It wouldn’t be an exaggeration to say that PSD2 is one of the most significant, if not the most significant, updates to open banking legislation in living memory.
Banks are now being forced (kind of) to share their data with their customers, and crucially, with third parties. What this means in practice is that Fintech businesses can now build all kinds of new services, powered by bank data that was previously inaccessible.
When used to its full potential its impact over the long term could easily outshine other banking innovations like the rise of contactless payments or online banking – and that’s a big statement to make. It has opened the consumer financial market up to greater competition outside of legacy banking corporations and is helping to drive innovation across the sector.
Put simply, it represents an immense opportunity for Fintech companies to provide intuitive and creative financial solutions that improve the lives of their customers. And what business doesn’t want to do just that!
To make the most of this opportunity, Fintech start-ups need to know the ins and outs of the new rules. Not only to understand where to angle their solutions for maximum customer benefit but to be able to make the biggest impact, while staying compliant.
In this article, we’ll be answering some of the most pressing questions around PSD2 regulations. So, you can fully understand the opportunity that awaits and help propel the latest and greatest revolution in financial services forward!
What exactly is PSD2?
PSD stands for Payment Services Directive and the 2 denotes the fact that it is an updated version of the original legislation from 2007. The updated rules came into effect in September 2019.
The PSD – the original legislation passed in 2007 – was aimed at creating a single payments market throughout the EU. The second round of legislation in 2019 (PSD2) sought to build on this by creating a level playing field for innovation throughout the EU financial services space, allowing third-party providers (TPPs) access to banking customers’ financial information and the potential to create innovative and disruptive financial services products.
The Regulatory Technical Standards (RTS) set out the standards that TPPs and banks must meet when they offer their services to customers under PSD2.
What does PSD2 mean for customers?
Although they may not be aware of the full range of benefits, or even that the legislation exists at all, customers have experienced many benefits since the introduction of PSD2. They include:
- Greater choice in who handles their payment needs
- Improved access to credit
- Enhanced fraud protection from SCA
- Tougher protection of consumer rights, including prohibiting surcharges
Increased competition for payment and other financial services means end-customers have a greater choice in providers and potentially access to much better services than they had before.
What does PSD2 mean for banks?
PSD2 is both great, and challenging, for banks.
On the one hand, they’re now legally obliged to share data with third parties based on their customers’ consent, which is no easy feat. Banks are scrambling to understand how to open up data that has historically been safeguarded. This is a huge shift both technically, and culturally.
That said, there are plenty of benefits for banks, too. First and foremost: the ability to offer better services by tapping into wider data sources.
Secondly, PSD2 has the potential to create a more efficient payment journey. No longer do card payments have to pass through one of the incumbent payment schemes. Fewer stops on the journey mean fewer delays and costs for banks and merchants – a win-win!
The even playing field of innovation that PSD2 is helping to create has opened up the potential for banks to innovate as well. The European Central Bank (ECB) recently welcomed the launch of the European Payments Initiative (EPI) by 16 major European banks. The ambition of EPI is to create a unified pan-European payment solution leveraging Instant Payments/SEPA Instant Credit Transfer (SCT Inst), offering a card for consumers and merchants across Europe, a digital wallet and P2P payments. EPI promises to rival the likes of Visa, Mastercard, Apple, Google, Alipay and WeChat pay.
We are certain to see more innovations like this as organizations push the boundaries of what PSD2 can offer, and hopefully, consumers and merchants will continue to benefit from a more competitive payments market.
Why is PSD2 important for Fintech start-ups?
Because PSD2 has wrestled control of the payment and financial services markets away from traditional financial institutions, Fintech start-ups and other TPPs can now provide these services directly to customers.
These services fall into two categories:
- Payment Information Services Providers (PISPs), and
- Account Information Service Providers (AISPs).
PISPs have been around for years. Trustly is an example of a long-standing PISP that enables eCommerce payments directly from customer bank accounts.
But there is a wave of more disruptive PISPs on the horizon such as billx that allows customers to integrate all their accounts and enables instant payments to contacts, companies and more under the Open Banking directive and PSD2.
AISPs are newer, but effectively they are products that give consumers easy access to their account information – usually for the purposes of sharing with a third-party tool.
Yodlee was an early AISP and has been around for over 20 years. Part of their business model involved sharing customer information with third parties – which is no longer possible under PSD2 and GDPR.
Like PISPs, the new legislation has led to the rise of more disruptive companies like Yolt, who help customers to understand their financial situation, manage expenses and save money.
What this means is that Fintech start-ups can offer complex financial solutions while working alongside established banks rather than feeling like they can only enter the market as disruptors. They have the potential to work as facilitators to legacy banks while providing improved customer outcomes.
How can Fintech companies capitalize on the opportunity that PSD2 presents?
While PSD2 has opened the doors to innovators and inventors in the Fintech space, the full potential that the new rules possess is still being explored. Established Fintech companies and start-ups find themselves in a race to the edge of what’s possible, with many falling short of fully exploiting the legislation.
Any company that can properly grasp this potential could disrupt the market in a way that has not been done for many years – providing revolutionary payments or financial services that change the way money moves around the world.
A key success factor will be a full understanding of how PSD2 can be used as an enabler and the company’s role in the financial value chain.
Helping to unlock the full potential of PSD2 for the Fintech sector
Sometimes you need a hand to get ahead, and PSD2 compliance is certainly an area that this maxim applies to.
At 2knowlab, we specialise in doing just that – helping innovators and change-makers in the Fintech space make sense of the rules and different players in the market and identify the areas where they can have the biggest impact.
Get in touch today to find out how we can help you and your business.