Kernefunktioner 1 PSD2. The way to customer loyalty. The PSD2 way to customer loyalty 1

Transcription

1 Kernefunktioner 1 PSD2 The way to customer loyalty The PSD2 way to customer loyalty 1

2 2 The PSD2 way to customer loyalty

3 Introduction The changes facing the banking industry is an opportunity for some and a threat to many. Combined with new technologies, the PSD2 (Revised Payment Service Directive) directive opens doors for disrupters, which were not open only months years ago. Meanwhile, customers are searching for a combination of personalised services and core banking that minimises their overhead costs, while fulfilling their needs for other non-banking services. And all this is taking place on a global scale where distance is rapidly disrupted by digital solutions. The authors of this perspective are fully aware that most banks, particularly the major banks, have already embarked on their individual open banking journey, so by stating the following hypothesis, we aim to initiate a discussion on how to leverage future retail banking differently: Early movers will gain significant customer loyalty advantages if they dare to work with competitors (banks), third-party services and tech giants in one collaborative open banking environment. This perspective underpins the validity of the above hypothesis and outlines what is required to successfully achieve the announced first mover advantages, while describing the future roles of each of the key players within the retail banking ecosystem and how they mutually benefit the most from being collaborative: The future role of the bank The future role of the tech giant The future role of the merchant The future role of the fintech The PSD2 way to customer loyalty 3

4 Changing dynamics The global governing dynamics for banking are changing due to a number of well-known factors; globalisation, technological progress and regulatory tightening and changes. We claim that local knowledge in combination with borrower liability is becoming less of a key loyalty factor since the underlying drivers for these exact measures are being commoditised so that outside agents acting within financial services (or with the will to enter financial services) can potentially access these. And with frictionless global movability of capital (and amount of excess cash available), lending availability is not limited by local capital scarcity. Hence, the dynamics for retail banking are changing from borrower liability, local knowledge and lending availability to customer behaviour, technology and regulation as drivers for global digital personal banking. The consequences are that traditional customer loyalty factors no longer apply and customers search for better and different services. The change in retail banking behaviour is caused by changes in the underlying dynamics in society, driven by changing technology such as blockchain, IoT, big data and AI. These technologies are all undergoing a tremendous leap, motivated by customer behaviour. While technology is of a more general character and affects all of society, the regulatory changes imposed, specifically towards banking and with retail supportive purposes, are conscious political choices enforced for certain outcomes, on the back of increased technology possibilities. Hence, it is a continuous loop - as suggested on the right side of EXHIBIT 1 below. A vast number of capital and liquidity measures have been imposed since the financial crisis, and lately, they have been followed up by a number of transparency measures affecting both wholesale banking and retail banking (Mifid2 and PSD2). PSD2 is a significant game changer for retail banking, and throughout the world, it will change the landscape of customer experience and loyalty completely (this point is explained in the next paragraph). However, it is not all bad. If banks adapt and accept the new era fast enough, it can become an advantage to the banks and place them as global leaders within collaborative open banking. EXHIBIT 1: 4 The PSD2 way to customer loyalty

5 Brief on PSD2 1 The regulatory game changer for retail banking is PSD2 ratified as of January 13, The directive has two main purposes: 1. Enhancing competition and level the playing field in a rapidly changing market environment 2. Ensuring consumer protection While the latter is all about protection of payment transactions and account access, the first has to do with opening up for new market participants who want to engage with banking customers. Two types of market participants are introduced: 1. Payment initiation services providers (PISPs). These initiate payments on behalf of customers. They give assurance to retailers that the money is on its way. 2. Aggregators and account information service providers (AISPs). These give an overview of available accounts and balances to their customers. These (market participants) services that have historically been privileged to the data-owners (which de-facto means banks) are now open to third parties if accepted by customers (given that the third parties meet the security standards applicable). Moreover, banks have to comply with an open API minimum compliance standard, securing infrastructural conditions. The Danish bank sector had 72 banks (measured by number of bank licenses as of March 2017) with 5.7 million inhabitants (1 to 79,000) 2 Sweden had 117 banks in 2016 (hereof 29 foreign banks) with 9.9 million inhabitants (1 to 85,000) 3 Norway had 137 banks in 2017 with 5.3 million inhabitants (1 to 39,000) 4 Germany had 715 banks in 2017 (only counting 431 saving banks, 176 regional banks and 106 foreign banks. Hence, investment banks, credit unions, etc. are not included) with 82.2 million inhabitants (1 to 115,000) 5 Norway has almost three times as many banks measured by number of inhabitants as Germany, while Sweden and Denmark are of a factor ~1.5. We are convinced that the development of IT and digital infrastructure in the Nordic region must be done in cooperation between banks to lower costs, gain sufficient efficiencies and stay competitive. Zooming in on Denmark, we will use the Danish banking system as an example for how to navigate the new dynamics. The findings are applicable both within and outside the Nordics. The immediate consequence is that the interface between banks and customers is disrupted. Hence, the monopolised loyalty is gone overnight. Full stop. The remaining part of this text will outline the future roles within the open collaborative banking ecosystem, through a zooming-in on first the Nordic banking sector, and then the Danish sector isolated. However, we do believe that the open collaborative banking philosophy can be extrapolated anywhere. The Nordic banking sector in numbers Despite a massive consolidation since the financial crisis, the Nordic bank sector is still rather fragmented as can be seen from the statistics below 1 Ref: 2 SOURCE: 3 SOURCE: 4 SOURCE: 5 SOURCE: REF: POPULATION SOURCE: The PSD2 way to customer loyalty 5

