The financial services industry is already facing a wave of digital disruption that are starting to reshape the industry. Nevertheless, the PSD2 is not ‘just another regulation’, it will reshape the entire payments system as we know it today. Innovative start-ups will get larger playing field and banks are obliged to share their data (with permission of the accountholder) to third parties. A directive that will disrupt the Fin-Tech industry, but how does this impact the traditional banking model? And what does the implementation of PSD2 entail for Fin-Tech start-ups?
The Payment Service Directive is a work-in-progress EU-directive that regulates payment services in the European Union and will impact financial institutions. The directive, originated in 2007, is designed to increase the competition in the payments landscape and to lower the threshold for new entrants in the payments industry. After an update of the regulation in 2009, there is a bigger adjustment on the way, leading to the implementation of the Payment Service Directive 2. The regulation is now expected to be passed by the European Parliament in September 2015 and then transposed into national regulations across the region from 2016.
To understand how the PSD2 will impact banks and Fin-Tech start-ups, it’s good to know what the PSD2 actually entails.
- PSD2 will force banks to facilitate access via API to their customer accounts and provide account information to third party account information service providers (AISPs) if the account holder wishes to do so. This data can be used by third parties to develop innovative payment services. Banks are obliged by law to provide this data to third parties (Access to the Account: XS2A).
- With the arrival of PSD2, third party payment initiation service providers (PISP’s) are able to initiate payments via internet-portals on behalf of the account holder, if the account holder gives permission. Banks are obliged by law to enable this functionality.
So, what do these changes mean for…
The arrival of PSD2 and in particular the Access to the Account (XS2A) again threatens the traditional business model of banks even when banks have already been threatened for several years by Fin-Tech Start-ups. In the last few years, billions of dollars have been invested in Fin-Tech Start-ups and their innovative financial services. Banks have difficulty keeping up with the newest technologies and are simply not as innovative and flexible as the Fin-Tech Start-ups (most banking systems are already 20 to 30 years old).
Despite the fact that PSD2 directive is challenging the current banking business model, the directive may also offer huge opportunities for the banking industry. Banks have realized that start-ups will play an important role in the future of finance, and have thus started entering into partnerships with them. For example, ING recently announced that they will be launching the “ING Innovation Studio”, an accelerator designed to support multiple Fin-Tech start-ups with their initial development.
A recent survey of Finextra has shown that banks are rethinking their business model as PSD2 looms. Finextra’s poll of over 100 banks found that 54% of all respondents agreed or completely agreed that they are in the process of rethinking their retail banking customer relationship and revenue/business model, with an aggregate positive score for this of 78%. Banking teams who worked on SEPA compliance are now being moved onto PSD2 projects, but a majority of banks will also turn to external partners for help with developing APIs, security layers and app stores as well as new business processes and product development.
To sum up, the impact of PSD2 on banks will largely depend on their own willingness to change and to co-operate with the more innovative and flexible Fin-Tech start-ups. It’s obvious that the role of traditional banks were already changing immensely, the implementation of PSD2 just adds more fuel to the (Fin-Tech) fire.
In contrast to the banks, the Fin-Tech Start-ups will be more likely to give a warm welcome to the PSD2 directive. The directive provides start-ups with a larger playing field with more obtainable bank data and improved laws: what’s not to love? Moreover, the PSD2 creates a range of new service opportunities for new entrants. Banks will be increasingly looking to use partnership-based models, with other financial services providers, innovative start-ups that they mentor and/or fund, and technology providers.
To conclude, the PSD2 will further open the markets to non-bank competitors and foster innovation in the already booming Fin-Tech market. It will definitely benefit the Fin-Tech Start-ups and, if treated as a business opportunity to modernise traditional banking systems, the directive will also be of great value to banks.
What does PowertoPay think?
PowertoPay believes that PSD2 is a great opportunity for the banks, industry and end-users in the financial sector. PowertoPay is closely following the regulations on PSD2 and our goal is to launch new features for banks and corporates every year. As a payment specialist, the directive PSD2 will provide PowertoPay with the opportunity to increase the number of features enormously and we thus are looking forward to its implementation.