How the revised Payment Services Directive will change payments and banking as we know it

The revised Payment Services Directive (PSD2), by putting all existing players under the unified regulatory framework, comes with an opportunity for companies that need access to bank accounts to offer their services.

Moreover, banks may benefit from PSD2, but for most of them (especially those with legacy infrastructure), this is a hard time.

In the following years, we can see an increase in the number of new fintech services. This will also bring a wider set of choices for consumers, resulting in many real differences for the payments industry. There’s no question that PSD2 will transform the payments landscape, but, for now, it’s hard to say on what scale.

What is the PSD2?

It is the European Union’s directive that mandates banks to open up access to accounts and customer data (e.g. payment details) to third-parties. According to the directive, all European Union Member States have to transpose it into their own national laws.

There are a few players included in PSD2, such as Third-Party Providers (TPPs), Payment Initiation Service Providers (PISPs), Account Information Service Providers (AISPs) and Account Servicing Payment Service Providers (ASPSPs)—a customer’s bank, for instance.

Before PSD2, there were only one-on-one interactions between a customer and their bank, but in a few months, we can see more providers in-between.

In short, according to the new directive, PISPs and AISPs may access customer account data and initiate transactions without the ASPSP prior commercial agreement. Third-party providers will be able to initiate payments through PISPs, directly from the customer’s bank account.

What does this mean for consumers?

Improving the customer experience

With open APIs, it will be much easier to give customers access to their banking services whenever and wherever they want. A customer will have the ability to see their financial history among various accounts in seconds, without any effort.

Businesses known as Account Information Service Providers (AISP) can display users’ all account information within one application, even if they have more than one bank account. It simplifies the entire process, as they can conduct some financial operations without the need to login directly to their banks’ websites or apps. Making banking or payment operations will be as simple and easy as a few taps on their smartphones.

These are just a few examples, but the possibilities are endless. And this isn’t anything new in the industry, as some banks had opened data on financial transactions to third parties even a few years ago. However, in a few months, the process will start becoming standardized, so we can see more competitors on the market which, I believe, will come with lots of innovative solutions that will make our lives easier.

PSD2 can be a huge opportunity for all players involved, such as banks, third parties, and consumers, but it’s also a real challenge, especially for financial institutions. Most of them still struggle with legacy and clunky systems, and, as they need to be ready until January 2018, they don’t have much time to overhaul it (and plan the budget wisely). With a few months to go, there are possibly many new partnerships and collaborations coming.

The European Union (flag pictured) implemented a directive called the Payment Services Directive that orders banks to give third parties access to customer data and accounts. (Source)

Fintechs know how to use data

We all know that the more competitive the market will be, the more choices for customers it will bring. Both financial institutions and third-party providers will be more focused on customer-centric solutions with an improved and more friendly user experience. In today’s online world, consumers expect speed and convenience in everything, the same goes while using bank or non-bank applications. Basically, it’s a must to provide seamless products and services and stay ahead of competitors.

Open banking can be perceived as a chance for companies to be more innovative so they can offer services that can really change our lives. Implementing new technologies and understanding modern consumers’ needs will definitely change the market of payment services and transform the experience for end-users.

It’s a common truth that banks are getting a bit concerned, as they will no longer have the monopoly of customer data and most of them have a legacy infrastructure. Banks have been highly regulated institutions so far, but they need to make all the essential pre-work until next year, and the clock is ticking. That’s why the PSD2 is also an exam for banks—financial institutions can use their position to create offers that help them win and retain customers.

The thing is that traditional institutions should change their mindset. With their predominance of having a huge customer base in place, they can create competitive solutions to keep their position on the market. This all gets even more interesting when combined with attaching third-party components via open APIs to their solutions. Starting partnerships with fintech companies lets them enhance their systems without building new solutions from the ground up.

Security concerns

PSD2 wasn’t just made to move the innovation to a higher level and foster competition, but also to give consumers better protection.

Each time when there’s customer’s data included, there are security concerns. PSD2 makes customer’s data open to more players than before, so there are questions about what purposes the data can or should be used for. The PSD2 directive clearly says that most companies aren’t allowed to store account data after accessing it from banks, but consumers are concerned that some might try to make inappropriate use of it.

Moreover, PSD2 mandates stronger identity verification during online payments, so the transactions will be authenticated with two or more steps. Banks also need to provide two-factor authentication and effective security, such as fraud detection and precise reporting in case of fraud. There will also be better customer protection for payments made outside of the European Union.

Sharing financial data with third parties makes consumers concerned about their data safety, but the big question is: Do the consumers know in what ways companies can use their data? We can guess that a vast majority have no idea what can change when PSD2 is implemented.

This directive was intended to bring consumers the possibility of managing their finance and multiple bank accounts via a single application. They just need to stay aware that third-party players can access their data only when they allow them to. There’s probably still a great deal more to be done to educate people about what’s behind this directive.

The bright future

With new players and services on the market, there was a huge need to provide new legal components to the European Market. And by opening up bank’s APIs, new entrants, without a banking license, will get easier access to this market. Most of them have innovative ideas that will change the financial market in the future.

As you can see, it’s going to be a busy time for banks and fintech companies. Opening up APIs comes with both changes and challenges and it’s a huge step forward, especially for financial institutions. Those who will adjust their systems to new changes first could benefit the most.

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DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation in writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.