The Second Payment Services Directive means that 2018 has the potential to be a game-changing year for banking. As payment and transaction data is democratised by new regulations such as the revised Payment Services Directive (PSD2), it seems like the European payment services market is opening up to innovations in financial technology.
Whilst researching these new regulations, I realised how complicated they were to understand. And since I couldn’t find a comprehensive simplification of them, I decided to create one.
So, what the hell is the PSD2?
This legislation is a step towards a digital single market; it will benefit consumers and businesses, and help the economy grow.
Second Payment Services Directive Explained
What is a payment service?
Any services enabling cash to be deposited in or withdrawn from, for example, a bank account, as well as all the operations required to operate the account. This can include transfers of funds, direct debits, credit transfers and card payments. Paper transactions are not covered by the directive. (Source: EU Commission)
What is the Second Payment Services Directive?
The Second Payment Services Directive is a law introduced in 2016 by the European Commission that all banks and financial technology companies in the EEA must comply with by the 13th of January 2018. The revision of the first Payment Services Directive aims to promote the development and use of innovative online and mobile payments through open banking.
The regulation is a rulebook for payment service providers with rules on:
- Increased protection of consumers’ financial data (which aims to guarantee safe authentication and reducing the risk of fraud).
- Transparency of information requirements for payment services.
- New rights of users and providers of payment services.
One of the amazing opportunities created by greater transparency is that it opens up the EU payment market to companies offering payment services based on information about the payment account.
Second Payment Services Directive has made room for innovations in FinTech such as AISPs and PISPs, what does that mean?
What are Account Information Service Providers (AISP)?: These are companies that use information from your payment account (with your permission) in order to offer you a service. For example, a company that helps you to manage your personal finances by giving you an overview of your financial situation across all the bank accounts that you own can now do so. These companies will be able to break down and analyse customer’s data to provide you with information to make better decisions – or will be able to analyze your financial situation to assess your suitability for a loan, for example.
Previously, banks had a monopoly on their user’s data – in other words, if you have a bank account with Barclays, only they could analyse your data and offer you financial products (like a mortgage) based on that information. But now, this competitive advantage is being taken away, opening up payment account information and creating a more level playing field in the payment services industry.
What are Payment Initiation Services Providers (PISP)?: These are services that allow consumers to pay online for items by initiating a payment on behalf of the user. Normally, when you pay for something online you get redirected to a service like PayPal or Visa, which connects to your payment account and begins the transfer process of money from your account to the seller. However, after PSD2 is introduced, online merchants (like Amazon) will be able to access your account data from your bank directly, make the transfer for you, and get assurances that the money transfer has been initiated, without the use of a redirect service – which has the potential to be a lower cost solution. Other PISP services that we are expected to see are innovations in bill payment and P2P transfer.
By taking away the information advantage from retail banks the EU aims to open up the payment markets to new entrants (more competition, better prices for consumers), improve innovation, increase consumer protection and security of internet payments within the EU and EEA, and introduce PISP and AISP to the financial landscape. Although this proposes economic challenges to retail banks – it may be difficult for banks to differentiate themselves in the loan market as non-banks begin to take over in this industry.
An interesting offshoot of the shake-ups in the financial industry is ‘open banking’. With greater financial data transparency and new Open APIs, third-party developers will be able to build mobile applications and services around financial institutions – enabling customers to have their current account with one bank and bolt on financial services from other providers to that account.
Alasdair Smith, chairman of the retail banking investigation in the UK, said in a CMA Press Release that: “Open banking will make a transformational change to banking for personal customers and small businesses.”
“For the first time, innovative and secure apps will provide personalised services and information to cover all financial needs in one place, and make it easy for people to find out what bank account is best for them.”
Continue reading about open banking.
Thanks for reading! I hope that clears some things up. Is there anything that I’ve missed?