Dave Birch at Consult Hyperion wrote an interesting article recently 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 at Celent, but in the context of traditional banks. When you run brainstorming 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 bank.
- IT banks, providing products and services to others. Citi with its co-opetition model, might be an example of this. I labelled these ‘manufacturers’.
- 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 Birch 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, using ISO as in the US group of card solution providers known as Independent Sales Organizations, 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. This 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- flavors, it’s the back-end that distinguishes the two, with neo a traditional platform and iso with a far simpler account platform (a prepaid card). In PSD2, there are numerous variations. Here are 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 account. Most consumers would think that as a non-FI, but, as they have a banking license I assume they would be included as well under PSD2 (thoughts please!). But what about the true non-FIs?
- 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 realize the more I need to do.
– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. You can read the original article here.