New regulation to drive innovation in payments
On 13th January 2018, the new European Directive on Payment Services “(EU) 2015/2366” comes into application. With just under a year to go, financial services providers are gearing up for change. What will be ‘PSD2’‘s immediate effect and longer-term impact on the payments market?
- PSD2 integrates the European payments market; enhancing electronic payment security and consumer protection, and encouraging competition and innovation
- The new law requires the licensing and regulation of all third party providers
- Building a new interface using open APIs will facilitate a new era of open banking
PSD2 updates PSD1 – which laid the legal foundation for the Single Euro Payments Area (SEPA) in 2007, facilitating easy, efficient and secure electronic payments in the European Union. The latest stage of this goes live in November 2017, an instant credit transfer scheme that will eventually link over 34 European countries and cut the time it takes to execute a euro transfer to under 10 seconds.
Meanwhile, the payments market – not just in Europe, but globally – has undergone deep technological and market change since the first directive, and PSD2 provides a much-needed regulatory update. However, it is more than that: it will be a catalyst for a more open, digital, and customer-focused payments market fit for the twenty-first century.
PSD2 further integrates the European payments market; enhancing electronic payment security and consumer protection, and encouraging competition and innovation. But its scope and impact are not limited to European banks or companies or even euro transactions.
Firstly, PSD2 extends many provisions of its predecessor regulation to payments where only one party is located in an EU/ EEA country (“One-Leg-Principle”), and to payments in all currencies. For Asian payment service providers with operations in the EEA, this may involve some process and system changes, for example to ensure compliance with transparency and information requirements. However, since PSD2 does not extend PSD1’s provisions in all cases, detailed advice should be taken. Corporate customers will not have any major change burden, but they may decide to implement some changes to ensure they can benefit from new services.
PSD2 also mandates strong, 2-Factor customer authentication, raising the standard for secure electronic payments and online and remote account access throughout the EU/EEA. Some worry that requiring an additional step might deter customers from completing online purchases. The European Banking Authority’s (EBA’s) Final Draft Implementing Regulatory Technical Standards, planned for January 2017, may deal with this concern.
Enter third party providers
However, potentially the most far-reaching change of all is licensing and regulating third party providers (TPPs). There are three of these, two of which are particularly important. Account Information Service Providers give payment service users a user-friendly single view of their multiple account balances, helping them manage their finances. Payment Initiation Service Providers, on the other hand, give online retailers comfort by initiating a payment on behalf of a payment service user, encouraging the retailer to release goods or deliver a service without delay. Both their activities are currently not, or only imperfectly, regulated.
Possibly the most fundamental aspect of these new licences is that “Account Servicing Payment Service Providers”, e.g. banks, will be obliged to allow new providers to access customer account information via a “third party interface”. Details of this have yet to crystallise, but it is anticipated that the resultant interplay between incumbent payment providers and new third parties will shake up the market and generate new services benefitting both corporate and individual customers. Whether these are offered by banks, fintechs, or collaborations between the two, they are likely to be delivered through new, convenient channels.
If open APIs are used to build the new interface, this might facilitate a new era of open banking. Certainly, the EBA is encouraging the development of industry-wide standards. Doubtless it will follow initiatives such as India’s Universal Payment Interface and Singapore’s Association of Banks and Monetary Authority’s Finance-as-a-Service API Playbook closely to see what lessons they offer. That said, a more vibrant and efficient payments market in Europe should benefit trade and encourage competition in payment services globally.
Note: Shahrokh Moinian is the global head of cash management corporates, Deutsche Bank. The opinions expressed in this article are strictly his own.
Keywords: SEPA, PSD2, EBA, TPP, Payments