The Impact of PSD2- European Regulation, on the Banking Sector
By Sakshee Sunil Sarrawgi.05 Aug 2019 .
5 min read
Why PSD2? PSD1 came into effect back in 2007, and how much has the world changed since then? Technological advances have moved the payment industry ahead. Today there are new payment methods and completely new business models- and these need to be regulated. For instance, what rules apply to mobile payments? How do we regulate entirely new business models? PSD2 is here to answer such questions. This new directive specifies which existing legislation the new payment methods and businesses will be subject to. The updation from PSD1 to PSD2 aims at increasing consumer protection and establishing healthy competition. A lot of measures have been taken to make sure PSD2 make the legislation more transparent and reduces risk.
So what exactly is PSD2? The second Payments Service Directive (PSD2) from the EU is set to regulate the payment industry across all of the EU. The directive is split into 12 sections, called mandates. Each mandate lays out a set of guidelines or standards and regulates a specific area. PSD2 enables bank customers- individuals/businesses, to use third-party providers for managing their finances. This Revised Payment Service Directive is a game-changer for retail banking. As PSD2 is in the implementation process, banks can no long monopolize on their customers’ account information and payment services. Banks are obligated to share their customers’ account information through open APIs with these third-party providers. Other institutes can now build their financial services on top of banks’ data and infrastructure. For banks, this means new competitors apart from other banks. They will not be up against anyone offering financial services.
These new changes in policy and ultimately in the industry, call for some measures including:
The setting of a security standard for the communication between third-party provider and banks
Harmonization and reinforcement of the authentication process
The biggest technical challenge, however, remains coming up with an efficient and safe way to facilitate access to banking accounts by third-party providers. This needs to be done in order to allow information collection or process payment. As a result, the European Banking Authority (EBA) has taken responsibility to set up the requirements for the communication standard through the publication of Regulatory Technical Standards. The new regulation introduces three new approaches :
Payment initiation through Payment Initiation Provider (PISP). These providers can initiate payments on behalf of the user.
The aggregate information of the bank accounts through Account Information Service Provider (AISP). These providers have access to the account information of bank customers. They are thus in a position to analyze the spending behavior of a customer. In addition, they can also get consolidated information of the particular user from several bank account.
Funds Checking through Card Issuer Service Provider (CISP).
These services pave the way for new business models for operators that aim to become payment institutions. The entrance of such third-party providers and the development of new services could implicate the overcoming of payment interfaces that are typically managed by banks. Customer experience can now be managed end-to-end by the same retailer. On the other hand, banks might have to put in more effort to built customer relationships. They will find it difficult to differentiate themselves in the market for offering loans. That’s not all. PSD2 brings economical challenges as well, for banks. IT costs are likely to increase due to new security requirements and the opening of APIs.
Why APIs for Open Innovation? Technology is moving fast and banks need to keep up with this pace. Many banks have traditionally been resistant to using new technology, mostly because it would mean that they would have lesser control. New entrants can now focus on offering just a single service instead of full banking experiences and connect their customer to other service providers through the cloud or with APIs. Moreover, these improved services within payments would make the banks more efficient.
The regulation does not give an indication to bank institutions about the technology to use for third-party providers. The idea is to enhance innovation and cooperation between financial service providers.
The Regulator should take into consideration the effort of Institutions that just developed new technologies for their business. APIs represent the right approach to grant scalability, security, and reusability of the code. In this way, banks could reduce integration costs, perform faster and make the platform available for developers and FinTech operators.
APIs allow the opening of the systems to the involved parts in the ecosystem with a higher value for the end-user. The most important players in social media and marketplace adopt API to get functionalities available to the third-parties with a modular design, creating value and dependence between their systems. APIs are the solution to create the best and innovative service that can fit all end-users’ needs and let banks/ other third-parties provide their solution to customers at a lower cost.
The PSD2 regulation helps with introducing the concept of open banking. It could be seen as a threat by banks, an opportunity for third party suppliers and both for customers. Customers now have easier and quicker access to their finances, but with a might have concerns about data security.
PWC estimates that open banking will create £7.2 billion in revenue by 2022. Applying these new technologies can enhance banks’ capabilities. It can also make them better prepared to handle tech-savvy consumers who are asking for offerings that are faster, personal, easily accessible and cheap. Banks need to take a customer-centric approach while creating new products and services, in order to come stronger post this change.
Will customers trust non-banks with their finances?
37% of European consumers say that they would switch banks if it did not offer them services with the latest technology. With consumers becoming more digital in their communication with companies, banks need to adjust to these trends as well. Open banking is a good opportunity for customers to better manage their banking account information using services that fit all their needs. Customer can authorize third-party access without having to reveal their login details to anyone other than the bank. Sharing data using API is the most secure way because the customer will know and be in control of all information that is shared. Kaleyra and Epiphany’s partnership is here to support banks in their digital transformation efforts with PSD2 compliance solutions.
Moreover, consumers are slowly getting accustomed to using financial services from non-banks, primarily because of the ease it brings. Almost all European customers would say they will be willing to use financial services from providers like Google, Facebook, and Amazon. Kaleyra and Epiphany’s collaboration will immediately aim at helping their joint customers. We will focus on PSD2 compliance solutions, as well as ready-to-use, customized products – such as Instapay and Account Aggregation – that meet all the security criteria required by the banking system. With our joint capabilities and platforms, we will launch and deliver more innovative solutions to the open banking market. Stay tuned for more information!
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