In two years’ time the revenue models of traditional retail banking may be under threat from rapid digital advances being spearheaded by the new EU Payment Services Directive which came into force this month.
As part of the lengthy document which provides the legal foundation for the creation of an EU-wide single market for payments, is the requirement of Access to the Account (XSA2); banks will need to provide API access to third parties.
It means the EU have recognised digital developments in the financial space since 2007 require legal and regulatory changes to be relevant by the technological standards customers now expect.
Back in 2012 Gartner foresaw the oncoming digital disruption:
“… banks need to stop relying on reactive product delivery and start providing a delivery model transformation that uses public and private Web application programming interfaces (APIs) and apps. This new approach will enable banks to deliver needs-based services that are relevant to the context, location and technology customers are using, which will lead to proactive delivery that either anticipates a customer need or improves their financials. It will also allow banks to respond quickly to new opportunities, and third-party developers to build the banking solutions they need.”
It highlights a pattern that organisations experience who are brave enough to expand digital capabilities to meet evolving market expectations; that the decision to involve digital can’t just remain with marketing, because digital is more than a communication channel.
It must be accepted as a cultural and business-model challenger, usually following the steps of competitors already making waves in the same space. This is none truer than in financial services where the entire sector is going through a digital transformation which is putting financial institutions in a catch-22 situation; continuing ‘business as usual’ to fit firmly in regulatory guidelines or innovating beyond comfort boundaries.
Either way, the financial services sector is being ‘displaced, diminished and disintermediated’ as argued in Bye Bye Banks? A timely book that interviews senior executives in financial services institutions about the state of the financial services industry, asking if the days of the traditional retail bank may soon be over.
The book is concise, offering a 5 minute version of the argument or in long-form version will take you a couple of hours to read (two train journeys for me) and it will challenge your views about the future of the banking industry. The arguments presented aren’t necessarily evolutionary, they are a natural progression of what digital disruption has done to other industries such as SMS messaging in the mobile market.
Technological leaps in the mobile industry used to be rated by hardware changes in (mostly) Nokia phones; the introduction of polyphonic ringtones, colour screens, and so on. When Apple introduced the iPhone in January 2007, closely followed by the launch of a 3rd party app store which gave developers the opportunity to reach millions of people instantly. This gave rise to apps such as WhatsApp which quickly eroded into mobile network revenues as SMS became less relevant. In fact, Bye Bye Banks quotes Ofcom who attributed £300m decline in UK mobile revenues to declining SMS use.
- This is when a service has been displaced. Daily interactions have moved from SMS messaging to online messaging apps.
- Diminished is when the existing (traditional) business model is put under pressure and the relationship with the incumbent service declines.
- Disintermediated is when the relationship between the new service provider no longer requires the services of the incumbent.
Applying this approach to the requirements of traditional retail banks to provide standardised API access could mean the functionality of banks being provided through tech providers, such as Google and Apple. In turn customer interactions become associated with the tech company, rather than the bank brand; this is when a bank’s relationship with its customers is challenged. The final step is disintermediated, perhaps as the bank (as a third party) is longer required, as customer mass makes peer-to-peer lending a viable possibility.
One thing is for certain, the shape of financial services is going to radically change over the next two years.
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