Algorithms, Internet of things and PSD-2: recipe for disruption in retail

Real innovation often comes down to unexpected, new combinations from unexpected places. What are the ingredients for total disruption in the consumer market? New laws and regulations for banks, the Internet of things and artificial intelligence. This mixture produces solutions that connect precisely with what consumers want: convenience, fast and real-time service provision – always available online.

Not much has changed for consumers since the financial crisis in 2008, but all the more for banks – their world has been turned upside down. Supervision is more stringent. For example, the regulators and members of the supervisory board must literally be present when the Board of Governors takes important decisions. In addition, banks are undergoing radical reorganizations, because rationalizing and digitizing the service portfolio is making a great many people redundant.

However, the greatest changes for consumers have yet to occur. The introduction of PSD-2, an extensive set of new laws and regulations enforced by Europe, constitutes a complete revolution. PSD-2 stands for Revised Payment Service Directive and will come into force in early 2018. From that time on, banks will no longer be the sole, exclusive and trusted party with which customers can arrange their banking business (financial transactions). They will have competition from parties that are permitted to offer these new banking services and that are obliged to follow less stringent rules. Consumers will no longer have to go to their own bank in order to conduct daily banking business. Will we still need banks? And which Fintechs will be the first to break through with disruptive innovations?

Will banks take action in time?

PSD-2 is a radical change for European banks. As of January 2018 they will be obliged to give external service providers access to the data relating to business and private accounts, when individual customers agree to this. In January 2017, the EU will announce the technical regulations in accordance with which access must be granted. In addition, banks must make their technical infrastructure available to payment initiation service providers.

The three major Dutch banks (ING, Rabobank, ABN AMRO) are currently still generating good margins on loans (credit, mortgages). Rabobank, ING and ABN Amro collectively control more than 90 percent of the Dutch market. However, they earn nothing from daily payment traffic – it is a cost item. This means that, in terms of serving consumers, banks must earn their money in another way – and this is certainly true when the introduction of PSD-2 increases competition in the banking service sector. The fact that it is still not very easy for customers to change bank means that the banks expect that they will still be able to effectively ‘retain’ their customers for the time being. The question is whether this is a sustainable combination with decreasing relevance. SNS Bank is already anticipating the arrival of PSD-2 by being the first bank to completely digitize the transfer service and make it possible to continue using your account number. Paul Alfing, senior payment traffic consultant at, the Dutch branche organization for e-commerce businesses, is clear about the future of banks – “If banks do not follow this movement they will become increasingly out of touch with their customers. There are already signs that banks are realizing this more and more.”

Will Fintech disrupt retail?

Investments in Fintech companies have increased enormously in recent years. This increases the chance of an enormous shake-out, and also of successful initiatives that will radically change banking services. The best opportunities are there for services that are ‘ten times better’ than existing services. Sometimes, the secret of that success lies in a detail. Sometimes it comes down to making smart, new combinations. For example, by combining your accounts at different financial institutions (bank, credit card company, investments) in a single environment. Or by integrating budget or accounting software in your bank environment. Or by making payment transactions ‘invisible’, which is something that interests (online) retail. Shopping cart abandonment is a major problem – time-consuming payment procedures with passes, codes and identifiers cause 45 percent of drop-outs during the online purchasing process. So there are enormous opportunities if you can narrow the gap between ‘offer’ and ‘payment’. 

Handy: computerization of transactions and payments

The automatic transfer, ATM machines (never having to stand in line at the bank); online banking with your smart phone – a great deal has already happened to make financial transactions easier. We no longer trust the underlying and background mechanisms without question. For an increasing number of services – such as the public transport chip card with automatic balance top-ups – we find it no problem to pay according to use without consciously initiating every individual transaction.

As we trust the mechanisms it is only a small step to services with which we leave transactions over to objects. For example, the connected Nespresso machine can generate a push message with a new, proposed order on the basis of data input from the store. The only thing that we have to do is agree via our smart phone. Payment and completion of the order then takes place in the background.

Computerizing brainwork with the smart phone

When data is analyzed effectively you can also use it to make predictions or suggestions. Where consumers must still actively look at announcements by online retailers (‘you were searching for…’; ‘other customers were enthusiastic about…’) algorithms can also actively take on a portion of our brainwork. The health App on your smart phone can make suggestions to add some extra power food or vitamins with a few healthy recipes to your next order from Albert Heijn on the basis of collected data. When you order flowers for your mother’s birthday online there are opportunities for the supplier, who then knows when to contact you next year. Should I send flowers for you? In short, the choice is already made. You only have to confirm it.

Outsourcing brainwork

Oxford professor Ariel Ezrachi warns against misleading use of these algorithms. The algorithm determines not only what you see, where and when, but also, for example, the price of the products. Prices may rise due to postal codes (because you live in a rich neighborhood) and algorithms of different sellers can influence each other so that they collectively drive prices up. You could limit saying ‘yes’ to automated orders by setting a budget on your smart phone, but first taking a critical look at the prices before buying will disappear.

Having algorithms execute orders and transactions is a form of delegation. You not only need clear boundaries for this, but also sufficient trust. Consumers generally accept the general terms and conditions of smart phone Apps of Facebook, Google or Apple unseen. The first Fintech player to gain a comparable level of trust when asking for permission for financial transactions on the basis of algorithms has a bright future.

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