New regulation will end the banks’ long held monopoly on customer account information and payment services.

PSD2 (Payment Services Directive 2) will open up the competitive landscape, not only to challenger banks, but to non-banks looking to take advantage of their trusted brand and wide customer base to deliver new and innovative models for financial services.

The economics of banking is changing – lower margins, higher compliance costs and enforced competition from regulators is forcing banks to re-assess the value that they offer, and how they interact with customers. Rapid technological change is both the driver of this challenge, and the key to unlocking the ability to compete effectively in this new landscape.

>See also: Redefining customer experience: the future of the branch

In this fight for user acquisition and loyalty, customer engagement is key. But what does relationship banking look like, in a digital world where the customer is usually at arm’s length?

The number of physical touchpoints with customers is decreasing, as increased mobile app usage continues to threaten the UK bank branch network. Meanwhile, mobile-only challengers are seeking to capitalise on this new consumer appetite for digital services.

Banks must navigate a complex path to adapt to these evolving customer needs. Relationships are still key, but the way in which they are built and maintained is no longer reliant on face-to-face interaction.

Deloitte’sMobile Consumer 2016 notes that we are in the era of ‘peak smartphone’, giving banks more opportunity than ever to have ‘conversations’ with their customers, building brand loyalty and delivering value via the pockets of more than 80% of UK consumers. With unprecedented access to their financial information, a report from the British Bankers Association reveals that customers use banking apps more than 7,610 times a minute – or four billion times a year.

Digging into data

Banks are facing stiff competition, but have a mountain of customer data at their fingertips. Unlocking and understanding this data will be the key to offering meaningful, personal relationships.

>See also: Open banking: the quiet revolution

In a digital age, creating ‘personal’ relationships is reliant on the ability to personalise product offerings and tailor pricing according to customer needs.

Banks’ core infrastructure has not historically been set up to operate in this customer-centric way. Achieving this level of personalisation – a “segment of one” – requires a single view of the individual customer to be able to offer them the right product, at the right time, through the right channel, and at the right price.

Out with the old

The struggles with legacy systems has been well publicised, leading to many of the frustrating IT outages that customers have had to deal with in recent years. There’s simply no room for this, for banks looking to build a defensible competitive advantage.

That said, banks have a key advantage over new third party providers. PSD2 will mean more and more transactions going directly through the bank account rather than cards, giving banks even stronger insight and greater accuracy and understanding into what that behavioural activity profile is or what their customers are likely to need or want to do at a given point in future.

>See also: How UK banks can fight off disruptors in the next decade

If banks can derive insight from this data, they will be well placed to deliver value-added services to the customer, such as budgeting tools and real-time tailored advice on spending and payments.

In addition to the brand equity this would earn, this in itself would bring unique cross-selling opportunities for the bank, enabling precise commercial decisions which drive happy, profitable customer relationships.

We’ve already seen some banks make a move here. Just one example is Santander, which is equipping 11,000 employees with iPhones, using real-time enterprise data to improve customer engagement. Santander’s goal is to “empower [employees] with information that transforms the way they approach customer service.”

There is no opt out of the digital landscape

There’s no ‘pause button’ for banks, to grapple with the pace at which consumer expectations of banking services are evolving. How they equip themselves now will determine whether PSD2 whether they rise to the top as the hub of all their customers’ account information, or risk relegation to a commodity capital provider – no brand, no customer relationship.

>See also: Collaboration between banks and fintechs is key to survival

The challenge that banks face, is how to innovate, creating sophisticated, dynamic, tailored client propositions in real-time, without jeopardising the stability of the core system. It’s not a ‘rip and replace’ conversation, but a question of augmenting, to extract product and pricing information into a separate and central innovation layer.

A website and mobile app refresh do not make a bank digital. This ‘veneer of digital banking’ will quickly be exposed if the underlying infrastructure can’t keep pace, and will not stand up to scrutiny from the new generation of customers, whose heads are already turned by non-bank providers of financial services. The race is on – and it’s all about the data.

Sourced by Nancy Langer, President, Zafin

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