Throughout history, banking has remained a closed industry, monopolizing the majority of other financial services. Total digitalization has brought changes to the industry. FinTech gives users the right to choose an alternative. However, the PSD2 directive adopted in the European Union goes even further. It will disrupt the banking industry, completely changing the rules of the game through massive competition.
The Revised Payment Service Directive (PSD2) is a forced switch for all European banks to the Open Banking model. 2018 will be a turning point for banking as the EU countries are obliged to incorporate PSD2 into national law and force banks to publish their Application Programming Interfaces (APIs).
Open Banking gives equal position to services from banks and FinTechs
The main goal of PSD2 is to ensure maximum transparency and security, encouraging competition in the financial industry. As a result, the quality of financial services will improve, and fees will decrease. Consumers’ financial data will be released from the bank's monopoly and will finally become the property of the customers who will have open access to it at will.
A global, unified financial platform based on APIs will be formed, ensuring fair access to data that will disrupt existing bank advantages. This will most certainly result in a surge of activity from the FinTech startups. They will now have access to banking databases and financial infrastructures that were previously closed. They will be able to provide innovative solutions to existing bank customers, and modern financial products more relevant to the needs of the digital world will appear.
Open Banking will speed up the transition━from domestic financial services offered by bank branches, to digital financial services available anywhere in the world. This will give power to small FinTech teams (only 20 people) to successfully outcompete banks who employ thousands of employees. Having equal access to customers’ data and the possibility to process it, the main competition will be on a customer experience level. The digital interface design will become an important part of the new user experience.
Further development may impact data storing, from bank servers to decentralized storage distributed across many devices. Blockchain technology can do that. In this way, financial data security may be significantly improved in the future.
Open Banking brings financial freedom to customers
Open Banking will cause the rapid growth of financial services, taking the user experience to the next level. Many procedures will become simple and automated. With access to the banking APIs, FinTechs can provide users with opportunities to improve their financial lives. For banks and FinTech companies, this means only one thing. It is necessary to revise the existing user flow and redesign the actual service to eliminate friction, making it valuable for customers.
Currently, banks have an infrastructure and a customer base, but they are burdened by a product-centered thinking legacy. Most banking solutions are outdated, and interfaces are not intuitive. Unlike the banks, FinTech companies create modern, client-centered solutions, but they do not have enough resources to bring them to market and acquire customers. The API will provide third-party developers with access to banking systems and customer databases, thus allowing end users to manage bank accounts via third-party service interfaces that do not belong to their primary bank.
It is clear that the transition of the financial industry to the Open Banking model requires a complete rethink of the financial user experience. In reality, banking infrastructure and the ownership of customers’ data will no longer be a decisive factor. Key differentiation from the user perspective will associate with the convenience and clarity of the interface, providing a clear advantage to the user experience.
It means that, in the digital world of Open Banking, design will become a tool for creating successful financial services. The ability to access accounts, financial data, and payments using any third-party financial service will give users previously unimagined financial freedom.
Open Banking forces a focus on the financial user experience
It is difficult to estimate the significance of the legislative implementation of Open Banking in Europe. In fact, the potential results of this outstanding experiment are not fully understood, even by market experts. But one thing is certain━this will cause serious technological changes in the banking industry around the world.
As an expert in the field of financial UX design, I have been thinking about the possible impact on user experience. How will this impact user behavior? What perspectives and improvements will appear, and how can UX design help to create highly demanded services in this age of Open Banking?
1. Access to different accounts through a single service
In the framework of the new Open Banking architecture, the emergence of the Account Information Service Provider (AISP) is inevitable. AISP providers will act as aggregators of customer account data from various banks. This will give users the ability to access different bank accounts through the most convenient service.
Those who have accounts in several banks need to visit each online bank separately to check their balance and move money. Some FinTech services already offer the opportunity of working with different banks through a common interface using a “screen-scraping” connection, but this is unsafe and violates the client’s rights.
Open Banking allows the client to decide in which banks to keep their money and what service to use for managing their finances. This will significantly increase competition in the financial sector while, at the same time, improve the quality of services. Third-party operators will undoubtedly use this opportunity for cross-selling, but it will give users more choices and will help them to make informed decisions.
2. Easy, cheap and instant money movement
Other agents whose implementation is provided by the PSD2 directive are Payment Initiation Service Providers (PISP). They are players who can initiate payment transactions using the API connection at many banks.
This is a radical change in the payment-processing industry, opening the possibility of integrating instant and cheap payments into any digital interface. For users, this means transferring money will be as easy as sending a message.
Paying bills and paying for goods, as well as money transfers, have become much easier, faster, and more convenient due to Open Banking. At the same time, they will be much safer as the number of intermediaries in the transaction chain will be reduced.
3. Increasing financial safety
One of the key priorities of the PSD2 directive is to enhance user security. Providing FinTech developers with access to bank APIs will reduce the use of the screen-scraping practice. Users will no longer need to violate the contract with banks and compromise their finances as they will have the choice of using the innovative and convenient services offered by FinTech.
To access banking APIs, third-party banking services will have to obtain licenses from the financial regulator. As in the case of banks, their liability will be secured by guarantee deposits, and “know your customer” (KYC) will be enacted, thus ensuring the security of the digital financial environment.
