pean Economic Area (28 countries in Europe and Iceland) will launch the Payment Service Directive 2.0, popularly known as PSD2 by early 2018. After the successful launch of PSD1 that implemented a common legal framework for payments across the EEA, PSD2 will bring the European market much closer.
PSD1 was rolled out in 2009 and is a milestone payment directive for EU. It was instrumental in creating Single Euro Payments area (SEPA) and set common standards for all payment service providers. It defines the information requirements, rights and obligations of the payment service providers and users of the payment service.
Today banks are not the monopolistic players in the payments eco-system. PSD1 effectively paved the way for innovative solutions in banking, better regulation of markets and greater digitization.
What is PSD2 – new kid on the block?
PSD2 is building on PSD1 and will emerge as a game changer in the payments industry. It will impact how consumers pay, get paid and obtain information while making a payment. Fintech companies will emerge stronger with a mobile and digital payment ecosystem supported by PSD2.
So, will it break the monopoly of banks?
Studies point out that 37% of Europeans would move to financial services that are faster, personalized, frictionless, accessible and cheap. Disruption through Fintech players will force banks to upgrade their technology platform to serve exploding transaction volumes at high speeds. Banks will now serve the Fintech industry with authorised customer information. Banks must now find ways to enable Fintech companies develop innovative solutions for their common customer.
How will PSD2 impact the payment ecosystem?
The removal of entry barriers in the financial sector will bring in innovative solutions. Large majority of the fintech players will focus on delivering niche solutions and connecting with other service providers. Consumers will rely on value added financial services with enriched and differentiated options for their financial needs instead of choosing from limited set of common options offered by banks.
PSD2 makes it imperative for the banks to provide third party service providers with access to specific account information as long as the request is accompanied with necessary customer authorisation.
Imagine yourself choosing from the best of financing options for your vehicle purchase, listed after analysing all your bank relationships and considering the special discount offers by all your bankers specific to your profile, all in a matter of a few clicks on your mobile right at the vehicle show room.
So, what is the new deal in PSD2?
PSD2 has recognized new business activities like
- PISP – Payment Initiation Service Provider who can initiate payments on behalf of the payer with suitable authentication from the payer
- AISP – Account Information Service Provider. The third party provider that can request account information on behalf of the customer with suitable authorisation from customer
- ASPSP – Accounting Service Payment Service Provider – Entity that holds the customer account and effects the payment by transferring payments from and to the customer account. Essentially your bank.
Service providers can choose to perform any or all of the above roles. PSD2 directs that all the service providers honour request for service from any other service provider without any need prior arrangement with each other, as long as the request comes from authorized, registered third party providers with necessary authentication from customer. The relevance of Open APIs is significant in the context of PSD2.
The open API initiative of the UK brings together the top banks to agree and implement common and standard APIs for account information access and payment initiation. Standard APIs accessed across banks will convert all banks into a giant repository of accounts data. The fintech industry could then mine, analyse and deliver innovative solutions to customers, insights to banks and financial trends to markets. It would be interesting to see if the rest of the EU will create their own open API standards. Common Open API standards, if implemented across EEA, will expand the scope of financial innovation exponentially.
How about customer service and security?
Strong customer authentication is mandatory under PSD2 for accessing online account, initiating electronic payments and while carrying out a remote payment. PISPs and AISPs are free to rely on the authentication mechanism extended by ASPSPs (the bank).
Disintegration of payment processes and recognizing PISP, AISP, ASPSP as distinct service providers with specialization, opens up the market, shifts focus from banks and towards empowering the customer with choice. New innovative models that delivers exceptional customer experiences will emerge. For example, a PISP could integrate their payment initiation engine with ecommerce portals enabling instant credit transfers as alternate mechanism to card payments.
The road ahead…….
PSD2 will bring in major changes that has broadened the mandate of PSD1 and is bringing us closer to a Unified European Market. PSD2 will kick in by January 2018 and Competition and Markets Authority (CMA) has initiated a mandate for open API support by 9 major banks of UK, which most believe will serve United Kingdom to implement PSD2 directives successfully.
For more information you can refer https://www.paymentsuk.org.uk
Balaji is the co-founder and Chief Executive Officer of Evolvus Solutions Pvt Ltd. He plays a critical role in anchoring strategic priorities for the company to gain leadership position in the payments domain.