PSD2: customer loyalty and bespoke, behavioural open banking
In a controversial era for ownership and sharing of consumers’ data, the advancement of open-banking is an interesting twist in data protection policy, as it requires consumers to willingly share their financial data with third parties, often challenger banks and mobile payment app providers.
The January 2018 managed roll-out of open banking can be understood as the UK implementation of the second EU payments services directive – PSD2 – published in late 2015.
In 2016, the Competition and Markets Authority (CMA) published a report on the UK’s retail banking market and found that older, larger banks do not have to compete hard enough for custom and that smaller, challenger banks were finding it difficult to grow and access the market. “Open banking” was seen as one solution. Customers could themselves drive innovation and growth by choosing to share their banking data with third parties and have a better retail and banking experience. Effectively this compels the UK’s nine largest banks to be released in a standardised format so that it can be easily shared between authorised organisations.
The sharing of all customers’ financial and banking data with a view to improve their customer experience is pushed by firms learning more from their preferences. At a deeper level, open banking is a sign of the times and the battle for attention in the economy. Essentially your banking data, in tracking your expenditure, reveals more about your personality, preferences and financial security. Recent developments in open banking aim to leverage these insights to connect to customers on a deeper, psychological level, as fintech expert Louise Beaumont has argued. Combining these with banking services that use behavioural insights to incentivise and nudge your spending patterns can be very powerful.
We like what we know, and this means we better know what we like, the potential emotional attachment that these services can create take us into a new realm for financial services.
How have disruptors in this space connected with consumers by deep learning from data? Some providers like Yoyo Wallet, a mobile payments and loyalty platform, take these insights a step further by learning from your banking data and partnering with third party providers such a loyalty cards, to provide the best value for customers through personalised loyalty programmes.
Yoyo has leveraged this deep knowing of customers by cultivating brand loyalty in partnerships with household brands like Caffe Nero, Planet Organic and Coca Cola. In a canny move, it has also partnered with university student union cafes across the country. Investors are seeing the possibilities and Yoyo has already attracted over £15 million in venture capital since inception in 2016. This ability to time offers with spending patterns is a very potent mix.
The technology is, therefore, not, understandably, without controversy. For example, banks cannot, for the moment get these powerful insights from granular data back from the third parties that use their banking data. While in some ways, deep knowledge of the customer can enhance security, the same rich data poses inherent risks if compromised.
So for those who have signed up, some experts worry there may be unintended consequences. In an age of data protection and worries about the control algorithms already have over our preferences and behaviour, people are saying PSD2 is too blunt and clunky, with wide variations in user experience.
Some important nuances have not been addressed that can have important structural outcomes. Several financial services stakeholders are already arguing for a PSD3, to address some of these issues.
I caught up with Yoyo’s co-founder, Dave Nicholson, to discuss some of these issues.
- What do you think the outlook is for open banking providers?
Traditional banks risk becoming a utility layer in the financial services stack, providing the data and infrastructure for startups to build exciting new services and products on top of the established banks’ customer base. Banks will need to behave more like start-ups – quickly building, testing and delivering new propositions.
If banks build on the initial open banking APIs, or create their own PSD2 APIs, to provide more access to more data, there is a massive opportunity to build mutually beneficial collaborations between old and new financial services.
Fintechs will generate more innovation in the banking ecosystem and the best ideas can then be taken in-house to be developed at scale.
The customer base of the banks and the speed of innovation of fintech companies will result in amazing new services being developed.
- Can you tell me more about the underlying API technology in Yoyo that allows you to tailor rich customer data to provide bespoke loyalty programmes?
Yoyo’s unique API is able to tap into debit/credit card payment data to instantly apply retailer loyalty points, stamps and other offers, whilst pushing an itemised receipt back into a card’s user’s associated banking app.
Yoyo can identify a shopper through their bank card transactions, leading to more personalised offers and rewards for a bank’s customers and the data insight to deliver hyper-relevant marketing communications for retailers.
This means banks can now act as a full-service provider, creating a highly-engaged marketplace interface through which banks, retailers and their mutual customers can interact!
- Given some of my criticisms of behavioural nudging, how would you respond? Do you not think there is a risk in customers being less open to different viewpoints and do you not think it opens up the risk of monopolies?
Being able to know with certainty who a consumer is means that it is easier to understand your customer base, segment them and communicate to them in relevant ways.
There is a risk that a wave of new startups in response to open banking might create a perception of a gold rush, which could put off consumers from trying out the benefits of open banking – it will be critical to build trust in this new approach, and fintechs must ensure that they are very open with consumers about what their role, the information they are gathering and what they are doing with it.
The FCA’s approach of establishing a directory of trusted third parties is very helpful in this respect, and although many companies will find getting authorisation a pain, it will be worth it in the long run.
- Do you think we will see a PSD3 and do you think it will see banks getting the augmented data back from third parties?
It would be a brave prediction that PSD2 was the end of the road of banks and data sharing. Whether it is PSD3 or some other regulation, it is reasonable to assume that in an ever more connected world, banks will be able to supplement their existing data with value added data from third parties.
Yoyo is in the vanguard of this, working with Visa to be able to share transaction and loyalty data (vouchers, stamps and points earned) back to a bank customer to view the same information in their bank app as they can see in their Yoyo app.
Over time we can expect other transaction related data, maybe from providers like Google Maps (for outlet contact details and location) or Uber (details of your journey) being included to make the banking experience richer and more engaging.
- From a challenger perspective, what do you think is missing from PSD2? Being an early adopter of the concept of data optimisation for customer experience, what are your reflections on open banking almost six months after the managed roll-out?
Open Banking should mean that consumers will be much better placed to get value from their financial products, be in more control of their money and see new value models emerge to reward them for the use of their data. And consumers will need full transparency when it comes to what happens to their data.
It will take time as traditional banks, fintechs and retailers will want to see tangible examples of the benefits of open banking.
Yoyo has already shown the positive impact it’s can have on consumers and retailers through our partnership with Starling. In November 2017, two months before open banking/PSD2 came into force, Yoyo became the first company to tap into Starling debit / credit card payment data to instantly apply retailer loyalty points, stamps and other offers, whilst pushing an itemised receipt back into the card’s user’s banking app.
Overall, I think anyone expecting a “big bang” open banking launch has probably been disappointed – there remain only a limited number of regulated businesses able to use the new PSD2 permissions, and the consumer propositions that have emerged have not been earth shattering. However, this is only the beginning, and the critical part of this launch phase is that the technology works, it is secure and it is being used, albeit in limited volume.
As the open banking API develops and providers richer data and functionality, new use cases will be developed and adoption will increase. The direction of travel is clear.
By Desné Masie, editorial contributor to FinTech Futures