Revised Payment Services Directive (PSD2): Pipeline to European Banks’ Oil
If data is the new oil as many technology capitalists have remarked, the revised PSD2 (Payment Services Directive) regulation is the new pipeline that will allow third party providers (TPPs) to access customer data in EU banks.
On 13th Jan 2018, when the PSD2 regulation was adopted by legislation in EU countries as per the EBA (European Banking Authority) guidelines, it ushered in a new era for the Payments industry in the region. The change is significant and will impact all the participants of the ecosystem- be it Customers, Banks, Intermediaries or Technology vendors- albeit to varying degrees.
Why was PSD2 needed?
Despite the fact that 19 of the 28 members of the European Union share the Euro – thereby eliminating many of the traditional barriers associated with cross border trade – there are many aspects which are still challenging, for example the fragmented nature of the payments market. The challenge in the European banking system has been to create an ecosystem that would facilitate a smooth, efficient and secure payments infrastructure across its member states.
Payment and securities clearing and settlement systems in the Euro regions were originally created with the aim of meeting domestic requirements. They were relatively diverse in nature and not necessarily suited to the needs of a single currency area.
The key objective of the PSD2 is to allow third parties to compete with Banks in providing financial services that meet the buying behaviors of today’s customer thereby stimulating an environment of unification across Europe.
Conceptually, the regulation can be considered analogous to Electronic Health Records (EHR). Implemented in the Scandinavian countries, EHR allows the patients’ data to be available across hospitals whereas most countries tend to use only Electronic Medical Records (EMRs) i.e providing patient data only within a particular hospital. Once patient data is available across hospitals it improves the quality of care and decreases the dependency on a particular provider.
Similarly, PSD2 will unlock the customer data currently held by banks and thereby increase access and transparency.
New players in the landscape
PSD2 introduces two new types of players to the financial landscape: AISP (Account Information Service Provider) and PISPs (Payment Initiation Service Provider). AISPs are the service providers with access to account information of bank customers. Such services could analyze a user’s spending behaviour or aggregate a user’s account information from several banks into one overview. PISP (Payment Initiation Service Provider) are the service providers initiating a payment on behalf of the user. P2P transfer and bill payment are PISP services we are likely to see now that the PSD2 has been implemented.
New technical standards, being developed by EBA (European Banking Authority), will define the connection requirements and API to be used. Banks will have to implement these APIs to share information with AISPs and PISPs.
What will PSD2 mean for Banks?
Banks will be affected by the directive as they will no longer be able to hold center stage in the payments ecosystem. They may lose some of their fee-based revenue as the TPPs will provide consumers an option to not interact with the bank directly. Banks will be faced with several strategic choices which could include greater collaboration with Fintechs to improve customer experience and retain their key customers..
Banks will also need to make investments in their IT systems in order to meet the demand of the directive. This would include investments in security and authentication platforms.
However, as outlined in this article, while many banks are focusing on the cost of complying with regulation, in this case the banks that get their strategies right will be market leaders. By providing their customers best-in-class user experience through collaboration with Fintechs, banks would need to convince their existing-as well as new- customers to nominate them as the prime aggregator bank (or AISPs]. Going forward, decisions by customers will be taken through the guidance and information provided by the AISP.
What will PSD2 mean for Customers?
Needless to say, customers stand to gain the most from PSD2. TO cite an example, if a person is shopping on Amazon, instead of entering his debit or credit card details, he is asked whether he wants to give the retailer access to his bank account at Lloyds. The person agrees and it takes him to the Lloyds internet banking site where he gives his permission. This is similar to the way people allow applications to access their Facebook or Twitter accounts today. In this case, the person do not give his bank logon details to Amazon, and neither does the retailer share the person’s logon details with the bank, he simply gives permission to Amazon to execute payments on his behalf via his Lloyds bank account.
As the above example shows, a sector which is likely to benefit is e-commerce. Currently, most of the e-commerce trade is domestic which will expand across borders with further unification of EU market with PSD2 compliance.
Once the oil or customer data in banks starts to flow, it is bound to fuel growth and bring efficiency across the payments ecosystem. However, the true value of this “oil” is realized only when used in the right way. Some banks might fail to leverage this opportunity because of their inability to ensure the privacy of their customer data which would lead to lost customer trust. Others could fail because they are unable to add real, quantifiable value to their customers’ data. Successful institutions will be the ones who develop a clear roadmap as to how they become take the raw crude oil (data) and refine it into higher value products and services.