This week over in MoneyWeek I’ve an article enthusing about PSD2 and the rise of Open Banking. I won’t steal the thunder of that piece but in general I think it is a real game changer with the potential to save us all a lot of money – and improve the banking experience.
In that MW article I suggest that in practical terms the real impact will be felt in the following areas:
In the box below I’ve also extracted a key summary of the impending changes from PaymentsUK – it’s as good a one as I’ve seen anywhere and neatly sums up why allowing third parties access to our data is so crucial.
What is PSD2?
The industry body PaymentsUK has an excellent summary of what PSD2 means online at https://www.paymentsuk.org.uk/sites/default/files/PSD2%20report%20June%202016.pdf
The key passage for me, is as follows:
“ PSD2 is expected to lead to a major change in terms of the accessibility of customer data to authorised third parties when the customer has given their explicit consent. Customers will be able to use payment initiation services and account information services where their payment accounts are accessible online, making internet and mobile payments easier and helping customers to manage their accounts and make better comparisons of deals. In addition, Payments UK anticipates that these changes will result in the development of products and services that allow customers to optimise the use of their account and transaction data. The value-added services which could result could easily go beyond payment and financial services and e-commerce. PSD2 could help open up new markets and encourage new market entrants, some of whom will offer services that will assist people who are currently financially excluded. There are a whole host of opportunities that it may not be possible to fully anticipate which could hugely benefit customers.”
In this blog I want to explore the changes in a little more detail – and raise some important questions.
The first is perhaps the most important – it's voluntary. And of course, it needs to be because it is using our sensitive private information. But this raises a huge problem. If we assume that these changes are in part about making banking and payments generally more efficient and cost effective – and opening up choice – then we need to somehow find a way to universalise the likely impacts. More specifically I’m referring to what I call the Energy Market Problem. Put simply this is the proven fact that although consumers can shop around online (and by phone) for new energy suppliers, many don’t bother, thus defeating the whole purpose of the regulatory exercise. Lurking behind this is a well-known market failure which is that regulators assume rational AND informed customers in their models. But customers aren’t entirely rational and many are certainly not informed. In particular most of the easy switching goes on online where many older clients – as well as poorer clients – don’t transact greatly.
PSD2 will be eagerly adopted by young and wealthier clients but I can safely predict that many older and poorer clients won’t touch it with a bargepole. The idea of sharing their private information probably fills them with utter horror. If that does happen, we could see the benefits of this technological and regulatory change massively diminished and restricted to specific socio-economic groups, thus increasing inequalities.
Which raises issue number two – that data is valuable. Many cynical clients might also refuse to sign up to these services because they’ll correctly suss out that their private data is valuable. Why should I allow my financial service provider to capture all the benefit of providing them with this information? I can imagine new digital services offering clients the chance to make money out of their digital data vault – marketing it to the highest bidder.
Next up is the issue of which bits of information get shared and for what purpose.
If I can grossly over simplify we’ll probably see two core functions emerge.
The first is what I call SELL IN SERVICES. We can already see this with Revolut‘s embrace of borrowing through Lending Works (plus it's recent offer to invest in bricks and mortar via Bricklane).
The second set of services clusters around BUDGET, PLANNING and VISUALISATION services i.e tools that help better sense of the existing data.
If it’s all just about sell in services and some nice visualisations I can predict that when it comes to PSD2 we’ll look back in a few years and mutter “so what”. Trying to sell in secondary services to bank account customers is a long established practice – think of all those useless PPI products that ended up costing tens of billions in compensation. It is no blinding revolution to suggest that you can sell in another service to someone with money – all that the technology does is to better target the offer.
Equally financial aggregation services such as Money Dashboard have been around for ages. They’re excellent but they haven’t exactly revolutionised banking as we know it. I wish they would but by and large most people have better things to do with their time than stare at a chart and say “gosh I’ve spent too much on Uber”.
The real driver of change will be what I call the nudge strategy. This involves marrying both of the elements above into real insights which then result in practical solutions. What do I mean by this?
Data is always great but we need to analyse it in order to reveal insights. These insights tell us about existing behaviour. Those insights then need to be gathered, analysed and solutions offered.
An example might be to look at how much a customer spends on electricity and gas. The PSD2 apps might crunch through the data on spend, with the client’s personal profile as context. A solution might be suggested and a price comparison service offered.
Another version of this more active nudge aproach – solutions based – might be to send a client an email saying that “given that you are 57, only having £300 in pensions savings is a REAL problem” – and here’s a link to a range of low-cost pension providers, all of whom are currently running a special offer for people like ‘you’. My hunch is that most 57 year olds with £300 won’t actively look at a financial planning visualisation tool which reminds them they’ve been a complete no hoper. They’ll need active intervention and a nudge.
This talk of solutions brings me to the last point – whether the suggested outcomes are whole of market or simply based on sweetheart deals with the financial services platform. We all know of course that it’ll likely be the latter but this raises an important regulatory issue – surely any suggested solutions architecture based on data insights should be whole of market. In effect shouldn’t all third-party aggregation services for instance be offering solutions that are whole of market – in effect full market price comparison websites with no search favouritism based on back handers?