# PSD2: Kick-starting banking business models of the future
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2018-02-28
Category: BUSINESS
Category URL: https://financedigest.com/category/business
Meta Title: PSD2: The Game-Changing Legislation Shaping the Future of
Meta Description: Explore the impact of PSD2 on UK financial services and how traditional banks are adapting to meet customer needs in a changing market landscape.
Tags: featured
Tag URLs: featured (https://financedigest.com/tag/featured)
URL: https://financedigest.com/psd2-kick-starting-banking-business-models-of-the-futurehtml

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_By **Karen Wheeler**, Vice President and Country Manager,_ _Affinion UK_

As we approach two months since it became mandatory for financial services companies to comply to the FCA’s latest European legislation, the Payment Services Directive (PSD2), change is already afoot.  European banks understand exactly what the new rules are aiming to change within the industry, so it’s unsurprising that introspection and preparation became the norm. By forcing change in the industry, PSD2 has been a catalyst for traditional banks to consider the validity of their business models. In fact, it’s not a stretch to say this legislation is the beginning of a new journey for banks that now have to question the [future role](https://www.financedigest.com/the-role-of-fintech-in-shaping-innovative-future.html "The Role of Fintech in Shaping Innovative Future") they will have in the industry, and in their customers’ lives.

Competition is already rife in the UK, with the worlds of e-commerce and retail producing new challengers to the throne. This is great news for customers, as increased choice places the power firmly in their hands, while [banks have no choice but to continuously improve the customer](https://www.financedigest.com/canadian-banks-fighting-brokers-back-for-customers.html "Canadian Banks Fighting Brokers Back For Customers") experience. As the industry evolves, the future success of banks depends on their ability to meet the needs of customers, particularly through [digital channels](https://www.financedigest.com/gamers-spend-twice-as-long-viewing-intrinsic-in-game-ads-compared-to-other-digital-channels-reveals-new-research-from-lumen-and-anzu.html "Gamers Spend Twice As Long Viewing Intrinsic In-Game Ads Compared To Other Digital Channels, Reveals New Research From Lumen and Anzu"), products and services.

Market change remains inevitable – PwC predicts that [“2018 is set to be a game-changing year for retail banking”](https://www.pwc.co.uk/industries/banking-capital-markets/insights/psd2-a-game-changing-regulation.html).In response, banks have already started exploring new models to guarantee their customers remain engaged and loyal over the [coming years](https://www.financedigest.com/refrigerated-trailer-market-to-exhibit-increased-demand-in-the-coming-years.html "Refrigerated Trailer Market to Exhibit Increased Demand in the Coming Years").

PSD2 is set to accelerate this further, as [banks adapt to the reality of the new regulation and witness how customers are responding](https://www.financedigest.com/how-bank-cisos-can-respond-to-a-digital-hostage-scenario.html "How Bank CISOs Can Respond to a Digital Hostage Scenario") to the changes.

**Both fintechs and traditional banks embracing change**

Both established banks and fintechs have already started to change their [business models](https://www.financedigest.com/cfos-its-time-to-own-the-business-model.html "CFOs: It’s time to own the business model"). We’ve seen mobile-only challenger Starling Bank announce [four partnerships](http://www.cityam.com/280482/starling-bank-announces-partnerships-mortgage-broker) for its in-app marketplace in February 2018 alone. This is just the starting point however, as the [firm has confirmed these are just the first of 25 planned partnerships for this year](https://www.financedigest.com/german-engineering-firms-expect-hit-from-supply-chain-bottlenecks-next-year.html "German engineering firms expect hit from supply chain bottlenecks next year"). Part of a wider trend of start-ups becoming finance platforms, it aims to become a hub for people’s financial lives by selling third-party [products like insurance](https://www.financedigest.com/insurance-products-growing-in-importance-in-2021-and-beyond.html "Insurance products growing in importance in 2021 and beyond") and even mortgages through the app, and taking commission of each customer that is referred to other services through its marketplace.

In the [world of high street banks](https://www.financedigest.com/fund-nature-protection-now-or-face-huge-losses-says-world-bank.html "Fund nature protection now or face huge losses, says World Bank"), Santander is leading the charge for fintech partnerships. Recently, [it announced it’s working with fintechs Pixoneye and Gridspace](https://www.santander.com/csgs/Satellite/CFWCSancomQP01/en_GB/Corporate/Press-room/Santander-News/2017/07/12/Santander-InnoVentures-adds-two-new-UK-and-one-US-fintech-businesses-to-its-portfolio.html) to bring predictive personalisation, connected finance technology and conversational intelligence to its customer offerings.

