PSD2 is upon us. As all banks know, the industry has around two years or so to comply with this directive, despite there being a lack of clarity around certain technical areas. Perhaps because of this lack of clarity, many banks have yet to embark on the API strategies that will allow them to fulfil their obligations under PSD2. To them, it is just another compliance project. This thinking is understandable, for as a standalone piece of regulation there is an awful lot to comply with.
Just another compliance project?
Yet it would be wrong to view this as just another EU directive to comply with, another SEPA or Mifid implementation. Building a new scalable API architecture, integrating it with legacy core banking systems, maintaining it and risk managing it to ensure there is no downtime for data hungry PSPs will be hugely complex. All the more so as few banks will have had the experience of managing APIs to date. But all this must be done and banks should not view complying with PSD2 requirements as the end game itself.
More forward thinking banks will treat this as the starting gun in the race to a new open banking ecosystem. For them, moving to an open banking API economy represents an opportunity to gain a strategic competitive advantage over those are just happy to conform to the directive. PSD2 is an opportunity for those banks at the digital vanguard to become TPPs, to offer their own tailor-made, high-margin financial services to their competitors’ customers. All this using customer account information that their competitors will be compelled to provide for free. Laggard banks will only be able to watch while their lunch is being eaten.
It’s the APIs stupid
These more forward thinking banks (be they incumbents or digital startups) have already started devising their open API strategies. Some have even created new open API divisions and hired some high profile executives. Despite the uncertainty that exists around some of the finer technical detail of PSD2, these banks are confident that they have a good feel for what ultimately will be required by the EBA. National open banking initiatives, such as the UK’s Open Banking Framework help give further clarity and direction in the absence of specific technical detail. All this means that there is no justifiable reason for any bank to delay starting these projects.
Juggling regulatory compliance and strategic ambition can be tricky however. By moving to an open banking model and adopting APIs, banks can become a platform for financial innovation, banking as a platform if you will. This will be the PSD2 route to new revenue streams via innovative financial products and premium APIs. If done correctly, this can be the payoff for the up front cost of implementing PSD2, an opportunity that can be difficult to appreciate at the outset of what will be a large compliance project.
Start thinking like fintechs
However, to take advantage of these new business models banks will require a sea change in how technical and product innovation is performed. To innovate at the speed of a nimble startup, banks need to mimic their product development practices. They need to replace waterfall with agile, their business analysts with product managers, build MVPs in order to learn by failing fast, and to embrace disciplines like product marketing. In short, they need to think and act like fintech startups.
For some large organisations this is seen as impossible to achieve internally. The overhead of legacy banking systems and a risk averse corporate culture hinders any attempt to innovate either quickly or at low cost. Many see partnerships or acquisition as the way forward, and we have seen a number of examples of this of late, such as BBVAs recent acquisition of Holvi. Being API-lead allows such banks to work closely with startups to foster innovation – to partner with those who would disrupt them rather than be disrupted.
Bank as Lean Startup
Yet it can be possible for banks to develop internal innovation units that mimic the product development practices of the high-tech industry. Lean startup methods can be applied at a division or unit level if correctly insulated from the rest of the corporation, allowing these units to innovate like the fintechs. Some are already embarking on this journey.
Fostering this culture and setting up these innovation teams should not be fully dependent on on completing PSD2 API compliance projects. Yes, there will be some dependency, but the two need to be developed simultaneously. Getting both right will be critical for the survival of those banks participating in the new open-API economy, which in Europe will soon be all banks.
Those organisations who both embark on their API journeys today and aim to foster fintech product development methods will be those who profit most from the forthcoming changes contained in PSD2.