6 The Danish banking infrastructure In Denmark, only the two dominant banks, Nordea and Danske Bank, run own independent data "centres". The other banks are clustered up in three centres that individually develop and maintain core banking infrastructures for their member banks across Denmark (and also in Norway and Sweden). In addition to being data hubs, these three centres handle a number of core banking services deployed by the member banks. The centres build generic services deployed by most member banks, but also specialised services on demand for member banks. While some of the smaller banks also use the data centres for their analytical services, the larger banks primarily keep their analytical demands in-house. Leaving out Nordea and Danske Bank (for a short while), the infrastructure is displayed in EXHIBIT 2 below. The figure highlights that the local banks use data centre services also for analytical (Intelligence) purposes, contrary to the regional banks, which keep most analytical services in-house. We stress that the below is an illustrative description and it is obviously more nuanced than displayed. However, we do not find it necessary to detail the picture further for making our point(s) clear. From EXHIBIT 2, we see that the data centres play a vital role in Danish retail banking infrastructure, and they are natural integrated parts of the (future open) banking ecosystem, since all integration (PSD2 API connectivity) must be towards these centres, where the data is stored. We notice that despite the centres being owned by the member banks, they do to some extent act independently, given a predefined mandate. The situation for Nordea and Danske Bank is identical, with the only difference being that they also play the role of data centres. Hence, this article can be extrapolated to any given bank similar to one of the types identified. The future role of the bank With the opening of account data and transaction services to third parties, it is paramount that traditional banks start to rethink their services as commodities that can be replicated in a much lighter and personalised format (by fintechs) than what has previously been possible. The reason being that the new EXHIBIT 2: 6 The PSD2 way to customer loyalty

7 market players (fintechs and the like) do not carry any kind of heavy technology legacy portfolio. Hence, they can build their infrastructure much lighter and much more agile than ever before. We will elaborate on their role later on. The implications are that traditional loyalty factors are no longer unique and reserved to banks. Fintechs, competitor banks, merchants and tech giants can (with proper cyber security in place) be granted access to provide highly valuable services and data as a consequence of PSD2. Banks will simply lose the customer interface if their response to the changing dynamics is too passive. So instead of working against the inevitable disruption, we suggest that all the relevant stakeholders partner up in one open collaborative digital banking ecosystem. Hence, banks have to open up their infrastructure to fintechs and collaborate on multiple financial services and not only be PSD2 minimal compliant. Also, banks have to aggregate core banking services with merchant services such as online streaming services, grocery shopping, magazines, fitness memberships, newspaper subscriptions, airline loyalty programmes (and many others) to create customer value through new services that are both convenient and financially viable for their customers. In addition, banks have to accept that they should not individually build their own API infrastructure. This will simply just create a new heavy "spaghetti" legacy that will eventually be replaced by something lighter and more agile on a Nordic scale. To secure a true Nordic ecosystem, banks must support a joint infrastructural base across the entire Nordic banking community. Bank) through individual APIs, and they also transfer data to all third parties (PISPs and AISPs) that have been granted access to customer accounts or to account transactions, through one standardised API. Building the Data/API Hub requires technology and data experience to such a level that it does not exist within any of the Nordic banks and neither should it be their focus. Playing this role of technology provider is crucial for the digital open collaborative ecosystem to be complete and optimised. The future role of the merchant Using already stored bank data in the bundling of services and products across different business areas is a potential driver for future customer loyalty. Banks holds enormous amounts of data supporting analytical joint ventures with merchants. Hence, by proper analysis of bank data combined with discounts and offers from merchants, is it possible to improve the financial situation of retail customers, while bank loyalty is preserved. In this win-win-win situation, merchants get access to banks customer portfolio, customers obtain hard economic value and ease of access to a wide range of services, while banks retain customer loyalty. There is an endless number of possible combinations and both local and international partners can be brought into play. Two alternative routes are 1. Exclusive merchant discounts 2. Financial improvements through analytics We provide examples of both below. The future role of the tech giant The strengths of tech giants are superior hardware and software, big data handling and digital architectural design. No one, not even the largest Nordic banks, can compete with the tech giants on these measures. The reason for this is obvious: tech giants are born digital and think digital first in all they do. Tech giants will play an extremely important role in the future landscape/ecosystem of Nordic banking. They will play the role of data hub for all banks on the one side, and all third party agents on the other side. Hence, they are both linked to individual banks' data centres (BEC, BD, SDC, Nordea and Danske The PSD2 way to customer loyalty 7

