Q. DIGITAL IDENTITY A NO-BRAINER FOR BANKS?
If, as leading fintech authority Dave Birch of Consult Hyperion has famously asserted, “identity is the new money”, then it surely goes without saying that the future of banking is keeping identity safe? Just as banks have been the trusted guardians of our money for millennia, so, as we enter into the connected age, we will trust banks to look after its currency – our digital identity.
This prized asset will be our passport through the digital world, our key to unlocking all the services we need as we navigate through our ecosystems.
We will want both to be able to access and use it easily, and to be certain it is completely secure – exactly the conditions we have relied on our banks to ensure when it comes to our money for centuries. The logic of banks as leaders in digital identity is inescapable.
For their part, this new avenue of business for the banks could not come at a more opportune moment. With the imminent enforcement of the revised Payment Services Directive (PSD2) and the consequent unleashing of the phenomenon of open banking, incumbent banks are under siege.
PSD2 is mandating the creation of a new competitive landscape. Regulated Third Party Payment Providers (TPPs) must be given access by the banks to the account information of their customers, in order to enable innovative new entrants to offer exciting new payment initiation and account aggregation capabilities to those customers.
In other words, banks are being forced to make it easier for competitors to poach their customers.
PSD2 is not the only driver for the move to open banking. Other regulation in other markets is having the same effect, as is the rise of new banking entrants, the relentless development of technology and the increasingly demanding requirements of tech-savvy customers. In the EU, PSD2 is increasing the urgency around open banking – and the rest of the world is watching this leading example of transformation develop.
Certainly, incumbent banks have the same opportunities as new entrants in an open banking world. However, what they may not have is quite the agility – of technology and mindset – to react with the same speed, vigour and innovation as new competitors.
There is no doubt that, coming on top of the already powerful wave of new competition heralded by the rise of fintech, open banking is creating challenges for existing financial institutions.
This paper will argue that the case is especially convincing if banks build on both the core attributes they need to perform their central function – enabling secure, authenticated and compliant transactions – today, and as it evolves in the world of PSD2 and open banking.
In effect, viewed in this light, there is a natural path for banks towards becoming the main gateways for identification and authentication in the connected world.
Q. WHY DO BANKS NEED TO LOOK FOR NEW BUSINESS MODELS?
KEEPING THE CUSTOMER SATISFIED
Remember that banks already have a customer engagement problem. Further illustration of the engagement challenge banks face comes from the results of a survey carried out by Finextra early in 2017 among 242 consumers from 20 countries (customers of 99 different banks between them), which do not paint a particularly rosy picture. A lacklustre 49% of respondents actively agree that their banks work hard to engage them, and that they do feel engaged.
This statistic is especially concerning when viewed through the lens of findings of a parallel Finextra survey, which garnered 203 responses from 124 financial institutions in 36 countries, and which shows that banks are trying very hard to better engage with their customers. A large majority (84%) of banks in that study identified customer engagement as a top three priority – yet as we have seen, fewer than half of customers feel engaged as a result.
In short, new sources of competition from agile, customer-focused new entrants are arguably the last thing banks need in the current environment, but they have no choice but to face and tackle them.
To combat the threat, bolster customer loyalty and underpin new customer acquisition, banks must provide services that are not only customer-driven, but work, are visible and add value where those customers are. In this digital age, that means mobile.
It is also important to understand that as well as innovation in channel and delivery, these customers are also looking for innovation in product and service. They don’t want to see their account information for the sake of it: they want their banking to relate to their lives.
SAFETY IS PARAMOUNT
Last but not least, to cement their value in the digital world, banks must provide and ensure the highest levels of security. The environment in which they and their customers operate is transitioning from a closed system to an open platform. PSD2 and the connectivity required for open banking are predicated on the use of open APIs connecting the systems of TPPs and banks, and the regulation – and the customers – clearly expect the banks to make sure all this works in a secure way.
Safe, streamlined digital identity services are what will enable customers to easily and safely access all the different providers in their ecosystem, at the same time enabling connections between all the sources of information banks will need to deliver integrated financial information and products to support their customers’ lifestyle choices.
Overall, leadership in digital identity is key to empowering banks to deliver the customer-driven, mobile, innovative and secure services they need to offer, in order to keep hold of existing customers and pick up new ones in an ever-more aggressively competitive banking landscape.
CONCLUSION: OPEN BANKING, KEY THREAT AND OPPORTUNITY FOR BANKS
Open banking is creating a competitive imperative for banks to seek new sources of revenue and new business models – but as well as representing a critical threat for banks, open banking also presents an exciting opportunity for them, by strengthening their credentials as authentication and identity providers in a world crying out for the digital identity problem to be solved.
As this paper has argued, the case for banks to be the main point of contact for authentication and identification in the connected world is a powerful one.
Banks need only build on their existing strengths – trust, infrastructure, customer data and regulatory compliance – to position themselves convincingly in this role within the financial ecosystem first.
If identity is the new money, then the new banking is surely digital identity management, and banks have all the assets required to make a success of this new business model, turning the potential negative of PSD2 into a positive, and carving out new sources of revenue – and relevance – in the digital ecosystems of the future.