In an exclusive interview, John Bertrand, industry value engineer at software giant SAP, talks Internet of Business through the likely impact of open banking on payments in particular and the financial service sector in general.
Open banking is coming to Europe. With the introduction of the EU’s Payment Services Directive (PSD2) in January 2018, banks will need to provide third-party providers access to their customers’ online accounts through open APIs (application programming interfaces), if those account holders have provided their consent for them to do so.
This promises to be “a complete game-changer” for the financial services industry, says John Bertrand, industry value engineer for banking at software giant SAP.
The aims of open banking, as he describes them, are to increase competition, improve customer service and promote the development of new online and mobile payment systems. The third parties involved, meanwhile, could be fresh new fintech start-ups or the could be digital giants such as Apple and Amazon, who are constantly looking to make bigger in-roads into new aspects of their customers’ lives.
Open banking, open disruption
Either way, the move to open banking looks set to be highly disruptive to established banks. The role of the retail bank in the age of open banking will change dramatically, says Bertrand, from safeguarding money on behalf of its customers, to enabling those customers to organise the movement of their money by other providers. And this, in turn, means a shift away from being a ‘one-stop-shop’ for financial services, to providing customers with an open platform – but importantly, one that continues to provide them with a safe and secure environment.
It’s from this open platform that banking customers will be able to access apps and services from new entrants to the financial services markets – those that provide price comparisons on loan rates, for example, or help them to manage household budgets better. In reverse, a third-party mortgage provider, for example, would be able to view a customer’s transaction history directly, in order to arrive at a lending decision.
And perhaps most importantly, open banking will enable third parties to initiate payments. This video, from the Euro Banking Association, explains more:
Tackling the risk of cyber crime
Given this backdrop, banks have a lot to address, especially on the technology front. In particular, they must tackle the cyber crime risk head-on if they are to retain customers’ trust. And according to Bertrand, this means that they must also get to grips with a range of new and emerging technologies, among them IoT, artificial intelligence and blockchain.
For many, this won’t be easy. The legacy infrastructure that powers retail banking arms may look pretty good on the surface, thanks to hefty investments in front-end technologies and new user interfaces, but at the back end, says Bertrand, it’s still batch based.
This means that payments are processed in large bundles, often overnight – so the true balance in an individual account is generally not known until the next day. To add to the complexity, retail banks have grown up in siloes, he says, with current accounts often administered separately from other services such as loans and savings.
But in an age of open banking, banks must not only provide an audit trail of the third-party providers that a customer selects and the transactions they are authorised to perform, but also inform customers, preferably in near real time, when a request arrives from a third party and before the transaction is made.
A new type of banking platform
All this will take a radical rethink of the systems that power banks at the back-end and, in many cases, a big refresh as legacy software will need to be replaced. Here, SAP reckons it is in a good position to help, as a company that provides modern banking and payment products for financial services companies worldwide.
What’s more, it’s also a provider to industrial companies in areas such as oil and gas, for example, and manufacturing, as Bertrand points out. These areas, he says, provide some interesting models for how digital and IoT technologies might be applied in the financial services sector.
“Think about predictive maintenance – the use of data from machines and systems, mixed with artificial intelligence, to tell when a pump might fail, for example, so that a company can take action and repair it before it does,” he says. “Well, it seems to us that similar mixes of machine data and AI might help banks to detect payment fraud just as effectively, spotting suspicious transactions and flagging them up for further investigation.”
This kind of intelligence could be vital, at a time when banks are looking to grow revenues, increase compliance, but most importantly, cut costs. According to Bertrand, the 5 percent of payments that raise questions or doubts currently cost as much to deal with as the other 95 percent that are processed without a hitch.
With a hefty dose of digital, banks could quickly get much smarter at sorting through that 5 percent and, into the bargain, be helping customers in a way likely to ensure their ongoing loyalty, even as their payment options increase exponentially.
Four weeks to go: For more on how and why financial services companies are applying IoT and digital technologies, attend our Internet of Banking and Payments event at Canary Wharf, London on 21-23 November 2017.