The revised payment service directive (PSD2) is an anticipated watershed for the banking industry. PSD2 compels incumbent banks to open up their data to third party service providers. The new regulation is profound because it shifts the locus of power away from institutions. With complete account portability, banks can no longer lock their customers in.
The premise of the shift in power is straight forward: the customers own their data not the institutions with which they bank. Although the traditional concept of owning the customer is defunct, competition for the customer relationship is ever greater. It’s here that FinTechs and their strong orientation towards offering winning customer experiences threaten bank’s siloed product centric legacies.
Although PSD2 amplifies the risk of disintermediation faced by banking incumbents, it also presents opportunities. After all, banks will have the same access as FinTechs to customer account information residing with their banking rivals.
One such opportunity exists for corporate banks, whose clients are typically multi-banked. Corporate banks have an opportunity to launch their own account aggregation platforms. Aside from offering a consolidated view across multiple bank accounts it is also possible to offer tools that help clients develop consolidated cash flow forecasts. The tools and analytics can enable corporate banks to pursue contextual cross-selling of term finance, consolidated account packages and other more bespoke products.
THE UNENVIABLE TASK OF BALANCING THE SCALES
Financial Regulators have a tough job trying to regulate FinTech. On the one hand they are obligated not to stifle the FinTech revolution’s innovation that promises immense benefits to customers. In the same vein they cannot protect the interests of incumbents by overregulating FinTech startups.
On the other hand regulators must uphold their mandate and protect consumers and the financial system from predatory lending, money laundering, funding of terrorists, and fraud. A scandal at the world’s largest lending marketplace, Lending Club, is a case in point. At the heart of the scandal, Lending Club was found to have tampered with loan applications to make them more attractive to investors. Lying to investors is a serious faux pas for a leader in a new form of finance trying to establish its credibility with institutional investors. Predictably, the fall-out since the scandal broke has hurt marketplace lenders.
On the surface it appears that with PSD2 regulators may have tipped the scales in favour of FinTechs. While this may be partly true, it’s also widely accepted that the honeymoon in the grey area of lax regulation that FinTechs have enjoyed so far cannot not last forever.
Many prominent banking executives have expressed their desire for more stringent regulation to be imposed on FinTechs. As John Williams, CEO of Federal Reserve Bank of San Francisco said, “If it walks like a duck and quacks like a duck, it should be regulated like a duck.”
There are bound to be more twists in the tale as financial regulators grapple with the unenviable task of trying to balance the scales.
by David Krawitz
