So PSD2 is here, but what does it all mean? Let's start with a brief background of payment services in Europe
Since 2009, payments standards have been laid down as a European Directive. Each member state could enforce the Directive in their own way, and in the UK PSDI paved the way for, what was then, a newly created Payment Services Regulator and Financial Conduct Authority (FCA) who enforced these standards.
But since PSDI the payments market has grown significantly and, as you’ve probably noticed with the rise of Fintechs, innovation is rife. As the growth of innovative Fintechs and financial solutions continues to boom, the regulatory framework under PSDI is no longer fit for purpose.
So what is PSD2?
In light of the changing landscape, the EU is completely revolutionising the framework with the introduction of the Second Payment Services Directive, or PSD2. Together with the introduction of Open Banking, PSD2 represents the single biggest change in the payments sector since payments were first regulated. It’ll change a number of things, from how you pay for things online to how you can share your financial information.
PSD2 has actually already been around for several years, on the books as they say, but it only became effective as of 13 January, 2018. A small number in the industry had been taking advantage of the services under PSD2 early, but the actual implementation across Europe hasn’t been a legal requirement until now, and it has meant a pretty considerable investment from the industry to ensure all players both keep up with consumer demands, as well as protect them.
Who’s driving these innovations?
Much has been fuelled by the growing expectations of consumers. If you think a minute about your own experience as a consumer - are you happy for a payment to take a number of days to clear? Are you happy to wait 5 business days to for something you've bought online to arrive?
No – we, as consumers, want things instantly, in real time, and expect full visibility over our transaction at all times. Businesses want the same.
These consumer demands and expectations have paved the way for innovative Fintechs to create solutions that allow businesses to provide better services, financial products and advice.
PSD2 allows these new solutions to make more intelligent use of a consumer’s data, as the consumer has a greater ability to share their own financial information more freely with whichever provider they choose.
PSD2 paves the way to place the power back in the hands of the consumer, who will be able control their own financial data – previously held as though it was the bank’s financial data, rather than the consumers.
These changes democratise financial services because the fast-paced growth of these Fintechs and new solutions mean more competition to challenge the mainstream financial players, like the big banks, that have traditionally been slow to innovate and address the needs of the consumer.
What do the PSD2 changes mean for me?
First up, these changes will mean more scope for competition, allowing innovators to challenge traditional mainstream providers like banks.
You’ll also benefit from greater transparency on the true cost of any payment or transaction, whether that be the cost of sending money, or foreign currency exchange. Ultimately, greater choice and transparency means more control in favour of you, the consumer.
Any provider that holds customer accounts will be required to open up the data they hold on an individual to another payment provider, at the request of the consumer.
So, what are the key changes?
Payment Initiation Services
If you’re buying an item online, rather than having to redirect to your online banking portal, with your permission the online retailer can seamlessly “pull” funds from your bank account and make the payment for you without the on-screen redirect.
You can share your own financial data, at your discretion
If you hold more than one bank account, you’ll be able to allow specialist providers like a financial advisor access to your financial information more seamlessly. The same applies to the likes financial planning services, affordability and anti-fraud services. Of course, this is at your discretion but simply means banks and other financial institutions will have to open up your information and make it easier for you to share with your chosen providers as you see fit.
The fraud factor
As the growth of online and cross-border transactions continue, the risk of fraud grows with it. This is where the PSD2 requirements really kick in, having prescribed that more robust identity checks and more secure customer authorisation is needed when making payments.
Innovations in biometric technologies, facial authentication and identity verification will pave the way for new ways to authenticate your payments more securely.
The end of the pesky surcharge at checkout
Another important change is the ban against any surcharge for direct debit, debit or credit card payments.
You’re probably all too familiar with being hit with an added surcharge at checkout when paying with a credit card online. Retailers like airlines and delivery service often surcharge users for using a particular payment at method at check out because of the added cost they incur to process that payment type. But it'll be interesting to see the impact of this over time, as many expect retailers will simply increase the price of their goods or services so their costs don’t increase as a result of the surcharge ban.
However, ultimately, while Open Banking and PSD2 are revolutionising the payments industry, the impact won't be immediately visible, and is unlikely to send tremors across the network just yet. There's still a lot of work that needs doing - consumers will still have trust issues in sharing their financial data, and many of the technical standards released by the European Banking Authority won't be in full effective until mid to late 2019. But innovation will continue to drive the industry forward and what is clear is that PSD2, despite its technical complexities, will better facilitate the growth of payments innovators, by providing an increasingly safe and resilient payments environment.
This is the first of a four part article on Shieldpay's view on PSD2. Willem is our Chief Legal and Compliance Officer and as well as being our regulatory and compliance geek at Shieldpay - and the guy who puts the Shield around Shieldpay - he is passionate about all things innovation and amuses us on a daily basis with his eclectic mix of musical tastes.