Starting my new company has exponentially increased the time I’ve spent reading about other entrepreneurs’ best practices. Articles like the ten best or four best or single most effective method to embrace failure, be productive, find a mentor, keep lists, manage email and on and on. But being an old-school worker and former hippie, I prefer keeping it simple, like embracing visualization.
Now shift this idea to financial services, particularly to banking. Visualization – meaning, what is it a bank wants to be. You mean, as in, “not a bank”? And this is exactly what our banking friends across the pond are dealing with in PSD2.
A quick recap: PSD2 is the second generation of the original Payments Services Directive (PSD) which was a sweeping set of rules issued by the European Commission designed to open up the financial services market across the EU. PSD2 has taken an even more prescriptive position to clarify and harmonize the original rules laid out in the original legislation. (link to entire directive here)
In this post, I want to focus on what may turn out to be one of the key regulatory changes for banks in quite some time which is Access to Accounts or XS2A.
Essentially what XS2A will do is require that payments participants open their platforms for access by Third Party Providers in order to validate account information or process direct payments. While the dynamics that preceded these rules aren’t unique to the EU, a reading of the PSD2 regulation and subsequent early analysis illustrates quite clearly the environment banks and credit unions are facing in the very near term future. One that I believe will require a significant level of imagination and commitment to navigate.
This has already begun as regulated financial institutions face-off with shareholder-funded or private equity-funded firms for the position of primary financial services and information provider. The new fintech companies are unencumbered with the weight of complicated, silo-driven strategic planning. They enjoy the clarity of vision as “not a bank”. This is the imagination that banks must embrace as well, if they are to survive into the next decade.
The EU is pushing banks to get to the edge and look out to the new horizon of open banking. But thinking that open banking is a regulatory issue misses the significance of the central dynamic that will drive the market forward in the future – owning the heart of the customer. For my generation, my heart belonged to banks and I never imagined another financial services solution. XS2A breaks open the box and let’s any kind of entity in, including telecoms, social media conglomerates, multi-national merchants and technology or media companies. In fact, these entities are perhaps even better positioned to use the muscle and scale they own in order to jump through the technical and logistical hurdles necessary to enable open banking.
To effectively compete, financial institutions must be able to visualize themselves as an active participant in this new eco-system and imagine what their strategic place looks like on a re-imagined value continuum. I’m not suggesting that banks and credit unions will be eliminated, in fact, their importance is just as secure as it has always been since fintech will likely never want to be more than an arms-length away from the minimum amount of compliance necessary to operate. Rather, I’m suggesting that the opportunity to improve revenue flows will be directly related to the position the institution assumes in the value chain.
Let me illustrate this idea below, where we consider a simple value continuum where being a compliance container for financial accounts is least valuable and becoming the centralizing financial services factor is the most valuable.
This is where visualization will become such an important activity for banking strategists because the revenue streams associated with each of these positions will be different in ways that will make our last generation competitive environment look naive in comparison.
Emerging consumers want access to actionable information, security, transparency, choice of payment and choice of terms. They want to be able to compare offerings and decide which is better for them or hide the mechanics under a default option and vary this by need, product or lifestage. The entity that is able to pull as much of these activities together under one brand owns the Centralizing Factor position and therefore, will have the greatest opportunity for the highest returns. Imagine yourself in that position.
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