In addition, users will be able to determine the volume and content of financial information that they are ready to share with third parties. This will require informing users about the rules of Open Banking service operations.
4. Simplified and friendly onboarding
The ability to instantly retrieve user data using an AISP provider will open up previously unavailable capabilities to financial services. When a user has to perform an enrollment procedure, he/she will no longer need to provide identification. It will be sufficient to share secure access to their primary financial account data, resulting in no further need for onboarding and no more long forms.
This will allow users to freely migrate from one service to another. Users will be able to onboard an unlimited number of services, import their financial data, and immediately try them in action. As a result, it will become easier to choose the one that provides the most convenient and enjoyable user experience.
From the FinTech point of view, this will make it easier to enter the banking market. In the world of Open Banking, the data about customers’ financial history and transactions will not be considered a barrier to switch between financial services. This information will be available regardless of the service provider.
5. Forecasting and personalization
Open Banking will allow third-party companies to use and process a huge array of accumulated data using Big Data and machine-learning technologies. This will take it to a new level, thereby increasing the value of the service offered to users.
Access to Big Data will enhance the predictive capabilities of financial services. Using data power and machine-learning techniques, as well as the unrestricted access to all financial data it is possible to predict and warn users about financial actions.. Such a service can help users to optimize quality of their financial lives.
The detailed financial picture of the user, compared with the behavior patterns of millions of other customers, allows users to maximally personalize the user experience. This will provide users with the most suitable financial product from thousands available in the market exactly when they really need it.
6. Increasing the availability of financial services
Simplified user identification implemented in the Open Banking platform will allow customers to apply for financial products (e.g., loans, investments, etc.) in just one click. With the rise of aggregators, it will no longer be a traditional application but a request for a personalized offer from different suppliers. Users will be able to search the best, or trust the recommendations of the aggregator service.
Access to full customer financial data will stimulate offers of analytical services that provide financial recovery programs. This may be relevant for improving credit scores or simply changing users’ financial habits.
In any case, such services will help users understand what prevents them from accessing the most attractive and profitable financial products. Users will learn exactly what they are doing wrong and get automated recommendations based on an analysis of millions of similar cases.
7. Providing the best possible financial solution
Aggregators for finding the best financial offers, taking into account the user's profile, should become an organic part of the Open Banking market. As a result of an increase in the speed of the market’s transition to the Open Banking model, we can expect explosive growth of such services.
This is quite natural. On the one hand, the number of financial services will grow. On the other, solutions that will help to choose the right service as needed. Such solutions may become a core part of the banking platform and help some banks to find their business model in the new economics of Open Banking.
Open Banking will unite banks, and FinTech in creating a new world
I believe that the Open Banking revolution will lead to a defragmentation of the financial industry. As a result of the emergence of a unified digital platform, financial services will become more transparent, faster, cheaper, and more convenient. Consumers will be able to better manage their finances, make better financial decisions, and gain access to innovative financial solutions.
This revolution will create a form of cooperation between banks and FinTech services. In the long term, banks will need to find a new place in the disrupting industry. Gradually, they could turn into platform providers of banking service infrastructure. Excellent case studies for inspiration can be found on such platforms as Amazon, AliExpress, iTunes and Google Play. Only an appropriate digital strategy will allow banks to stay alive after the disruption of the traditional financial industry.
As a result, successful banks may lose in service fees, but they will gain in volume. Many FinTech startups will not only offer services on their platform, they will actively introduce innovative products designing new user experiences, thereby enriching the financial user’s journey and transforming the banking industry. This will attract new users and provide them with new ways of using financial instruments.
Open Banking has already started, but it is a long way off
Today, there are already dozens of banks that are reserving their place in the new digital reality by entering the Open Banking model and publishing their APIs. They are also actively experimenting with FinTech partnerships to try new forms of banking.
One of the leaders in this area is BBVA. It is providing extensive access to its online banking platform on the internet, clearly demonstrating the transition from product-centered thinking to Banking as a Platform (BaaP).
At the moment, the following banks already provide access to their APIs, and the list is growing: ABN AMRO, Banca Sella, Bank of Cyprus, Barclays, Banco Bilbao Vizcaya Argentaria (BBVA), Česká spořitelna, Citi, Danske Bank, DBS Bank, Deutsche Bank, Fidor Bank, Hellenic Bank, HSBC, Lloyds Bank, MKB Bank, NGB i-bank, Nordea, Royal Bank of Scotland, Saxo Bank, SEB, Spar Nord and Starling Bank.
At any rate, we have to stay realistic and understand that 2018 is only a starting point. Such a large-scale transformation of the industry requires a lot of technical work and will take longer than a year. There are still a lot of unanswered questions, especially concerning security. The state introduction of PSD2 in Europe is a good start, which will launch the Open Banking initiative around the world. After all, it is a revolutionary experiment of a targeted transition to a global, digital financial system.
In conclusion, I would like to remind you of the main idea of this post. Open Banking will lead a huge number of financial services to enter the industry. At the technical level, they will collaborate with each other through the APIs. But, on the customer level, it will be a tough competition, tenfold higher than the one we are witnessing today. Therefore, in the world of Open Banking, the user experience design will become the main way to understand customers and to ensure that they will choose your service out of thousands of available offers. I hope that you started moving in this direction yesterday.