europe early next year.
The more I hear from banks about fintech the more I think they don’t expect to face huge disruption from new companies or from others currently outside their sector, although they do acknowledge they have to up their game. Are there big development in progress in the background that nobody is talking about?
Disruption is slower in banking, compared the taxi sector with Uber, due to customer caution and banking complexity, but the Payment Services Directive II (PSD2) might inject a bit of adrenalin
Every bank is developing a digital offering to ensure they remain relevant. But with the EU’s PSD2 regulation coming into force in January we could see how differentiated their offerings really are.
PSD2 will enable third parties to access the customer data held by banks via application programming interfaces, if given permission, and offer services using this information. Payments could be initiated by third party supplier and account information viewed via them, or both.
This will mean a third-party can build services on top of an account and allow the consumer to use these rather than those offered by the bank. The core competencies of third party fintech firms is developing these services, and they are pretty good at it.
Banks would still hold the money but would not be the main banking interface. A consumer could have multiple accounts from various banks put together in a single mobile app for example.
I was at a fintech event this week, looking at PSD2, and heard from a couple of the high street financial services firms. They appeared excited about the opportunities brought by PSD2. They are probably a bit worried about the threats too, although they didn’t let on.
But you can’t help thinking that companies like Google and Amazon are much better at providing the services the digital generation demand, and while they probably don’t want to be banks, they will want to add access to financial services to their platforms
A couple of years ago I did a simple web search which showed the scale of customer bases of banks and their challengers. This was to get an idea of the amount of customer data held on the huge processing engines of the big internet companies, in comparison to banks.
To save time I will re-use the same figures as it gets my point across, although I imagine the first set of figures are bigger now. At the time in 2015 PayPal had 157 million active users, which was more than most banks, while Facebook had more than a billion users with a lot of sensitive data held. Amazon boasted more than 244 million users. I am sure these have increased significantly. In comparison, at the time Lloyds Bank had 30 million customers, HSBC had 52 million customers and Barclays has 48 million customers.
If the Amazon and Google’s of this world become the consumers’ access point to financial services banks could be cut out part of the value chain.
When I asked one bank executive at the event if some banks will inevitable fail he said “there are lots of car companies”. This was a claim that there is room for many banks. But as many as now, I am not sure.
The car industry analogy doesn’t really work anyway. In the banking sector in the UK the competition is only just beginning with the emergence of challenger banks. Many have been approved by regulators and are now looking for customers.
Meanwhile changing current account suppliers is easier than ever following the introduction of the government initiated current account switching service which reduced the time taken to switch accounts from 30 days to seven. One executive at a current account provider at the event didn’t seem worried by this due to slow take up so far. But the service is there and with the right marketing and other triggers take up rates could increase.
So I asked the panel ‘what will a bank need to do to be one of the winners’. The panel seemed to think that they could all be winners and that PSD2 would offer them the opportunity to get even closer to, not further away from, their customers.
But after the presentation I spoke to another financial services executive who said: “whoever uses artificial intelligence in the best way will win.”
Maybe the banks have been working away developing a PSD2 killer app or service?
If tech giants become the platforms to bring together financial services for consumers banks might just become highly secure vaults for customers’ money.