Nancy Langer, President and Chief Operating Officer,Zafin
It is widely agreed that the introduction of the revised Payment Services Directive (PSD2) will substantially increase the competition from digital alternatives in the financial services space, as banks will no longer be able to rely on their vast customer data as their key competition point.
Banks will soon be obliged to allow third-parties, such as tech enterprises and FinTech companies, to access their customers’ accounts through open Application Program Interfaces (APIs). As such, they will have to get smart at using this data to their own advantage, or risk being overtaken.
Analysing data is not a new concept for banks. They’ve had to collect and manage customer data long before Big Data was a known term. Banks use a host of data to support with both customer insights and compliance – such as information on transactions, loans, branch visits, call logs, e-mails, and credit card histories. The common link here is that these are all examples of structured data, however the best insights are often a little more disordered. Unstructured information, such as call centre recordings and customer care web chats can provide deep customer insights, but this is often ignored by banks, as it is more challenging to record and analyse.
Even more opportunities are uncovered when this valuable information is combined with unstructured information from external sources, such as the information coming from social media, the smart grid, demographic statistics or even weather reports. Banks are used to neatly recording and analysing their own internal datasets,but they are often daunted at the prospect of this potentially infinite external data, which requires real-time analysis.
Prioritise pricing alongside product
Data insights provide valuable customisation opportunities, which are a key pillar in the quest to keep clients happy. By understanding customers, banks move away from the risk of becoming a ‘faceless service provider’to start bringing genuine value to both sides of the relationship: happy customers spend more with their top bank, show loyalty and can even become advocates to attract more customers.
If banks are to provide a service that truly matches the experience their customers expect, then the pricing of products needs to be prioritised alongside the product itself. Smart use of data should play a major role here, but a lot of this information is currently trapped or lost in complex core banking technology.
Banks need to lift all the product and pricing information out of the bank’s core into a product and pricing middleware platform. The next stage is to consolidate it, and then apply smart analytics to accurately price, target, and deliver one-to-one personal product and pricing to end users, in order to optimise revenue.
Deep data analysis will also enable banks to expand beyond their traditional business models. We can expect to see the smartest banks offering solutions such as budgeting tools and peer behaviour benchmarks, which will enable customers to gain insight into their own spending behaviours in relation to a broader community. In addition to the brand equity this would build, this would also open up valuable cross-selling opportunities for banks.
PSD2: The opportunity
While PSD2 may appear to some as a burden for traditional banks, the revised legislation also presents a fantastic opportunity for banks to gather more data than ever before.
The fact that banks hold the majority of customer accounts gives them a distinct advantage over third party payment service providers (TPPs), when it comes to servicing customers. This will provide banks with direct access to the increased data, set to come from innovative payment technology providers to the accounts, meaning they can become the hub of all customer information. What’s more, they can do this without tackling the long and trying customer acquisition battle that third parties face. The success with which banks capitalise on this advantage and create the new services that will define the post-PSD2 ecosystem,will depend on their ability to collect and analyse this payments data.
How can banks benefit from payments made through third parties?
Under current legislation, if a traditional bank customer uses, for example, a credit card with another financial institution, the bank doesn’t see those transactions, despite being the primary account holder. This means banks can only run purchasing behaviour analysis and customer engagement analysis using the data they have. PSD2 will likely mean more and more transactions go directly through the bank account rather than the card providers.This could give banks even stronger insight and greater accuracy and understanding into their customers’ behavioural activity profile – putting them in a powerful position to pre-empt customer behaviour and predict their servicing needs in the future.
That said, simply gathering the data is not enough. Banks will need to uncover data-driven insights, as third parties will also have the right to claim access to this data from the banks so the payments data that goes to the account holder isn’t the bank’s alone – unless that bank can also become the customer’s Account Information Service Provider. These new providers, which are set to come into play with the introduction of PSD2, will allow customers to view all of their multi-bank details in one portal.
AISPs will be the clear winner from a data aggregation perspective when PSD2 is launched. If banks want to own all the data at the end of the day, they need to establish themselves at the centre of the data flows by “being an AISP” in addition to all the other roles they will play in the ecosystem. They’ll no doubt continue with their normal functions, such as providing customer accounts and processing payments, but if they’re an AISP, they can build personal finance apps that have all the client’s financial information in one place. This will enable them to assess client needs across their entire financial footprint and make offers based on insight, rather than guess-work.
An AISP will have full sight of every line of credit for a customer, their savings or their accounts, regardless of how many different providers are used. As such, they’ll know better than anyone what products best suit the individual customer. By employing smart revenue management technology that enables dynamic relationship pricing, configurable billing and loyalty management, banks can determine what prices the client should pay for each of their products. They can also see what products across the spectrum the client should be offered, as well as seeing where customers might already access these products from competing banks. Finally, banks can make an informed offer to entice the client to use their product.
Of course, it remains to be seen exactly how the AISP role will play out and privacy regulation will also be a consideration. If banks want to lead in this new era of banking, they’ll need to embrace the AISP role and the additional data protection compliance that comes with it.
Preparing for PSD2 – what actionable steps can banks take today?
Stop managing data in silos Banks will need to prepare automated systems that examine and derive actionable insights from the new rush of payments data. Siloed systems that feed aggregated data into other siloed systems will have to be re-thought, so that data from multiple sources can be used to uncover new cross-selling opportunities at the individual customer level.
Give customers a next generation technology experience Customers are going to compare user experience provided by banks, not only with FinTech providers, but with best-in-class digital experiences from service providers in other verticals. In order to acquire and retain the privileged position of customer account hub, banks must communicate that they are making good use of the payment behaviour information they are collecting. Banks must deliver excellent user experience design and provide thoughtful notifications to customers, based on their individual preferences.
Open up to collaboration Working hard to maintain a powerful position as the primary account information hub does not mean closing the door to third parties. Banks can’t ignore the growing popularity – or the regulatory shift – towards digital payments providers.Traditional financial institutions must be open to partnership with third party payments providers to ensure they aren’t outmanoeuvred by agile innovators when it comes to customer service.
PSD2 will come into play next year, whether banks are ready or not. The impact this has on banks is entirely dependent on how they behave in the next 12 months. Operating in a ‘business as usual’ fashion will not end well for banks. Data must be elevated from a “by product” of a transaction or client interaction, to a critical font of information to be analysed. The winners will be those that are hungry for more and more data, with a view to what can be achieved with this information. It’s time to dig deep, delving into this rich source of intelligence to extract valuable insights, which can inform everything from product to pricing, transforming the relationship with the end-customer.
“Original publication in Finance Digest Issue 1 https://www.financedigest.com/