There is a growing customer appetite for an alternative way of doing things in [today’s digital world](https://www.financedigest.com/bridging-the-gap-between-banking-and-digital-accessibility-in-todays-digital-by-default-world.html "Bridging the Gap Between Banking and Digital Accessibility in Today’s ‘Digital by Default’ World"), where ecommerce and tech giants are increasingly encroaching on banks’ territories. A recent study by Accenture identified a new wave of Nomad customers who are open to non-traditional banks, with 78 per cent saying they would be willing to bank with a tech firm like Amazon or Google.

**Traditional [banks and challengers](https://www.financedigest.com/big-bank-ceos-to-sell-lawmakers-on-relief-diversity-efforts-amid-economic-regulatory-challenges.html "Big bank CEOs to sell lawmakers on relief, diversity efforts amid economic, regulatory challenges") coming together**

While there is indeed competition between the old and the new, there is a growing trend of banks creating marketplaces and partnering with fintechs and third parties to draw on their experience and offer services through a [branded platform](https://www.financedigest.com/brand-strategy-tactics-for-an-online-learning-platform.html "Brand Strategy Tactics for an Online Learning Platform"), akin to Amazon’s in the world of retail.

By moving from a position of seeing each other not as competition, but potential partners, they can capitalise on each other’s strengths, meet the needs of today’s [customers and drive forward innovation](https://www.financedigest.com/customized-innovation-to-drive-the-human-microbiome-market.html "Customized innovation to drive the Human Microbiome Market"). The industry is increasingly open to collaboration; [a global survey by PwC](https://www.pwc.com/bm/en/press-releases/assets/042117-global-fintech-survey.pdf) found that 82 per cent of banks, insurers and asset managers intend to increase the number of partnerships they have with fintech firms over the next three to five years.

According to PwC partner and fintech head Steve Davies, “Every bank in Europe is now running its own [incubator or accelerator for fintechs](https://www.financedigest.com/fintech-incubation-more-value-than-meets-the-eye.html "FINTECH INCUBATION: MORE VALUE THAN MEETS THE EYE") whose technology it hopes to benefit from”. In the UK, for example, [HSBC has partnered with the fintech Bud](http://www.cityam.com/274202/hsbcs-partnering-fintech-startup-bud-latest-open-banking) to offer its customers a range of financial management tools under its online-only brand First Direct in a new trial.

[Working together in this way provides a clear opportunity](https://www.financedigest.com/hybrid-working-a-risk-or-opportunity-for-the-financial-services-industry-2.html "Hybrid working: a risk or opportunity for the financial services industry?") to capitalise on the strengths of both. High-street banks have worked tirelessly for years to build trusted brands and achieve consumer loyalty, while fintechs offer the [digital agility and expertise traditional banks](https://www.financedigest.com/being-the-best-digital-bank-is-not-enough.html "Being the Best Digital Bank is Not Enough") often lack, held back by regulations and legacy infrastructures.

**A golden opportunity for banks**

The continued evolution of financial regulations remains a burden on the industry however, making it increasingly difficult for legacy systems to be integrated with the cloud [technology that fintech](https://www.financedigest.com/financial-technology-fintech-how-to-navigate-the-latest-trends-and-innovations.html "Financial Technology (FinTech): How to Navigate the Latest Trends and Innovations") start-ups rely on. These complex integrations can take their toll on the fintechs too, directly [impacting profitability](https://www.financedigest.com/oil-rebounds-on-profit-taking-as-market-shrugs-off-virus-impact.html "Oil rebounds on profit-taking as market shrugs off virus impact") by sapping time and resources which are already limited.

[Banks’ procurement protocol can also be a significant obstacle to overcome](https://www.financedigest.com/how-can-banks-overcome-the-tech-trust-gap.html "How can banks overcome the tech trust gap?") for start-ups. Its not uncommon for them to [require prospective partners to have two or three years of accounts](https://www.financedigest.com/whats-required-of-accounting-to-build-a-better-tomorrow.html "What’s required of Accounting to build a better tomorrow"), which many of these start-ups simply can’t offer.

Whether traditional banks are on board or not, [developments like PSD2 continue to transform the industry](https://www.financedigest.com/image-guided-surgery-devices-market-recent-industry-developments-and-growth-strategies-adopted-by-players.html "Image Guided Surgery Devices Market: Recent Industry Developments and Growth Strategies Adopted by Players"). Now’s a crucial time for these [banks to focus on innovation and ensure they are differentiating themselves in an increasingly crowded market; through dedicated incubators, acquiring or partnering with a fintech](https://www.financedigest.com/the-stem-cell-banking-market-to-keep-up-the-digitized-momentum.html "The Stem Cell Banking Market to keep up the digitized momentum"). With tech giants eager to occupy the role banks have within customers’ lives, banks that bury their heads in the sand and ignore the need to change their [business model will soon get left behind by innovative disrupters](https://www.financedigest.com/disruption-and-innovation-four-predictions-for-the-business-landscape-in-2016.html "DISRUPTION AND INNOVATION – FOUR PREDICTIONS FOR THE BUSINESS LANDSCAPE IN 2016").


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