Will a unicorn be spotted in the PSD2 grasslands?

PSD2 and open banking are coming and bringing with them opportunities for start-ups. Will a unicorn be among them?

The unicorn, that legendary creature described since antiquity, has been re-purposed by venture capitalists as a start-up company with a value at over $1 billion.  Now unicorns are not as rare as they once were. Many are household names: AirBnB, Snapchat, WeWork etc.

Disparate though their offerings may be, unicorns share a similarity in their disruptive effect on whole markets. Some re-invent how the market operates, some create services that weren’t available before and some just offer a better service than their competitors.

The second payment services directive (PSD2) is changing the rules for the banking industry.  From January, the UK’s banks will have to provide your transactions details to any authorised organisation you have approved to have them.  They will also have to make payments on the instructions of organisations you choose to do this.

Meanwhile, Open Banking will shortly go live, helping to make PSD2 a reality in the UK. Banks will have capabilities to securely share your data and transact with your permission.  Consumers will have more rights over their data, as well as access to a Europe-wide digital market for services (at least for a while). 

These changes provide opportunities for unicorns. The question is will they come?  

We are already seeing the sort of business that might thrive: comparison sites that could make that difficult switch on your behalf; accounting services that access your bank accounts to pay your bills; services that dynamically help you understand your finances.  These are the obvious ones. But bright minds and capable coders will have much more in store for us.

Unicorns need revenue.  They might not make a profit for a long while, but if there is revenue growth and a potentially huge market, then investors will come.

Revenue is the key to success, and there are different ways to produce it. Innovators can charge consumers for a service (e.g. Spotify), they can get the product providers to pay (e.g. PayPal), or they can offer a service which produces a by-product that can be on-sold (e.g. Facebook).  All of these methods have produced unicorns.

In retail banking, margins for some products can be razor thin, or even non-existent.  In many banks, a few profitable customers subsidise the rest.  So it seems unlikely that product providers are going to provide revenue.  Furthermore, with the current possibility of “free, if in credit, banking” it seems unlikely that consumers will pay much for new services when they might never have done so for their existing ones. However, this may change: retail banking services have not always been available without charge and aren’t in many other countries.

As an advertiser would you prefer to know what someone likes, or what they actually spend their money on?

My prediction is that our unicorn will come from finding a way to make the data about customer activity into a useful by-product for targeted advertising.  Google and Facebook dominate this space, but as an advertiser would you prefer to know what someone likes, or what they actually spend their money on?

This will take some finesse to pull off.  People will probably be more sensitive about sharing their banking data than their search history.  And regulators will have to be sure that any business model "does no harm" to consumers before it launches.  PSD2, along with an upgrade to data protection (GDPR), creates a new regulatory landscape for the potential unicorns to navigate.  Though this sounds difficult, regulators are friendlier to innovation than they once were.

The banking industry knows what the opportunities are and what is at stake.

I can imagine that hundreds of entrepreneurs will give it a go. If I am right, they will need to find a service that is so attractive to users that they will consent to targeted advertising to avoid any usage fees.  Our entrepreneurs will also have to find a way to grow quickly as useful data needs volume. They will not be the only ones who have spotted this opportunity. The banking industry knows what the opportunities are and what is at stake. They will be competing fiercely.

The PSD2 grasslands are going to be very busy as the start-ups try to grow and outrun the competition. Many will not make it beyond youth and others will become the main event in a merger and acquisition feeding frenzy. Maybe a few will make it all the way and become unicorns.  For all us observing, it’s going to be fascinating to watch.

28/09/17