Payments Tech and Regulation Are Pressuring Banks to Get ‘Open’
Banks are facing pressure from three overlapping forces with ties to payments and retail innovation—customer, competitive and regulatory.
Customer pressure takes the form of changing expectations. Customers want—and expect—the same level of digital service and functionality from their bank as from Amazon. Customer pressure, in turn, drives competitive pressure. When other banks in the market adopt new digital functionality to meet customer demand, they leverage it as a key differentiator or area of competence, which creates competitive pressure to keep up.
Customer pressure also drives regulatory pressures, the most notable of which started in Europe with the introduction of PSD2 and GDPR. This galvanized the wider banking community into action. With consumers now controlling access to their data, banks must reconsider how they build and manage products and experiences for their customers.
Instead of approaching the customer experience as a single, continuous journey, the lagging banks still focus on lines of business—a siloed approach that, instead of enhancing the customer experience, disrupts it. Generally, they spend too much time focused on tools. Instead they should be looking to partner with fintech players that are already innovating in this space. By exploring these types of relationships, lagging banks can determine if it makes sense for them to borrow or buy (versus build) in order to accelerate their digital strategy.
The cultural shift that has facilitated the digital movement is further ahead in other parts of the world than in North America, so it’s expected to see a regional divide in the leaders and laggards. However, as the regulatory landscape in North America changes to align with Europe and other regions, the banking sector in North America will be disrupted in due course. Smart banks will learn from their international counterparts and adopt new technologies today to gain a competitive edge when the regulations catch up.
We’re seeing advances in open banking in different regions around the world, attributed in part to the growth of de novo (digital-only) banks and a lower cost to entry. In an open banking environment, de novo banks don’t need to invest heavily in obtaining data or building physical locations, which traditionally have represented huge hurdles to new banks entering the market.
Although this is a trend that is just starting to gain momentum in North America, in Europe, these new players have worked closely with regulators and governments, building sandbox and other innovation environments that allow them to certify themselves as viable alternatives or partners to existing banks. Traditional European banks are quickly following suit and actively working with fintechs to advance their digital banking strategies.
This collaborative model of fintech and payment innovation, banking and regulatory support has resulted in a new order for banking. One where the customer comes first and where their relationship with their bank is enriched, extending beyond transactional interactions, to helping people learn about their money and improve their financial well-being.