It’s the second iteration of the Payment Services Directive (PSD) implemented by the European Union. It affects both individual consumers and businesses, and is set to revolutionise the way we make payments online.
The PSD was adopted in 2007 to create a single market for payments. The idea was to create a more unified payment market in Europe. Adoption of digital payments has advanced steadily since then and is outside the scope of PSD.
Hence, PSD2 was born. It was implemented in 2015 and will come into force in January 2018. Businesses must comply by then.
PSD2 is a wide-ranging directive, covering 117 Articles including mandatory encryption and strict controls on merchant charges for transactions, but a significant part is Article 29 – Access to Accounts (XS2A). This opens up consumers’ account information to third parties. These third parties can offer payment services but they won’t have to be banks.
PSD2 opens up consumers’ account information to third parties. These third parties can offer payment services but they won’t have to be banks.
Merchants (such as Amazon) will be able to take payments from your bank account without using an intermediary like Visa or PayPal. They will access your bank account directly from your bank using an API (Application Programming Interface).
Here is a list of players who have been defined in the PSD and PSD2:
Credit Institutions – Banks
Payment Institutions – They can offer several payment services.
Third Party Payment Service Providers (TPP) – Don’t hold bank accounts so offer limited range of services.
Account Servicing Payment Service Providers (ASPSP) – Provide and maintain payment accounts for consumers.
Account Information Service Providers (AISP) – Bring together multiple payment accounts.
Payment Information Service Providers (PISP) – Enable the use of online banking to make payments.
XS2A Impact on banking
For a long time, incumbent banks have had the monopoly on payment services. Before PSD2, banks have had to authorise payments for account holders.
Now, free-market competition will be introduced to the payment services market. This creates new opportunities for third party services to create online payment products.
Also, banks and brokers can currently profit from offering poor exchange rates for consumers. PSD2 aims to prohibit non-transparent pricing methods in transferring money abroad.
Potential of XS2A for consumers
Right now, consumers plump for outdated online payment technology that seems better adapted to the needs of traditional institutions than users.
Banks will be obliged to open up their IT systems to third parties making payments on behalf of account holders. They must also be prepared to provide a consolidated real-time view of a user’s account statements.
For example, if you have bank accounts with more than one bank, you will be able to see your account information in one place.
With PSD2, consumers can become the focus of financial services. We’ll see improvements to the piecemeal way consumers currently manage their finances.
How banks could reposition themselves
The intense popularity of fintech is one indication that the industry is ripe for disruption. Many banks have slowly started to respond to the fact that consumers are dissatisfied with their services.
Companies such as the UK’s first mobile bank Atom Bank, and competitor Monzo, are digital financial services that have gained great popularity. With PSD2, true disruption is becoming more of a real possibility.
Banks have to comply with very strict regulations, which is one barrier that prohibits their innovation. To overcome this, some banks have already been scrambling to invest in fintech startups, and three of the largest fintech investors are international banks.
Businesses need to get ready for the changes coming into force with PSD2, and the huge opportunities for breaking into the payment services market. PSD2 should help to level the playing field and present more opportunities for innovation.
Startups have the advantage of being able to adopt disruptive new business models and move very quickly. Forward-thinking entrepreneurs will jump on this chance to make a profit.
Existing businesses can modify their service offering and take advantage of their brand name to quickly gain the trust of consumers looking for new payment services.
Consumers can get ready for a slew of new products and services that make managing their finances and buying online much easier.
New financial technologies often suffer from a slow uptake due to fears about security. Security is a valid concern.
Online transactions will require more security checks than we generally have now. Payment authentication is likely to require a combination of password or PIN, bank card, and/or fingerprint or voice recognition.
The reality is that most consumers are probably using services outside their normal bank without realising, such as PayPal. Consumers will need to switch on to the reality of online payment services, since those who don’t may get left behind.
All the new terms can be a little overwhelming. The core message to take away from PSD2 is that the online payments market is becoming more unified.
Some of the power is being wrested away from banks and placed back into the hands of the consumer. This spells good news for individuals and businesses.
It’s an exciting time for fintech. Startups and other businesses will compete to offer a new breed of financial services and products, following on from first movers like Monzo, and Mint in the US. Incumbents will be looking to invest these new businesses.