PSD2: game changer for European payment ecosystem

To play or not to play. There is no doubt that the momentum of banks, acquirers and processors is increasing towards fundamental change. This is the single most revolutionary change that has happened in recent times in the banking industry, and the result will be an unprecedented change to customer experience. Now is not a time to bury heads in the sand – traditional banks need to consider their position and response.

PSD1 – making cross-border payments across the EU
The aim of the original Directive on Payment Services or PSD instrument which was adopted in 2007 was very much aligned with the bigger economic vision for the EU – namely to create a single market for payments within the European Union. The objective of PSD1 was to make cross-border payments across the EU as easy, efficient and secure as “national” payments within a member state. For example, PSD1 introduced the concept of a Payment Institution, which is a firm in the payment industry that is regulated but not to the higher banking standard. Think of are large payments bodies like PayPal or WorldPay. So what’s with PSD2?

PSD2 – banking without walls
Under PSD2, banks and other PSPs must give so-called payment initiation service providers (PISPs) access to their customers’ accounts so as to facilitate transactions ordered at the customers’ request. However, in return, PISPs must observe a number of data security obligations and takes on certain liabilities in relation to any unauthorized transactions it is responsible for. The deadline for member states to transpose PSD2 into national legal and regulatory frameworks is 13 January 2018.

PSD2, but why? Oh, that's why!
The driving force behind both directives is the harmonization of the payments landscape to level the playing field between countries and between payments providers, with the end goal of increasing competitiveness and thereby giving the consumer better value. The common themes of both directives are about opening up the market to new types of organization and defining common standards that encourage inter-operability.

In a nutshell:

• Standardizing, integrating and improving payment efficiency in the European Union
• Offering better consumer protection
• Promoting innovation in the payments space and reducing costs
• Incorporating and providing clarity on the use of emerging payment methods such as mobile payments and online payments
• Create an equal playing field for payment service providers - enabling new companies to get into the payments space
• Harmonize pricing and improve security of payment processing across the European Union
• Incorporate new and emerging payment services into the regulation

Implications for you and me
In plain English, this enables a new type of financial services company – an Account Information Service Provider or AISP – which aggregates account information to let consumers with multiple banks view all bank details in one portal. Besides that, when you buy something online you typically enter our payment details into the merchants website, and the merchant then gets the money from your bank account by way of a few intermediaries. With PSD2, the Directive will allow retailers to ‘ask’ consumers for permission to use your bank details. Once you give permission, the retailer will receive the payment directly from your bank – no intermediaries.

Exiting times for merchants, banks, fintech companies and consumers
PSD2 will undoubtedly disrupt payment services in Europe. Banks sit in a position of significant power in the new PSD2 payment model. Banks need to position themselves as an AISP and/or PISP. However, banks will have significant costs to change systems and the will lose screen time in front of the consumer. Innovative companies will be eager to occupy this space and respond to consumer frustrations with existing incumbent providers. The challenge though, will be how consumers respond to new technology based providers and how these newcomers are able to meet the expectations of both the consumers and the European regulatory bodies. At the same time the newcomers must ensure the highest levels of security are implemented – after all they will potentially be handling your payments and have access to your account. As Einstein once said: You have to learn the rules of the game. And then you have to play better than anyone else’’. Let the games begin!

My postings reflect my own views and do not necessarily represent the views of my employer, Accenture.