The big change driving payments transformation is the Payment Service Directive II (PSD2), a subset of the larger Open Banking agenda, opens the market for qualified third parties as entities that perform transactions on behalf of customers, both corporate and retail. Consequently, banks are looking to enhance and augment their offerings, not only to offset the loss of potential interest income in the current low interest environment, but also because PSD2 allows them to do so in ways never possible before.
Aggregation services
One way that leading banks are augmenting their offerings is with aggregation services. Santander UK is transforming its corporate banking solution by facilitating a real-time consolidated view of balances across all the accounts and banking relationships of a customer.
These real-time insights are especially valuable in the context of liquidity management, as they empower corporates to assess cash positions and liquidity risks, and make decisions instantly as opposed to analysing historical records at the end of a day using SWIFT.
What’s more, using Third Party Payment Service providers (TPPs), which have access to customer data and can execute payment instructions in real-time, allows a single bank to manage positions across the various bank accounts a customer holds.
Clearly then, banks without the ability to aggregate real-time liquidity views and enable data-driven payment decisions will be at a disadvantage, even if they are the primary institution a customer banks with.
Virtual Account Management Solution
Secondly, banks are combining aggregation with cash management solutions such as virtual account management, a self-service model which has proven especially beneficial for large corporates with multiple banking relationships in different countries.
Banks incapable of providing aggregation services are further pushed to the corner as they become increasingly commoditized. For instance, a corporate using a Virtual Account Management (VAM) Solution has a complete view of its funds across all its banking relationships. The corporate can manage funds across different bank accounts, make transfers, and change the balance in these accounts. The other banks have a view of customer transactions but no insights into the nature and context of these transactions. And in the absence of these insights, these banks can no longer serve the corporate effectively, while the bank that offers aggregated insights moves closer to the customer.
There are thus two distinct layers developing – manufacturing and distribution. In the above example, the manufacturers gradually lose the ability to assess customer needs while the distributor increasingly gains more and more insights about the manufacturer’s customer. Interestingly, this will create a race to the bottom for manufacturing banks, thanks to the tailwind of technologies such as cognitive automation.
This is how it will potentially play out: small and mid-size businesses, unlike their bigger corporate peers, do not have special customized deals with their banking partners and follow standard business account terms. So, in a dynamic account management construct, an intermediary aggregator with inbuilt AI and access to intelligence across multiple banks can judiciously choose the best fee structure for a corporate, and open or discontinue a banking relationship on the corporate’s behalf. A price war thus ensuing among manufacturers will eventually lead to consolidation of hundreds of small and medium-sized manufacturer banks into a select few. Distributor banks on the other hand, will form partnerships with manufacturer banks to offer the best products on their digital networks and platforms.
Towards an open, network-based model
Thirdly, PSD2 and Open Banking will drive the shift from the front-to-back closed banking model, where a bank manufactures and distributes its products on its own channels, towards a more open network-based model with specialist manufacturers, distributors and hybrid banks.
The market will potentially constitute a few large tier 1 banks that continue as typical front-to-back businesses, a fair share of manufacturer banks that specialize in a product line where they can offer the most competitive price point, and lastly, distributor banks that provide loans or deposits from other banks and also integrate third-party services from parallel industries such as insurance. An example of banks providing third-party services is in the area of workplace pensions. By partnering with distributor banks, insurance companies benefit from insights about financial goals and position of employees, and can thus refine workplace pension schemes to better serve employers looking to serve their employees.
Collaboration with fintech innovators
And finally, greater collaboration between banks and Open Banking centric fintech innovators is enabling an influx of new creative ways to serve customers. Large banks are partnering with these fintechs for specific use-cases to augment their offerings for greater value-add and also to gain access to other banks’ services. According to a survey by PWC, 63 % of bankers see fintechs as a way to expand their products and services.
A global movement
Banks are adopting open banking business methods for positive financial outcomes, and regulatory push is introducing a renewed emphasis on innovation and competition. While Europe may be perceived as the most proactive, with its formal announcements and schedule for adherence, Open Banking is a rather global trend. In the US, banks are entering into data sharing agreements with third parties, the Hong Kong Monetary Authority has published an Open API framework, the Monetary Authority of Singapore is encouraging the use of APIs to drive innovation, and in India, Unified Payment Interface (UPI), a government scheme to enable interoperability, is catapulting the country’s growth towards digital.
Open Banking is making banks sit up and take notice regardless of a formal regulatory announcement or schedule. While some are looking at the upside, some others are struggling to understand the change and the implications of failing to act now. Banks that do not build attractive propositions around the new capabilities presented by Open Banking will be the proverbial prey to the larger digital and agile predators that are closer to the customer, empowered with insights and hence better placed to serve the customer, while the former move away from the customer and are left with little choice but to compete on price point until they reach the threshold beyond which it’s no longer viable. The time to act is now.
About James Buckley
James has over 25 years experience in Banking Solutions, Operations and IT. He is also an active member of the Strategic Advisory Board at BIAN which he continues as part of his Finacle role. James is based in Canary Wharf, London and operates globally on all large accounts.
About Infosys Finacle
Finacle is the industry-leading digital banking solution suite from EdgeVerve Systems, a wholly owned product subsidiary of Infosys. Finacle helps traditional and emerging financial institutions drive truly digital transformation to achieve frictionless customer experiences, larger ecosystem play, insights–driven interactions and ubiquitous automation.
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