European banks are facing disruption on numerous fronts, new banking regulation, new competition and uncertainty brought on by Brexit.
In our recent study, The New Banking Genome, we unpack these threats to understand exactly how they will impact banks and how incumbent banks can respond.
In this study we found that incumbents are yet to realize the full impact of the revised payment services directive (PSD2) with 63% been confident that the regulation will not impact the competitive threat to their organization. However, the European Commission implemented PSD2 with the sole purpose of increasing competition.
So do the majority of incumbents have the organizational firepower to manage this new onslaught and prevent diminishment from fintechs and challenger in the face of this regulatory change? We believe not and expect the following cracks to emerge within incumbents in the face of PSD2:
- PSD2 will lay bare low customer service levels
Incumbent banks operating costs and controls are significantly greater than other industries. These costs and controls, predominately brought on by legacy infrastructure and consistent regulatory change, have made incumbents proverbial oil tankers when it comes to moving on innovation and transformation initiatives. But now with agile startups entering the market due to lower barriers to entry, incumbents will face a real PR nightmare when their customer service and experience initiatives are laid side by side with these startups. And if you consider that incumbent banks testing processes alone often cost more and take longer than many startup development cycles, the challenges become truly frightening.
- PSD2 will expose the rotten wood in your technology stack
Incumbent banks have long held the discussion within their technical departments of whether or not they should be investing in open API infrastructure. All too often these conversations have descended into arguments centered around loss of control. This loss of control was a hard pill for banking execs to swallow and historically the motivation to make this leap wasn’t there.
Now however, PSD2 is mandating this change and those banks with legacy systems are going to be seriously struggling to retrofit APIs into their out of date infrastructure. Your dirty technology laundry could now be plain for everyone to see.
- PSD2 will shake, and potentially break, your organizational foundations
This regulatory change is going to force banks into doing something they are inherently bad at; working across multiple separated business units.
The changes required within PSD2 require highly defined input and collaboration between multiple business units including IT, operations, legal and compliance. Incumbent banks are going to struggle to get this right.
With these scenarios laid out, it becomes apparent that extensive structural, cultural and technological changes will need to be made by incumbents. In our report The New Banking Genome, we lay out a framework that banks can use to turn this regulatory change to their advantage and remain resilient in the face of the new competitive landscape they find themselves in.