The Financial Services industry is gearing up for the impending arrival of two new EU regulations – the Payment Services Directive (PSD2), otherwise known as Open Banking, and the General Data Protection Regulation (GDPR). The deadlines for compliance, 13th January and 25th May 2018 respectively, are likely to be circled on most IT folks’ calendars. Even the impending break-up of the EU will not save those in the City of London as Brexit will likely finalise after these dates.
Consumers may well benefit from these changes, but incumbent banks agonise over the threat of increased competition and operating costs. PSD2 could potentially commoditise the Financial Services sector just like the telco one was in the early 2000s with the birth of the Over The Top (OTT) players such as YouTube or Skype, which took the existing mobile operators’ revenues while using the operators’ infrastructure. This, would lead to retail banks becoming utility providers while customers’ needs are being serviced by new entrants.
The other option for incumbent banks is to use this regulatory change as an opportunity to overhaul their IT estate and be more Agile, in order to compete with the Challengers banks and provide a better customer experience.
But, how can Financial Services organisations use these regulations to their benefit? They can do so by ‘getting their house in order’. Challenger banks are equally applicable as they continue to grow at pace. Aldermore grew its profits 34% recently, while others such as Metro have delivered multi–billion valuations for their shareholders.
Until recently, the UK Government has protected these relative newcomers from some of the capital requirements their traditional rivals are subject to. This advantage is only compounded by the fact their new systems don’t suffer from the technical debt carried by traditional banks, whose code base could be decades old.
However, Challengers are not immune from the new tranche of EU regulations. It’s time for them to grow up about their IT systems for three reasons. Firstly, growth is always the goal. But as the customer base grows, so too does their exposure to data protection issues. With operations expansion, their application portfolio also expands. Staying on top of their application health is integral to the overall system architecture underpinning their evolving organisation.
Secondly, as many Challenger banks don’t have a high-street presence and only provide mobile and/or online services to customers, their IT organisations are a lot more critical to their operation. As their customer base and service offerings expand, their IT complexity increases. They then need to start measuring it.
And naturally, systems designed recently – with newer regulations in mind – are likely to present less of an IT maintenance burden than those written fifty years ago for a different IT platform. However, the basics of code quality, including benchmarking and continually improving a code base, have never been more relevant. If, as part of the hype ahead of PSD2 and GDPR, banks check their code base quality, we may find a pleasing emergent property of this red tape; better quality software.
Incumbent banks are at a cross-road. They can become a utility that FinTech firms and ‘GAFA’ (Google, Apple, Facebook and Amazon) monetise or use Open Banking as a catalyst to transform their business model. to avoid the similar seismic shift that happened in the telco sector in the last decade.
The opportunity is there to be seized. Banks know they have to comply, so should use this time to not only meet regulatory requirements, but significantly improve performance and customer experience. It is important for banks to start straight away, rather than leave it to the last minute – there is no time like the present.