The UK has a strong tradition of supporting a renowned financial services sector and in recent years has also experienced rapid growth in its FinTech sector. One of the biggest shake-ups in this space is imminent. The new Payment Services Directive looks set to change the banking marketplace drastically. Exception is currently leading a business-critical project using agile methods at a major UK bank to ensure the organisation is fully compliant before the approaching deadlines. Below we share our views on what to expect with the new legislation.
What is PSD2?
The Payment Services Directive (PSD2) is a fundamental new piece of payments-related legislation in Europe and is the biggest disruption the banking industry has seen in decades. EU regulation – law from January 2018 – looks to shake up the banks’ exclusive rights to customer data and open it up to more competition. What does this mean for customers? In its simplest form, PSD2 will make it easier to pay online and enable new services to enter the market to manage customer bank accounts. The two key elements are; (1) the opening up of data to third party providers and (2) the streamlining of payments to other third parties, as outlined below.
1. Services to provide a consolidated view of your bank accounts – 3rd Party Account Info Service Providers (AISP)
Online service providers will be able to start offering a consolidated view of your payment accounts from across one or more payment service provider making it easier to manage your financial information in one place. One example of the type of FinTech company already thriving in this space is Money Dashboard.
2. Easier online payments – 3rd Party Payment Initiation Services Provider (PISP)
Payment Initiation Services will be able to access your payment accounts to initiate the transfer of funds on their behalf, with of course your consent and authentication. (In fact PSD2 will also require stronger identity checks when paying online).
A current online transaction is a multi-step process, needing authentication from the Merchant, Card Providers and the customer’s bank. With PSD2 in place, a customer’s transaction with an online marketplace will purely be your request to purchase an item and that 3rd party will request the funds directly from your bank. That means when you buy something they can make a payment for you, without having to redirect you to another service (like PayPal or Visa).
What are the main challenges of PSD2?
One of the initial apprehensions surrounding the implementation of this legislation was the UK’s vote on Brexit. As this is a EU driven initiative, there were questions surrounding the need for compliance. PSD2 relates to the European Economic Area (E.E.A.), not just the EU. Most banks – particularly international institutions – are planning for some form of E.E.A relationship regardless of the Brexit deal. Secondly, PSD2 is essential to interact and thrive in the European markets and there is demand from banking experts to keep pace with global banking innovation.
Key concerns about PSD2 are around the safety and security of data being opened up to Third Party Providers. Also, much in line with the introduction of new GDPR legislation, customer consent to utilise their personal data is imperative. The industry timelines to implement the PSD2 legislation are aggressive which puts added pressure on all financial institutions. The ‘Go Live’ date is in January 2018.
What are the main benefits of PSD2?
PSD2 provides the platform for significant change to the customer experience, whereby financial transactions that were traditionally performed via banks are now being extended to Third Party Providers (TPPs), e.g. Amazon, eBay etc. The aim is to allow customers to initiate payments and view their data served via APIs. The industry objective is to make banking more competitive.
PSD2 allows Third Party Providers (TPPs) to enter the market, including many FinTechs. These providers will utilise the newly available customer data to provide personalised account information and allow customers to take greater control of their finances. In addition, the PISPs will work across multiple banks, challenging traditional banking digital channels. Charges for paying by debit or credit card will also be banned entirely from January 2018.
Overall, It is a very exciting time to be in the financial services and FinTech sectors in the UK. This legislation can only increase competition and in turn, innovation. PSD2 may be one of the most disruptive pieces of legislation the UK financial sector has experienced to date, but don’t bank on it being the last.
Exception have a proven track record in providing consultancy services for major change and transformation programs. We also have expertise in delivering mobile FinTech solutions. If you require assistance with any aspect of your digital ambitions, please contact our dedicated Exception team.
Written by Aftab Moman – Senior Consultant and curated by ExceptionBack to articles