I happened to be talking about access to payment infrastructure (something I blogged yesterday) at a client event yesterday, and got involved in a discussion about how the fintechs might begin to work with banks in the new world of PSD2 and mandatory APIs. This has been subject of great interest to me at the recent Money 2020 Europe (with top, top players like Shamir Karkal from BBVA and Alex Mifsud from Ixaris explaining why the move to APIs will mean a big shift in the delivery of banking services) and other recent events. Generally speaking, and this is a sweeping generalisation, I think there has been a shift in European bank thinking in recent times. They well understand that if they do nothing, then in the instant payments, API-centric, PSD2 world they stand to lose significant income. The outsourcing company Accenture, for example…
estimates that the new new breed of payment initiation service providers will erode 33% of online debit card transaction volumes and 10% of online credit card transaction volumes resulting in a total market share of 16% of online retail payment volume by 2020.
So the Payment Initiation Service Providers (PISPs) stand to capitalise on the new arrangements (if the banks do nothing, of course). What kind of services might they provide? Well, an obvious example is integration with social media. If you look at the use of instant payment “overlay services” (as they call them down under) in the UK (PingIt and PayM) it is far less than the use of, for example, Venmo in the USA. And Venmo doesn’t deliver immediate settlement (it works through the debit card networks). In the last quarter of 2015, Venmo transferred $2.5 billion. In January 2016 alone it transferred $1 billion. So why is it so popular? It’s the integration with social media. Just over half the users are 18-24 and half the payments relate to food and drink sharing! On a US college campus, “I’ll Venmo you” has entered the lexicon. In the UK, “I’ll PingIt you” has not. Paym is growing steadily, but it is still only transferring about £12 million per month.
So now imagine, post-PSD2, a combination of the immediate availability of funds like PingIt and Paym with the social media integration of Venmo. It will be a wholly different payment experience. I’ll give you an obvious example. My wife and some of her friends are planning a weekend break in August. They do this through a Facebook chat group. But when it comes to settling up for hotels and air fares, everyone has to log out, e-mail everyone for their bank details and log in to home banking and set them up as payees, then make the payments. Then everyone else has to log in to their bank accounts to see if the money has arrived and that it is the right amount. In 2018, however, it will all be different. Facebook will be integrated with instant payments through APIs so that it can function as a PISP. When my wife gets a message to say that she owes her friend £100 for her air ticket, or £25 for her share of the dinner, or £10 for the tickets to a show, then she will put money into her return message just as she adds emoticons today. Under the hood, Facebook (which of course knows the bank account of the person you are sending a message to) will initiate an instant payment and within a second or so her friend will get a message to tell that the money has arrived. Remember, Facebook already do this is in the US through debit cards (like Venmo).
It’s not all about payments though. The other category of organisation with direct access to the bank account, the Account Initiation Service Providers (AISPs) also stand to benefit from bank inertia. The row about “screen scraping” in the US adumbrates similar pressure for bank strategies in Europe.
JP Morgan Chase CEO Jamie Dimon is incensed about fintech startups like Mint, Acorn and Bloom “scraping” his customers’ data
I’m sure his experienced strategists will be quick to reassure him that third-party access to bank accounts (the data is the customers, not the banks, of course) ought to be seen to be an opportunity for JP Morgan Chase to develop some terrific new products and services. The reason why customers of JP Morgan Chase use Mint is because JP Morgan Chase do not provide a suitable, better product for them to use instead. Mr. Dimon, as a champion of free enterprise, would surely object to organisations building walled gardens and using regulatory barriers to defend them. If Facebook or Amazon provide a better financial services app for customers to manage their JP Morgan Chase accounts, then good for them.
In fact, it seems to me, that this is a very likely outcome of rational market evolution. I buy my electricity from whichever supplier offers the best deal for our household. When I change suppliers, I don’t need to change my TV. When I change banks, why should I change my digital wallet if I don’t want to? With a standard API, might personal finance management (PFM) app and my wallet app and my social networks will all access my bank account, whatever my bank. And if I change banks, whatever.
So… what makes sense for banks? Why bother making the wallet or PFM apps? Why not instead provide the best possible API to people who are better at making these apps. Why bother with PingIt and PayM? Why not instead provide the best possible API for PISPs to use. Why bother with fancy applications at all? Why not instead provide identification and authentication services (through APIs of course) that all of these other apps, APIs and services will depend on. After all, if I’m going to give Facebook access to my bank account then Facebook need to be pretty sure that it’s actually me and I need to be pretty sure that it’s actually Facebook. My bank is a rather obvious middleman here.
All of which leads me to suspect, as I have mentioned before with tedious regularity, that the banks should focus on what the Euro Banking Association call the “non-mandatory, non-payment APIs” (as shown above) as a basis for strategic advantage and get together to agree a digital identity infrastructure and a common set of digital identity APIs. Nothing to it, really…