Tell us about yourself and your take on and approach to Open Banking/PSD2.
Lav Odorovic: We started Penta because we hated our banks. In our last few ventures, we spent so much time doing boring banking tasks that stole our time away from our businesses, our customers and our personal lives. We manually did hours of tedious accounting tasks, we lost a ridiculous amount of money on FX. Getting quick access to working capital was very difficult and we were lucky if the online banking worked!
We didn’t want to put up with this anymore, because we knew that there must be a better solution. After speaking to our peers and doing some research we realised we weren’t alone in this observation. Over 2.5 million high-tech companies across Europe suffer from these outdated business banking processes.
Our founding team at Penta decided to build a bank account that we’ve always wanted to have. A bank account for small businesses that integrates all the best financial services and business apps into one bank account, from instant loans, to automated accounting and low-cost international transfers and more, helping people save time and money.
It’s such a great time and environment to be in this business because of PSD2. The directive has largely contributed to the evolution of Fintech which has in turn helped thousands of people and businesses across Europe. Innovative models from banks like SolarisBank, and Fintechs like Railsbank, are good examples of this. The likes of SolarisBank are offering Banking as a Service (BaaS) products that ultimately empower “finance pioneers [like Penta] to innovate the future of finance.”
And without SolarisBank or Railsbank, models like ours would not have been possible. Furthermore, the “a tech company with a banking licence” approach that many financial institutions are starting to adopt is where the future is. And even challenger banks like Penta are opening up their APIs as well, so that we can empower developers to further innovate for businesses and consumers with the wealth of data that we can provide.
This enables us and our developer community to offer our customers great products that can help them scale quicker, acquire more customers and save a lot more money than was previously possible before the idea of PSD2 came about.
Who will be the big winners and losers in Germany?
Lav Odorovic: PSD2 will offer a plethora of both data and services to independent developers and banks to take advantage of. The impact of developers getting access to data and APIs can be seen in the history of the Apple App Store which produced businesses like Uber and SnapChat.
But what banks will do with this data is the question. It goes without saying that the notion of PSD2 alone has redefined what Fintech innovation is. Today, the image and UX of banking is moving closer to an Instagram or an Uber. Push notifications. Constant updates. Beautiful designs. Power over your experience.
The winners in Germany are going to be the ones that embrace the inevitable future of API banking, partnering with one another and allowing others to focus on what they’re best at.
What does that mean? When Apple started in the late 1970s, their goal was to make the computer personal. So they teamed up with startups like Microsoft to build them applications, like Microsoft Word, that made the computer personal. Apple wanted to focus on hardware and the operating system while they partnered with companies like Microsoft to offer their customers the software they needed to take full advantage of the Apple personal computer.
Apple realised early on that it would focus on what it was best at while allowing others to do what they’re best at. They knew that partnering with others to offer great products within their operating system was the future. As a result, Microsoft and others were also inspired to innovate (and compete) with this vision in mind.
30 years later, the iPhone came out in 2007 and the Apple App Store followed in 2008. Apple allowed developers to decide where the future of the mobile phone would go. Ultimately inspiring over one million developers to build apps for iPhone customers. And empowering businesses like Uber, Deliveroo, SnapChat to completely redefine economies, laws and innovation.
The same is true for the future of banking. Today’s flexible Fintech core banking systems will be equivalent to the iPhone in 2007. Opening APIs that allow developers to build apps that help improve bank customers’ financial lives will be equivalent to the Apple App Store.
The winners will be those that recognise the benefits of enabling the developer and innovation community to get creative. Those that recognise this and put a massive focus on this will win. Others will slowly suffer the fate of BlackBerry.
How will customers benefit from this initiative?
Lav Odorovic: Today, the greatest minds in Fintech and banking are working together to build great products. But with PSD2, this mission is being proliferated, faster than ever before, because the responsibility of financial innovation is being pushed all the way down the chain, from the conventional banker in a suit, to independent tech people in flip-flops.
The beauty of Fintech is that money is part of everyone’s life. Everyone can relate to spending money and problems with banking. With PSD2, banking data via APIs will be (and are slowly) open to everyone to take advantage of and innovate with.
