On 13 January 2018, the second Payment Services Directive (PSD2) will overhaul the European payments landscape. The new legislation will force banks to open up their data, allowing third party providers such as fintech companies to access both account and transactional information. This gives third party providers the power to authorise payments as payment initiation services where they haven’t been able to before.
The new directive widens the scope established by the first Payment Services Directive (PSD), which came into effect back in 2009. PSD2 has a clear endgame – increase competition in the payments market, thereby paving the way for new services and lower costs for payment transactions.
Fear of the unknown
Tasked with breaking the stranglehold that banks have historically had on customer data, the PSD2 bill is boldly going where no legislation has gone before. With this change comes great uncertainty and fear of the unknown.
PSD2 states that all banks have to provide third party payment providers (TPPs) with direct access to customer information through open API’s, thus enabling TPPs to debit and credit funds. This exchange of power is tasked with revolutionising the payments industry, influencing everything, from the way we pay online to the information that we see when making a payment.
For the traditional banking powerhouses of Europe, there is definitely a cloud of apprehension about what this means for their future as their grip on customer data loosens. Additionally, there is uncertainty around the definition of what the open API actually means and how this will theoretically be implemented – further amplifying the anxiety banks are already feeling.
According to Strategy&, 68% of bankers fear that PSD2 will cause them to lose control of the client interface and many remain unsure how to respond to the new directive. Banks can’t afford to be passive or defensive anymore, in order to survive in this new financial climate, they will need to wholeheartedly embrace the changes or face potential extinction.
Businesses (merchants) are not exempt from a sense of apprehension either. Along with the opening of banking API’s, the legislation mandates a Strong Customer Authentication (SCA) process as a means to successfully combat increasingly complex fraud schemes. Typically, banks and merchants have worked to create a balance which allows the latter to implement security measures that have minimal disruption on the customer payment experience. However, this new additional security authentication process has the ability to disrupt this balance and by default the entire checkout ecosystem.
Currently in most markets, merchants have free reign to choose a fraud-mitigation method that best suits their individual needs, but PSD2 is set to remove this choice and instead stringently decide the scenarios where a SCA is part of the payment process. These new layers of complexity will pose a challenge for merchants as they have the potential to create an undesirable payments experience for customers and become conversion killers.
For consumers, uncertainty and confusion over who has access to sensitive financial data will see them enter uncharted territory for the first time. Having full transparency and keeping track of who has access to certain information is going to be even more difficult than it is now, as companies inevitably weave in terms and conditions without consumers fully understanding their meaning. It’s therefore important that consumers are educated about the new changes that are set to occur.
Change is coming: Opportunity on the horizon
Sensing the potential opportunities on the horizon, like bees to honey, third party providers will likely join the banking equation in swarms. By offering alternative payment options, consumers might have their heads turned at the prospect of easing their frustrations with legacy banking system. For the first time in a long time, there will be variety.
Consumers will be able to access a consolidated view of their payment methods and account details from the platform of their choice in order to better see, budget and plan their spending. They also benefit from being able to make immediate payments, send higher transaction amounts and pay reduced costs thanks to increased market competition. This is set to send tremors across Europe and global markets. Ultimately, banks and organisations around the world will compete to see who can best own the customer and their payments data.
Third party providers will be able to offer more competitive pricing because of their new access to data, fuelling commerce and trust. For example, PSD2 will prohibit the use of non-transparent pricing methods. The legislation states that all consumers should know “the real costs and charges” when making a transaction. In the current market, we see surcharges added to anything and everything. That said, the new changes will theoretically act to prevent these charges. With the market becoming more populated, banks might find these surcharges being side-stepped by third party providers as competition increases.
Understandably, banks are cautious about the entire prospect. Having held the cards close to their chest for so long, they’ll have to finally show their hand and surrender large amounts of their income stream, whilst battling fears of being relegated to the diminished status of data holders.
Where there is fear, there is almost certainly always opportunity. The biggest asset that banks have at their disposal is the vast quantities of data that have been amassed from their customers. By already being in a powerful position to leverage this data, banks are advantageously able to enter into partnerships with the same third parties that they’re being infiltrated by.
For those banks willing to go even further out of their comfort zone, the launch of APIs may be an industry defining moment. There is a strong case for innovation, and the potential for new revenue streams as everybody looks to create new products and services. These will be based on customer intelligence into areas such as spending patterns and money management.
The road to January
It’s definitely going to be a nervous period for banks, third-parties and consumers with the uncertainty and the demands that PSD2 is going to bring. Specifically for banks, the greatest challenge will be understanding the definition of what the Open API actually means and then implementing this.
What we do know is that the increased transparency into customer data will be a complete game-changer and everybody needs to be ready for PSD2, regardless of anything else. It shouldn’t be forgotten that with this uncertainty and fear of the unknown, also comes opportunity – especially for third parties and banks who are willing to embody the new regulatory change. Increased competition provides endless chances for innovation, fresh revenue streams and new partnerships to be formed. When an opportunity such as PSD2 knocks, you have the swing the door wide open.