PSD2 - The Future of Banking

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The Second or Revised Payment Services Directive (PSD2) is a fundamental piece of payments-related legislation in Europe, which entered into force in January 2016.

Retail banking has been in the game-changing year since 2018. Banks’ dominance on their customer’s account information and payment services will disappear with the PSD2 in effect.

How It Works

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PSD2 enables both consumers and businesses to use third-party providers to manage their finances in the bank. In the near future, you may be using Facebook or Google to pay your bills, making P2P transfers and analyze your spending. And still, have your money safely placed in your current bank account.

Although, Banks are obligated to provide these third-party providers access to their customers’ accounts through open APIs (application program interface). This will enable third-parties to build financial services on top of banks’ data and infrastructure. Which means any company has open doors to eat bank’s lunch.

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The competition will move beyond banks to any financial institution. PSD2 will primarily change the payments value chain, business models about profit, and customer expectations.

With PSD2, the European Commission aims to improve innovation, reinforce consumer protection and upgrade the security of internet payments and account access within the EU and EEA.

PSD2 introduces two distinct players to the financial industry:

PISP – Payment Initiation Service Provider is the service provider initiating a payment on behalf of the user. P2P transfer and bill payment are PISP services which are likely to be seen when PSD2 is implemented.

AISP – Account Information Service Provider is the service provider with access to the account information of bank customers. Such services could analyze a user’s spending behavior or aggregate a user’s account information from several banks into one overview.

PSD2 poses substantial economic challenges for banks. New security requirements and the opening of APIs will possibly lead to an increase in IT costs. On top of that, PISP services are predicted to take over 9% of retail payments’ revenues by 2020. And, as non-banks take over customer interaction, banks may find it increasingly difficult to differentiate themselves in the market.

PSD2 Infrustructure

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As the Directive states, “Significant areas of the payments market, in particular card, internet, and mobile payments, remain fragmented along national borders. Many innovative payment products or services do not fall, entirely or in large part, within the scope of Directive 2007/64/EC.”

In other words, the regulatory framework that was brought in for the single euro payments area (SEPA) needed to evolve further.

Innovations such as digital payments and cloud-based applications are lifting customer expectations for both convenience and security.

Upgrades in infrastructures are making faster payments an increasingly common offering, while also facilitating the convergence of cards, e-wallets, and other payments types.

Attacks from fintechs and digital-ecosystem owners are exerting additional downward pressure on pricing. And due in part to persistently low-interest rates and the cap on interchange fees, challenging payments economics are thus combining with other disruptive forces to reshape the global payments industry.

Globalization

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Despite its European-centric nature, the effects of PSD2 will be felt across the globe as organizations looking to do business with companies in the EU will have to abide by these regulations.

Businesses outside of the EU that use payment services in Europe can take advantage of some compelling provisions allowed through PSD2 by partnering with a wide range of service providers, from banks and fintechs to social media companies and retailers, to deliver the solutions they need.

For example, if a business sells its products to European customers on Amazon, it can now retrieve its customer’s bank account information and automatically initiate a payment from the customer’s bank without having to redirect them to a third-party service, such as PayPal or Visa.

Many U.S. banks see the rollout of PSD2 as an indication of where the industry is headed, and are getting ahead of the game by developing an open banking strategy now instead of later.

There can be several benefits like revenues from new products and services, the opportunity to attain market share from other banks and provide platform or technology services to other banks, e.g. APIs.

Cross-border transactions continue to grow, as more than one in four transactions are now cross-border. And, as banking and finance continue to take on a more global footprint, meeting PSD2standards will be critical.

However, the standards around such items as Strong Customer Authentication, risk-based authentication and the use of one-time passwords, are tech-agnostic, giving organizations outside of the EU some flexibility in their implementation, if not already mandated by government regulations.

The implementation of PSD2 is leading in a new era of open banking throughout Europe that is likely to be the catalyst for a revolution in global banking, opening up doors to new customers and whole new revenue streams.

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