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10 July 2015
Gareth Lodge
Dave Birch over at Consult Hyperion wrote a very interesting article today around the need to better name the stream of new non-traditional banking entrants. Have a read here. This is something we’ve talked about with Clients in a similar way, but in the context of traditional banks. When you run a brain storming sessions, particularly for innovation, it’s often useful to “blow up” the problem. That is, magnify the problem to its maximum so you look at truly radical solutions rather than incremental ones. One such example was a scenario where traditional banking ended up with two types of banks – 1) IT banks, providing products and services to others. Citi with its co-opertition model might be an example of this. I labelled these manufacturers. 2) The other extreme was banks focusing on the customer, and focusing on providing the best products and services, an agora of things built by the manufacturers. I called this ISO banking. Dave used iso to define one of his groups but in a very different way. He used iso from the Greek to mean equal. I wasn’t quite so clever – I used ISO as in the US group of card solution providers known as Independent Sales Organisations. Which leads to a broader thought. The PSD2 introduces the concept of XS2A – essentially any third party can access account level information of any financial institution in Europe and be able to initiate a payment from that account. That muddies the distinctions above even further. For example, Dave’s descriptions imply (I think!) two components – a front end (a mobile app) and a back end (a funding account). In the neo- and iso- flavours, it's the back-end that distinguishes the two, with neo a traditional platform, and iso with a far simpler account platform (a pre-paid card). In PSD2, there are numerous variations. Three examples off the top of my head that illustrate what I mean:
  • No-back-end. PSD2 could create a third category where the “bank” provides the front end, but no back-end at all as it uses the platforms of one or more other FIs
  • Every end. This is in some ways an extension of the above, but with a slightly different spin. Bullet 1 reflects that consumers often have products spread across multiple institutions. At its simplest, XS2A allows true PFM for the first time in some countries. But this second point reflects that the lines are blurred already, particularly for a consumer. I suspect many would want to include all their money holding accounts – say your PayPal acount. Most consumers would think that as an non-FI, but, as they have a banking licence I assume they would be included as well under PSD2 (thoughts please!). But what about the true non-FI’s?
  • Front/back weighting. With XS2A, how many will be provider slick but simple skins, and how many will provide functionally rich front-end (and perhaps back-end too) that will far enhance the standard offerings. You can imagine this particularly in the wealth management space. These feel very different beasts, and need distinguishing.
The upshot is that Dave has hit the nail on the head in that we need more/better/different nomenclature. However I wonder if in Europe in particular we probably need a much more fundamental rethink. As the regulator explicitly seeks to disaggregate the payments value chain, this, coupled with technology advances, have much broader implications, and make traditional labels misleading at best. I’ve only just started really thinking about this – but the more I do, the more I realise the more I need to do.

Comments

  • It is almost inevitable that banks will lose the customer-facing front-end. Once they provide (kicking and screaming) API access into their customers' data and transaction suite, they will have lost the customer's attention. PFMs and other aggregation portals will intermediate to own the customer with a rich and consistent experience across all channels (not necessarily just digital), while the banks will be left competing with each other to provide commoditised back-end products on a wholesale pricing basis. This is already happening in commoditised products like short-term insurance and homeloans, not to mention p2p lending where the bank is not even needed in the background anymore.

  • Thanks for developing the thinking on this Gareth. I didn't mean to imply that the neo-bank or iso-bank connect to only one back end. I think they will both connect to multiple financial institutions. In my head I was thinking more about what it looks like to the customer. Does it look like a bank or does it look like something else but nevertheless does what a bank does? Will go back and think about this some more!

  • Theo
    Thanks for your comment. I'm not sure all are quite so bullish as you are, but it's certainly a threat.

    One personal opinion - I'm sure some of my Celent colleagues might disagree! - is the business case for PFM led propositions, particularly in markets like the UK. Until free banking disappears, I suspect it's going to be difficult to convince people to pay for such a service, with so many payments automated.

  • No problem - I know you didn't, but the examples you gave fitted neatly into that categorisation. You raise another important point, implicit in your post but worth being explicit - the view/terminology is likely to differ depending on the constituency, and some other discussions (not these ones!) haven't always distinguished between functional components and what it looks like to a consumer. I think this matters because I'm not sure that that consumer understands and may not necessarily make the choice the regulator assumes they will.

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