What Affect Will PSD2 Have on European Financial Institutions?

Before and after PSD2 regulation.  Source.

Before and after PSD2 regulation. Source.

What is PSD2?

PSD2 is the Revised Payment Service Directive, passed November 16, 2015, by the Council of the European Union. This directive was first proposed by the European Commission in June 2013, adopted by the Parliament in October 2015 and passed November 16, 2016. Two years were allowed for member states to incorporate the directive into their national laws and regulations. PSD2 will go into full effect on 12th January 2018.

What was PSD1?

The Payment Services Directive 1 -aptly named PSD1- passed in 2007, ruffling many feathers in the banking industry. Banks furiously pushed back against PSD1, realizing that their monopoly of online payments was at risk. The adaptation to PSD1 took some time, but we (the consumer) received many beneficial products and services from the regulation.

PSD1 introduced the concept of payment gateway companies - A payment gateway is a merchant service provided by an e-commerce application service provider that authorizes credit card or direct payments processing for e-businesses, online retailers, bricks and clicks, or traditional brick and mortar. Payment gateways aren’t regulated to the extent of conventional banking standards. Payment gateways facilitate the easy payment transaction through the transfer of information between a payment portal and the front end processor or acquiring bank. PSD1 paved the way for PayPal, WorldPay, SecurePay, Amazon Payments, WePay, etc.

The driving force behind all Payment Service Directives is the harmonization of the payments landscape to level the playing field between countries and between payments providers, with the end goal of increasing competitiveness. Increased competitiveness gives the consumer better value in the end.

Why are traditional financial institutions afraid of PSD2?

In short, banks will no longer only be competing against other banks, but also anyone else offering financial services. PSD2 forces banks to share access to customer’s accounts through open API’s. This could mean that in the future we will use Facebook to pay our credit card bills, Twitter to make P2P transfers, and refer to third-party apps as in-pocket financial advisors.

Banking through AISPs.  Source .   

Banking through AISPs. Source

Which European FinTech companies will emerge because of PSD2? PSD2 introduces two new types of players into the financial landscape - PISP and AISP. PISP stands for Payment Initiation Service Providers, while AISP stands for Account Information Service Provider.

AISPs are service providers with access to the account information of bank customers. AISPs analyze a user’s spending behavior from several banks and displays the information in one simple overview. AISP gives a name to a process that already exists in other parts of the world. Take, for example, Mint.com - a free, web-based personal financial management service for North American bank accounts. Through API integration, Mint.com consolidates a users’ bank account details and transaction history across several different banks. AISPs have been the norm in America for some time, while the PSD2 regulation permits AISPs to Europe.

Imagine in a few years, you log on to one app and see your Deutsche Bank, ING, Number 26, and Goldman Sachs investment account all in one place. This unprecedented transparency is beneficial for the end user, while simultaneously invalidating countless banking careers.

A good example of an AISP-focused startup emerging on the coattails of the PSD2 regulation is MONI. MONI is a micro-banking FinTech startup from London that first started as a prepaid card, but is now looking to provide the same services as Mint - providing consolidated banking details for a customer in one place.

Checking multiple payment account details post PSD2.  S  ource .

Checking multiple payment account details post PSD2. Source.

MONI’s slogan is, “MONI is smart, so you don’t have to be.” The about page highlights the USP - a simple, low-cost mobile personal banking solution in real time for the average consumer. MONI just completed a 1.75 million seed round in November of 2015, proving that customer-oriented B2C FinTech solutions will slide in and poach neglected customers while banks keep their attention primarily on more profitable B2B customers, compliance, all the while reacting slowly to new regulations. 

Lastly, Payment Initiation Service Providers (PISPs) will take nine percent of retail payments revenues by 2020. P2P transfer and bill payment are PISP services we are likely to see when PSD2 is implemented.

With PSD2, banks are required to provide basic APIs to AISPs and PISPs - thus prompting banks to share profits with unforeseen competitors. It is up to banks to turn this threat into an opportunity for collaboration.

2018 is set to be a game-changing year for retail banking. As the directive goes into effect, traditional financial institutions will lose their monopoly on their customer’s account information. The PSD2 directive opens the door to any company interested in eating a bank’s lunch, and I for one, welcome the competition.