8 EXAMPLE 1: Exclusive merchant discounts The key concern is the merchant's brand (for the merchant but also for partner banks) and whether it is a sustainable option to be connected to this specific brand. Let us take a look at an example from Norway 6. This is an example of collaboration between a merchant and a bank. This type of collaboration can be expanded to a number of sectors. It improves the customer's financial situation, and by being a central and driving part of the collaborative service ecosystem, customer loyalty to banks can be preserved and the interface to customers can remain intact. Sbanken (former Skandiabanken) in Norway has made a collaboration with Adams Matkasse (bringing ingredients to cook meals from scratch to homes); if a customer has a mortgage loan from the bank, the customer is entitled to a 10% discount when using a coupon when ordering from Adams Matkasse (illustrated in EXHIBIT 3 below). EXHIBIT 3 6 Ref. 8 The PSD2 way to customer loyalty

9 EXAMPLE 2: Financial improvement through analytics Below, we look at examples of individualised merchant offers linked to purchase patterns and financial options: Everyday digital financial advisor Everyday need prediction and personalised recommendations Everyday help to fulfil goals and wishes Everyday investment advice This is now possible through easy and sufficient access to customer data, combined with a complete overview of current offers from collaborating merchants. Hence, by pattern recognition and general behaviour of similar segments, is it possible to create a very comprehensive and personal customer experience, based on data analytics. Illustrated in EXHIBIT 4 below. EXHIBIT 4: The PSD2 way to customer loyalty 9

10 The future role of the fintech The fintechs referred to are non-banks offering financial services or tapping into bank account data or both, in combination. Hence, they are either an AISP or a PISP or a combination. Typically, fintech companies do not offer a set of services comparable to a full-fletched bank. However, they offer service(s) with an underlying new technology that is personalised, lighter and more scalable than what exists within established banks. Given that PSD2 is ratified, fintechs will with ease tap into banks' customer pools. In the open collaborative banking ecosystem, this will happen through a standard API offered by tech giants. Hence, in collaboration with the most active and open banks, they will jointly develop and explore new services for customers. The nature of fintechs is that they try to attract numbers of users in scale by being simpler, cheaper and more personalised than the existing solutions. Initially, they do not aim to make profits, and they will normally be bought before they even start to benefit financially from their investments. The banks that do not only offer the minimum required openness (PSD2 compliant) will be the ones that fintechs will partner with. EXHIBIT 5: 10 The PSD2 way to customer loyalty

11 The digital banking ecosystem In regards to open collaborative banking, we belive that the Nordic region is in a sweet spot when it comes to digital banking. The Nordic countries are small and well-organised, and the existing digital infrastructure is at an overall high level. In addition, we find the populations to be sufficiently digitally mature to participate in a collaborative open banking ecosystem. We believe that by creating the ecosystem (see EXHIBIT 5 above) is key to sustainable banking customer loyalty. Also; merchants will leverage on broader customer access while tech giants will control the infrastructure and data centres, banks and customers will benefit financially from this collaboration. Conclusion Through the initiatives described above, is it possible for banks to lead the collaborative open banking ecosystem. The most crucial part is collaboration between the banks. Hence, Nordic banks should refrain from inventing their own individual standards as this simply does not make sense for the region. Instead, this standard should be developed jointly, but with a tech giant driving it. By creating this Nordic ecosystem, the region will become attractive for fintechs, financial service providers and other collaborators and jointly, these will add to the most collaborative retail banking environment yet to be found. Finally, the banks that supply these opportunities to customers and proactively support an open banking environment will stand out in comparison to the rest. Hence, customer proximity will be superior and this will be key to enhanced loyalty. The PSD2 way to customer loyalty 11

12 Tim Bruun Madsen Jesper Adeltoft The PSD2 way to customer loyalty

13 The PSD2 way to customer loyalty 13