PSD2, the directive that will transform banking in the EU

    Etienne Goffin
    Etienne Goffin

    The second Payment Services Directive (PSD2) has been attracting quite a lot of attention among bankers in the European Union (EU) as it is set to revolutionize the way consumers interact with banks, retailers, and other service providers. This is expected to happen soon. EU countries must incorporate the new rules into national law by 13 January 2018.

    The original Payment Services Directive (PSD1) was initiated by the European Commission in 2007. It lays down rules for payment services such as credit transfers, direct debits and card payments. The purposes of these rules were to increase pan-European competition in the payments industry, increase customer rights, guarantee faster payments and give clearer information on payments.

    Then PSD2 was introduced to create safer and more innovative European payments. It seeks to open payment markets to new entrants leading to more competition, greater choice and better prices for consumers. The new rules aim to better protect consumers when they pay online, promote the development of innovative electronic payments, and make cross-border European payment services safer. Here are 2 ways in which PSD will transform banking in the EU:

    #1 Direct payment

    Direct payments between bank accounts will be enabled using Application Programming Interface or APIs in short. The directive defines the concept of ‘payment initiation service’ which is a service to initiate a payment order at the request of the payment service user with respect to a payment account held at another payment service provider.

    For instance, a consumer will be able to select a contact on their mobile device and issue a payment to them without knowledge of their specific bank account details. Similarly, retailers will be able to ‘ask’ consumers for permission to use their bank details. Once the permission is granted, the retailer will receive the payment without involving any intermediary. Consumers won’t need to enter their payment details into the retailers’ website. APIs will enable certain fintechs (Payment Initiation Services Providers or PISPs in the directive) to connect to financial institutions directly.

    #2 Account aggregation

    Account aggregation, which involves compiling information from different bank accounts into a single place, will become a reality in the PSD2 API-driven framework. The directive describes the notion of ‘account information service’ which is an online service to provide consolidated information on one or more payment accounts held by the payment service user with either another payment service provider or with more than one payment service provider.

    For instance, bank customers will be able to use third-party providers to manage their finances. Those having bank accounts with multiple banks won’t need to access them through each bank website separately. As a result, several banks fear losing their customer interface (the so-called Internet Banking) while some fintechs (Account Information Service Providers or AISPs in the directive) will be able to acquire insightful data by consolidating multi-bank account information in one portal. This will offer them lucrative cross selling opportunities.

    In conclusion fintechs will be eager to take advantages of the PSD2 provisions to respond to consumer frustrations with existing incumbent financial operators. However, these newcomers must deliver the highest levels of security as they will potentially be accessing bank accounts and handling payments.

     

    SOURCES:

    1. CA Technologies. Five ways PSD2 transforms customer experience.
      http://blogs.ca.com/2017/01/25/five-ways-psd2-transforms-customer-experience/
    2. Deutsche Bank. (2016). Directive on Payment Services in the Internal Market. White Paper.
      http://cib.db.com/docs_new/White_Paper_Payments_Services_Directive_2.pdf
    3. European Commission. (2008). The payment services directive – what it means for consumers.
      http://ec.europa.eu/internal_market/payments/docs/framework/psd_consumers/psd_en.pdf
    4. European Commission. (2014). PSD1 Payment services in the EU.
      http://eur-lex.europa.eu/legal-content/EN/LSU/?uri=CELEX:32007L0064
    5. European Commission. (2015). Directive 2015/2366 on payment services in the internal market.
      http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32015L2366
    6. European Commission. (2017). PSD2 Payment services in the EU.
      http://eur-lex.europa.eu/legal-content/EN/LSU/?uri=CELEX:32015L2366
    7. (2016). PSD2 – The directive that will change banking as we know it.
      https://www.evry.com/en/news/articles/psd2-the-directive-that-will-change-banking-as-we-know-it/
    8. SEPA for corporates. (2015). 5 Things You Need To Know About PSD2 – Payment Services Directive.
      http://www.sepaforcorporates.com/single-euro-payments-area/5-things-need-know-psd2-payment-services-directive/

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