PSD3: A New Chapter in Financial Services Innovation and Investment

Contributor Sumanth Javvaji Debasis Chakraborty

The Payment Services Directive 3 (PSD3) aims to build upon the foundation laid by PSD2 by addressing key challenges while fostering innovation in the rapidly evolving financial services industry. PSD2, introduced in 2018, opened the European financial sector to greater competition, enabling third-party providers (TPPs) to access customer data and offer new services. PSD3, now under proposal, is seen as a response to the changing landscape and the need for stronger regulations, enhanced customer protection, and more efficient data-sharing methods. It levels the playing field not only between established financial institutions and fintechs but also among the newcomers themselves, creating a more balanced and competitive market.

?

1. Need for the Introduction of PSD3:

Payment Services Directive 2(PSD2) opened the world of open banking in the EU, which levelled the playing field between existing and new banking providers. Now, the introduction of PSD3 builds upon the framework laid down by the EU in PSD2 to better equip itself with the constantly evolving financial ecosystem in the world. It also levels the playing field between the new players and the incumbents.

With the COVID-19 pandemic highlighting the importance of secure digital payments, a review of PSD2’s impact was done, leading to the proposal for PSD3.

2. Porter’s Five Forces:

?

• Threat of New Entrants: PSD3 lowers entry barriers for fintech startups by standardising regulations and promoting data sharing, creating a more competitive environment for incumbents.
• Bargaining Power of Suppliers: With APIs becoming standardised, technology providers gain bargaining power as they become essential to the new digital infrastructure.
• Bargaining Power of Buyers: Customers gain more power with PSD3 due to increased transparency, access to a wider range of services, and lower switching costs.
• Threat of Substitutes: The introduction of innovative, customer-centric fintech products under PSD3 increases the threat of substitutes to traditional banking services.
• Industry Rivalry* The competitive landscape intensifies as new and traditional financial institutions vie for market share, driving innovation and potentially lowering costs.

3)??? Customer Engagement and Acquisition:

With the proposition of PSD3 comes a more open and competitive environment. Financial institutions are now not the sole keepers of data. Now, third-party providers can access the customers’ data as well, which increases focus on customer-centric innovation. Firms focused on a data-based approach, analysing the needs and the pain points of the customer, can triumph in customer acquisition and reduce churn rate.

There are huge opportunities in this field, and the integration of their software with various other tools can boost engagement as well. The usage of machine learning, AI, blockchain-based technologies, etc., can give each firm its own USP and give it its own competitive edge.

4)??? Investment Opportunities:

Investment banks would be looking to engage with companies that exhibit high growth potential in customer acquisition and engagement alongside good risk management capabilities. Fintech companies using more customer-friendly interfaces offer more than traditional services with the new changes in the ecosystem. Companies capitalising on this could be investment-worthy in the eyes of private equity firms.

5. M&A and Market Growth:

The financial sector can expect a growth in the number of mergers and acquisitions. Investment banks and private equity firms will play a critical role in determining the consolidation of competitors and the new entrants in the market. Targeted dominance of startups and companies in the fintech space may lead the trend. To remain relevant in the rapidly progressing technology domain that opened up with the introduction of PSD2 and PSD3, larger institutions may acquire smaller fintech companies with unique technology stacks to equip themselves with their own technology.

?

?

?6)??? Future Market Growth: Opportunities and Challenges

The introduction of PSD3 is poised to drive significant market growth, especially in the fintech and digital banking sectors. According to estimates, the European fintech market could see double-digit growth over the next few years as firms rush to capitalise on the new opportunities created by the directive. The increased focus on cross-border transactions and data sharing will also enable companies to scale across multiple markets, driving further growth.

However, the market growth will not come without challenges. Regulatory compliance will be a key hurdle, particularly for smaller fintech companies that may lack the resources to navigate the complexities of PSD3. Companies will need to invest heavily in cybersecurity, fraud prevention, and data protection to meet the stringent requirements of the directive. Additionally, consumer trust in sharing financial data remains a critical issue. Firms will need to prioritise transparency and security to gain customer confidence and ensure widespread adoption.

?

?

?

?

?

?

?

?