A Revolution in European Payment Methods
In 2007, the European Union adopted the Payments Services Directive (PSD). The PSD created a single market for payments within Europe and laid down the legal basis for the Single Euro Payments Area (SEPA), simplifying bank transfers of euros. Now, a decade later, the EU has pushed through a revised version of the PSD, titled the Payments Services Directive 2 (PSD2), to be implemented on January 2018.
PSD2 was drafted in response to the rapidly changing nature of payment and banking. Third Party Providers (TPP) are revolutionizing the payment services industry by providing alternate types of services such as Payment Initiation Service Providers (PISP), Account Information Service Providers (AISP), and Account Servicing Payment Service Providers (ASPSP). According to Signicat’s White Paper on PSD2, the initiative aims to ensure the security of consumer identities and to guard against fraud. Additionally, Seven Pillars Institute states that PSD2 will also set out to drive competition and innovation by reducing barriers to entry for alternative payment services.
What does PSD2 do?
With PSD2, the European Commission has proscribed for two-step verification for transactions that exceed €30. The payments require two out of three verification methods, either through knowledge (password or PIN), possession (a physical key), and/or inherence (fingerprint/voice recognition).
Bank customers, whether they are consumers or businesses, will be able to use TPPs to manage their finances under PSD2. For example, one might be able to use Facebook or Google to pay their bills. Fintech firms will be able to offer consumers a versatile experience through features like payment initiation, regrouping of multi-accounts information, investment management, and other services.
Moreover, banks will be obligated to provide TPPs access to their clients’ accounts through open Application Program Interfaces (open API), allowing TPPs to build financial services on top of the banks’ data and infrastructure. The European Commission hopes to drive prices down by encouraging competition between PSPs, AISPs, PISPs, and banks to offer the best services at the lowest fees.
With the help of PSD2, consumers and businesses, with the help of technology, will have the tools to better budget and set long-term goals, pay bills abroad, and have immediate access to credit scores and history.
One such example of a digital payment service that stands to benefit is Revolut, a British fintech start-up that began as a pre-paid debit card service to be used abroad, whose competitive exchange rates are based on interbank rates. Revolut’s recent success has inexorably moved the firm towards becoming a proper digital banking service. Another digital service celebrating the advent of PSD2 is Starling Bank. Starling has recently launched an app service called Marketplace, which will enable customers to browse products from other fintech providers.
The High Street is also adapting to the advent of PSD2, with HSBC developing its own open-banking app, called HSBC Beta. HSBC Beta will allow customers to view bank accounts with different providers, including Barclays, Lloyds, and Bank of America. The British bank hopes that the app, expected to be released to the general public in early 2018, will simplify the process of managing savings. Instead of leafing through various paper statements and manually calculating what’s left, customers using HSBC beta will have a streamlined statement viewable from their smart device, according to Becky Moffat, head of personal banking at HSBC.
PSD2 also presents a number of challenges for the fintech and banking industries. For example, Signicat has mentioned that PSD2 could hinder business by creating more friction for the consumer at checkout. In other words, the addition of a two-step verification system might further complicate the payment process. Such friction might lead providers to look for ways to simplify transactions through exemptions.
There are also ethical implications related to the implementation of PSD2. Seven Pillars Institute believes that since Fintech firms have no deposit liabilities or central bank supervision, they have little reputation at stake. Moreover, there is no requirement for any initial capital or funds to start an AISP. Therefore, these firms might take riskier business strategies than their high street counterparts.
There is also the question of impartiality. An AISP might be offering advice to a customer that might serve the former more than the latter. For example, a Fintech firm might, after poring over a client’s banking statements and current market trends, offer advice on buying a stock which, incidentally, they own. By driving up that stock’s price, the firm also profits.
Another example might be a Fintech firm convincing a client to invest in a private company involved in criminal activity. To address these concerns, Seven Pillars suggests that customers should be educated on the potential risks they take on by allowing Fintech firms to access their account.
That said, however, PSD2 has been praised, even by people outside of Europe. Seth Ruden, a senior fraud consultant at ACI Worldwide, lauded the initiative as a standard baseline for data security and allows for more accurate fraud detection during device-based transactions. PSD2 ensures that all parties involved keep everything clean and secure.
Juniper Research named PSD2 and its open API mandate as one of 2017’s top three disruptive, Fintech technologies, stating that the introduction of PSD2 will “redefine the payments sector as incumbents face new and increased competition.” Not only will PSD2 lead a proliferation in competition that could undercut established players, but it could also foster an opportunity for cooperation between banks and start-ups. PSD2 might have challenges to overcome, but it is an initiative that has opened up more possibilities for banking and payments.