Author: Nejc Urankar
Source: Lemur Legal
The revised Payment Services Directive (PSD2) came into effect in January 2018. By introducing new regulated business models and opening the financial services market to third parties, it has often been presented as the thing that will redefine the financial services sector. And while banks’ position in this system may be under threat, fintech companies are eagerly awaiting this new exciting era to finally take off. This could happen with the final compliance deadline, on 14 September 2019.
What is PSD2?
The story goes back to 2015, when the EU passed a set of financial services reforms with the ambition to improve and level the playing field for new market entrants. They were intended to stimulate competition and foster innovation in the financial sector, while the ultimate idea was to establish a completely new ecosystem where banks, fintech companies, and other third parties collaborate to enable customers to receive the financial services that best suit their needs. And while regulation usually plays a catch-up role in the world of technology, it seems that PSD2 has so far been a driver of innovation.
In its essence, PSD2 forces banks (and other payment services providers) to open up customer financial data to third parties via APIs, the set of protocols that transfer data automatically from one piece of software to another. At the same time, new regulation enables customers to easily share access to their data and pass it to so-called TPPs (Third Party Providers), who thus get the opportunity to use this precious information to create new financial products and services.
Why is it a big deal?
In a world where traditional structures have dominated financial services for a long time, this could undoubtedly bring huge changes. Even if the benefits for customers may not be immediately obvious, this shift from closed to open systems should have very positive impact for all of us. In the short term, the introduction of new regulated services will simplify the way we manage our finances and make the way we pay for things online more convenient while reducing the fees. In the long term, this development could potentially disrupt the financial world radically and introduce entirely new relationships as well as market structures, with AISPs and PISPs taking their piece of the pie.
AISPs: Turning data into value
Driven by the idea that the customer should have an overall view of her financial situation immediately at any given moment, the EU legislator focused on simplifying management of more than one payment accounts for customers. At present, a customer with multiple accounts has to access each individually through a separate interface. With technical barriers having being removed some time ago, the only obstacle left for taking a step forward were the banks (and other payment services providers) who didn’t allow it. Under PSD2, they have no choice – they are required to build API infrastructure and make customer data available to AISPs (Account Information Services Providers). AISPs are then able to consolidate data on transactions and balances from accounts the customer holds at multiple banks, and deliver an aggregated viewpoint of her finances, in a single place.
The potential behind the aggregation of the customer’s financial data and then providing them with a dashboard overview of their financial status could be enormous. This opens up the opportunity for a deeper level of customer engagement, analytics driven insight into customers’ needs and preferences, as well as many other ways to turn financial data into value (for customers and for businesses) presented through a modern interface.
PISPs: Shift to safe, seamless and cheaper payment experience
Another new regulated entity introduced by PSD2 is the PISP (Payment Initiation Service Provider), who is authorized to initiate a direct transfer from a customer’s account held with a bank or another payment service provider, using their open APIs. At present, when a customer buys something online (for example, on Amazon), the merchant contacts an acquirer (such as Worldpay), which gets in touch with a card network (such as Mastercard) to take the payment from customer’s payment account. With PISPs, funds could be transferred directly from the customer’s payment account to the merchant's bank account, bypassing the card network.
As a result, customers will be able to effortlessly make payments, with enhanced authentication options such as fingerprint sensors and facial recognition ensuring payments remain secure. It’s expected that this kind of seamless, low friction experience will foster innovation in the retail environment, enabling apps to connect directly with their customers’ bank accounts and encourage the emergence of the in-app, one-click online purchasing options. For customers, this should make online payments quicker and, since the various middlemen each charge for their service, also cheaper.
What’s happening right now and what comes next?
One common misconception is that open banking in Europe launched with the day PSD2 came into force. This was the day the revised directive should have been transposed to national laws of the member states, and since then the companies could apply to local regulators to be approved as AISP or PISP in order to access the APIs. At the time of writing, 99 companies have received AISP licence and 61 companies have been approved as PISP, with licences issued in 15 different countries (once again, UK is the front-runner with 97 licences).
Meanwhile, these companies can already test the API systems in the “sandbox” environment as the European banks (and other payment service providers maintaining payment accounts) were required to set up a publicly available testing facility until 14 March 2019.
However, the PSD2 countdown continues with the final deadline looming on 14 September 2019, when PSD2 Regulatory Technical Standards come into force – from this date on, approved AISPs and PISPs will finally be able to offer their services directly to customers. And with customers getting an opportunity to get the most of their financial data and use the financial services that best suit their needs, this may as well be the point the long awaited PSD2 impact finally starts to become visible.