Analysts are making great claims for open banking under PSD2, but does it have the wow factor? Brian Caplen looks into the matter.

Banks are rightly concerned that open banking under the EU’s second Payment Services Directive (PSD2) could both lose them customers and create security problems for which they will no doubt get the blame. The recommended solution is what one bank describes as “regulatory plus”, meaning that banks should not simply comply with the new regulation but use it to offer new services through new payment channels. 

Embracing rather than ignoring open banking is obviously the best way forward but all the evidence is that the banks will most likely keep the market rather than lose it to competitors such as social media companies, online retailers, challenger banks, fintechs and aggregators. Banks can protect themselves by becoming the aggregators (of all of a customer’s accounts and data, as PSD2 now allows third parties to do) and they are in pole position to do this. 

There are several reasons why they are likely to succeed and why PSD2 will not create a banking disruptor in the same way that Netflix was to video shops or Expedia to traditional travel agents. These reasons are trust and security and, perhaps, the lack as yet of a ‘slam dunk’ customer proposition. 

A survey by Accenture showed that customers' first preference for who they want as both payment initiation service providers (PISPs) and account information service provider (AISPs) or aggregators – the two new entities created under PSD2 – is traditional banks for reasons of trust. 

As far as aggregation goes, the response from customers was mixed with many older customers – the ones likely to have more bank accounts and more complex finances – saying they would not trust anyone other than a bank to perform this service. The Accenture survey was conducted back in 2016 but it seems unlikely that sentiment has changed significantly. 

Then there is the security involved with the insistence on two-factor authentication making it doubly difficult for a new PISP to come up with something as slick as, say, Amazon 1-Click. For AISPs they can only call up customer data twice a day, thus limiting the prospects of aggregation in real time. 

Finally, we must think about the wow factor.  Some analysts have been promoting how PISPs can use open banking to cross-sell to customers and offer them discounts and loyalty points. But customers' interest in these add-ons is likely to be only secondary. When it comes to banking, trust and security are more important. 

With aggregation, it may be the commercial market that offers more opportunities. Company executives would like things simplified, they are constantly fund raising so are interested in targeted products and the data provided can help them grow the business. Similarly, large merchants will likely seize the chance to offer their own payment services as a way of reducing fees. But the mass of banking customers may prefer to stay put for reasons of trust and safety. Banks need to keep this in mind when deciding how to respond to PSD2. 

Brian Caplen is the editor of The BankerFollow him on Twitter @BrianCaplen

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