January 13, 2018 may be remembered as the 'beginning of the end' of the traditional retail banking industry. Thanks to a profound set of new rules by European regulators and the UK government, we may see the start of an era where consumers no longer hesitate to change their bank accounts or make more personalised arrangements in regards to their finances.
If all goes to plan after the dust settles, a new era of banking will emerge where existing banks can no longer take lifelong loyalty from account holders for granted. Consumers will be encouraged and 'nudged' to explore new financial services propositions. New, non-banking companies will launch services based on access to existing bank account information, packaged to suit emerging demands of consumers – particularly those who cherish real-time information on the move, and who expect their finances to be integrated with and supportive of their day-to-day lives. Businesses will benefit as it becomes easier to get timely access to funds. Government authorities will celebrate as GDP growth accelerates, and new lines of digital productivity are created.
But like all massive building demolitions, even the best laid preparations for infrastructure renewal don't always go according to plan. I remember a story from last year about the attempt to demolish a decrepit sports stadium in the US city of Detroit. Helicopter video footage showed puffs of smoke encircling the Pontiac Silverdome after a partial implosion, however, the structure remained defiantly intact. The demolition company later said 10% of the charges had failed to go off, but never mind, the building should fall on its own although it's unclear when that will happen.
The day the new EU Payments Services Directive (PSD2) initiative goes live will obviously not be as visually dramatic as a stadium destruction. And the go-live of UK Open Banking on the same day is unlikely to get TV news viewers captivated by the narrative, even if it is presented as a battle between the modernising forces of renewal versus the stubborn inertia of an old infrastructure.
But January 13th will be a day regulators start to bring down the walls around traditional financial institutions.
Both the new EU Payments Services Directive (PSD2) and the UK Open Banking initiative have led existing banks to co-operate with third-party companies that from now on will be allowed to operate financial services on behalf of consumers. These new companies will be able to access account information and to perform transactions on behalf of consumers, obviously only with explicit permission from the account holder.
In the next few months, we will see new providers offering so-called 'account aggregation' services. Those of us with multiple bank accounts will be able to access all our private financial information in one place, without the need to log into separate applications. These providers are also expected to offer comparison services, showing fees, charges and features of different products. If consumers adopt these new services, our relationship with banks will eventually change.
We are also likely to see major retailers experimenting with new payment methods. As more of us become familiar with mobile apps and 'in-app" payments, it seems natural for retailers to offer a 'pay direct-from-bank-account option,' particularly if this is more convenient and if loyalty offers make it more financially compelling too.
How quickly will all this happen in the mass market? It may be difficult to observe whilst the Open Banking dust ball settles; those in charge may be justified in saying 'we pressed the plunger and most of the charges went off, but it's just unclear when it will all fall into place.'
There is also the danger that the inertia in traditional banking is not just down to the behavior of traditional banks. Citizens and consumers also have well entrenched behaviors and expectations. Academics and business observers will sometimes refer to the "Behavioral Economics" of change to explain why outcomes do not always go to plan, even when new incentives (financial or otherwise) suggest that consumers will flock to new products and propositions. These behaviors are often based on powerful cognitive biases based on loss aversion. People will tend to carry on doing what they have always done unless they are more effectively nudged, educated and better incentivised to change.
January 13, 2018 doesn't signify the end of banking and there is nothing to stop existing banks from becoming account aggregators themselves. But there will be few events in the retail banking industry as profound as the go-live of Open Banking.
Lu Zurawski is Practice Lead, Retail Banking at ACI Worldwide.