PSD2 — Age of Fintech
On January 3, 2016, the second payment directive of the European Union, — Revised Directive on Payment Services (PSD2), entered into force, which is mandatory for implementation in the EU.
The first Directive on payment services was adopted in 2007. It legalised alternative methods of electronic payment available on the European Union territory: mobile operators and electronic payment systems had got the opportunity to implement separate banking functions. New data disclosure rules were established, the term of interbank payments was limited, and direct international debit transactions were legalised within the EU. The implementation of the innovations required banks to spend €6 billion.
The first version of Payment Service Directive 2 from 2013 determined the size of interbank commissions, simplified and secured Internet payments, bringing them in line with the legal norms.
The second PSD2 edition is aimed at further modernizing the financial space and combating legal and technical obstacles on the way to the formation of the pan-European payment services market. Its task is to change the working conditions of the payment system, to realize the rights of consumers and to control the interaction of the process participants.
The provisions of the directive should be introduced into the legislation of European countries by January 2018.
What does PSD2 regulate?
The updated European payment directive provides an opportunity to make the payment system more attractive for consumers by introducing a new institutional hierarchy.
According to PSD2, payment service providers were added into the current scheme, to work as intermediaries. The list of official intermediaries and their agents will be indicated in the all-European registry.
Opportunities of banks and similar financial institutions were limited — provided they retained the previous behaviour model — they serve exclusively for the storage of money. Other functions are performed through the providers represented by IT companies, whose work is regulated by new licenses.
- Payment initiation services are created to provide interfaces that allow payments to be made. These instances are an intermediary between the consumer and the holder of financial resources. They make it possible to withdraw money from any accounts in any financial institution (for example, a bank) without agreeing with it. In fact, it is a large aggregator of all payment instruments.
- At the client`s request, services which collect the financial information request from the financial institution his/her account data (for example, balance sheet) and accumulate it in one place.
The user can now get complete information about the transaction, including all fees. Financial organisations are obliged to provide data to intermediaries even without concluding a separate agreement. Contractual relations have been replaced with the conditions of interaction described in the legislation, carried out through the capabilities of electronic devices.
Requirements for service providers
The directive provisions changed the user identification conditions when trying to access the account online, when making a request for money transfer or in case of fraud risk. Enhanced authentication requires compliance with two of three factors: knowledge of personal data (login and password), input from a specific device (IP address matching) and biometric verification of the identity (fingerprint, selfie, etc.). The client’s responsibility for refusing to follow the rules of the payment system is also stipulated.
Besides the introduction of strict identification, service providers must ensure high security of the channels through which the client’s personal information is received.
These measures are designed to minimise the risk of fraud by protecting end-users.
Advantages of PSD2
- Promotion of integration and optimisation of the payment services market throughout the European Union.
- Guarantee of equal competition conditions for market participants responsible for transferring funds.
- Ensuring the protection of customers.
- Promoting a surge of innovation among FinTech startups.
- Increase the protection degree of the industry infrastructure.
- Facilitate the reduction of commissions and tariffs for the provision of payment services.
Prospects for banks
The directive requires banks to open their APIs. This will lead to increased competition in the sector (especially in payments made online or through a mobile device) through simplifying access to the industry for non-banking organisations.
At the same time, large banks, when using the new “bank–platform” model, can take a stable position in a modified economic scheme. Qualitative transformation will require large financial costs, but banking organisations can join the Fintech community by engaging in construction, acquiring a base or cooperating with another player.
Experts predict a gradual change in the market, believing that until the end of 2018, and even 2020 (depending on the country due to differences in payment behaviour) there will be no noticeable activity. However, the leading players have already started preparing for the directive implementation.
Green Light for FinTech startups
PSD2 accelerates the pace of development of companies which are using the latest financial technologies. They have a number of advantages over banks:
- high transaction speed;
- minimal fees;
- easy-to-use platforms;
- the ability to provide services to persons without a credit history;
- servicing regions with undeveloped banking infrastructure.
Fintech companies make the use of financial services attractive not only for individuals. Now the refusal of bank to open an account does not mean the end of business — alternative options will come to the rescue.
The Directive opens new opportunities for businessmen who are not afraid to implement modern solutions.