Just a few years ago, if you wanted to build an innovative financial product you’d have to be a banker. Today, anyone can change banking. And that’s the biggest advantage. Because non-bankers look at the world differently. They fundamentally think differently than bankers. Because they are different.
And that’s the biggest gift the PSD2 directive gives to Europe. It enables a new generation of businesses to decide what the future of financial services will look like. It gives power to non-bankers to decide the future of banking instead of the High Street.
So, how will customers benefit? When the Apple Store came out in 2008, Apple had no idea where it was going. But it gave developers the ability to be creative. The result? SnapChat, Twitter and Uber and the beginning of mobile banking.
What will the future of PSD2 hold? We have no idea. And that’s the beauty of PSD2 because it allows teams and developers to be the pioneers in financial innovation just as the App Store enabled people to build multi-billion dollar businesses that make our lives so much more easier today. However, we know banking products will be commoditised; providing more options, less friction at lower costs.
Will Open Banking/PSD2 be the driver for a new era of banking?
Lav Odorovic: Before 2007, there were a few mobile phone makers and a few telecom providers who decided on the operating system of mobile phones and the future of the mobile phone. Then the iPhone came out, and one year later the Apple App Store appeared, where the power of innovation of the mobile phone and its “use-case” shifted from being decided by a few companies to being decided by millions of developers who were incentivised to build great products.
Just as the innovation of mobile phone operating systems and the use-cases (apps) shifted from a few big telco players to millions of developers worldwide, financial service innovation will shift from legacy banks to millions of developers across the world as well.
The developer community will be able to leverage the existing infrastructure and data via PSD2 in order to help spread ideas and the message that “there’s a better way to bank” to more Europeans at an increased rate, including those that are unbanked and un-bankable.
Banks will have to offer great, cost efficient solutions that will compete for customers across Europe since their lock-in effect will fade away.
What is the current state of play in Germany, ahead of the January 2018 deadline?
Lav Odorovic: From a Fintech challenger bank perspective, we’re all at the early stages of opening our APIs to allow developers to build great products for our customers as well as integrating existing players.
Non-bank players have been leveraging infrastructure and data for several years now from players like Figo to aggregate accounts and categorise transactions.
The problem is, the majority of these services act as substitutes to what PSD2 will do as the data is pooled by screen scraping. PSD2 will allow other Fintech players and developers to take advantage of this data with a clean API.
In Germany, banks came out of the recent financial crisis in a slightly better position than those in some other countries. This unfortunately gives them an unjustified sense of comfort and lowers their efforts to modernise. For many of the senior managers in their late 50s it is very hard to understand the scope and the speed of changes coming from Fintech.
API banking is coming, slowly but inevitably. Traditional banks require radical changes. To quote the Financial Services Club’s Chris Skinner, 87% of senior managers think their core banking systems are not up to the challenge. Modernising core banking systems is a major risk not many are ready to undertake. This will further prove to be a limiting factor in the years and possibly even decades to come.
Does the banks vs. Fintechs dispute over PSD2 threaten to derail the EU’s progress towards Open Banking?
Lav Odorovic: PSD2 is as much of a philosophy and mission statement as it is a directive. On the one hand, it “forces” some players to open their APIs in order to increase competition and innovation while in parallel it inspires others to innovate in line with their own will.
Banks like SolarisBank and Fintechs like RailsBank are in the latter category; they are inspired by the philosophy and mission of PSD2 because they know that’s the future. They know that banking is broken and they want to be the enablers of a whole new generation of businesses that’ll fix it and help millions of people.
And so they’re doing exactly that, with or without PSD2. And with or without PSD2 they will be there and open their APIs (or help others open their APIs) so that they can help proliferate this inevitable innovation.
In short, we see no dispute. PSD2 clearly works in the favour of FinTechs and a few modern banks. Everyone else will just passively see their market shares eroding.
The philosophy of PSD2 will happen under the PSD2 name or in the notion of the movement. It’s up to the legacy banks to realise that this is the future and not just a directive.
About me: Freelance journalist specialising in FinTech, banking technology and retail technology. Former Editor of FStech, Retail Systems and IBS Journal. Further info here.