By Edwin van Gorp and Chris Barbiers
A lot of hard work is being done to launch Payments Service Directive – Part 2. But why do we actually need PSD2? And what does this mean for the financial services market? Time to let go of the daily worries and details of PSD2 and to reflect on the larger context, the objectives of the European Commission (EC) and the emergence of the new financial Europe.
The PSD2, together with GDPR, is a great piece of European politics.
PSD2 is one of the pieces to the puzzle of the European Commission in the construction of a strong internal European market. The idea behind this plan is simple: if we remove barriers within Europe as far as possible, we create a strong internal trade market. As a result, Europe remains a strong player on the world stage, compared to America, China and Russia. The idea is simple, but the implementation of this master plan called Europe is extremely complex and takes a long time.
PSD2 fits in a series of measures from the EC, the beginning of which has been behind us for many years. The most recognizable step was the introduction of the EURO on 1 January 2002, when 14 countries said goodbye to their local currency for good and switched to a common currency. Years later, in August 2014, the introduction of 1 European payment market was another important step for the EC. On that date, the Single European Payments Area (SEPA) became a fact. Domestic payment products were replaced by the European payment products: SEPA Credit Transfer and SEPA Direct Debit. SEPA was accompanied by European legislation, the PSD1. In addition to legal arrangements for the settlement of payments, PSD1 allowed new players to place payment services on the market. The so-called Payments Service Providers were established. This change created the competition, so desired by the EC that enabled players such as Adyen, Buckaroo and Ogone to make their appearance.
New players in the payment market, however, began to openly complain about the fact that access to the payment account was reserved for the banks themselves. This impeded innovation in the eyes of FinTechs and prevented fair competition. Banks, on the other hand, worried about how new players could gain access to the payment account in unsafe ways. The European Commis- sions answer to this was the introduction of PSD2. This legislation makes it possible for third parties to gain access to the payment account at the bank, but, only after consent is provided by the customer in a secure way.
With this access, third parties are allowed, with the consent of the customer, to initiate payment orders on the customer accounts and to retrieve transaction data from the account. This makes it possible, for example, to take a first step towards a bank-independent payment app where a customer can manage his or her accounts with several banks. It is the first serious step towards a so-called “Open Banking” environment, where not the bank apps but apps from third parties are used by customers on a daily basis.
Parallel to this open banking movement, the concern for the use of data by all kinds of digital service providers increased worldwide. This also applied to FinTech payment service providers who will have access to payment accounts with PSD2’s implementation. Even though the customer has given permission for access to this account, it still raises all kinds of questions about what these parties can and may do with customer data. The answer to these questions is the GDPR, introduced by the EC, which entered into force on 25 May 2018.
And with this answer, the EC has presented a clever piece of an overall coherent legal framework for Europe, which the rest of the World can only envy. With PSD2 on the one hand, it offers new players the opportunity to introduce new, innovative payment services based on data from the payment account. On the other hand, the increasing concern about privacy among citizens and businesses is being securely addressed with the imple- mentation of GDPR.
The PSD2 is cleverly riding the enormous wave of digitization.
Some say that PSD2 is the cause of the creation of a completely new playing field for financial service providers in Europe. That is not true. Neither is the arrival of PSD1 the cause of these new opportunities. The real reason is the global digitization of our society. Global digitization is the leading cause of the disruption being experienced by all existing traditional service providers, including financial service providers, such as banks and insurers.
PSD2 does accelerate the creation of this new playing field. And this is exactly what the EC wants: to create a single internal market as quickly as possible, with more competition and better services for our citizens and businesses. And with these changes, a more powerful and attractive Europe is created. In short, a smart move by the EC to achieve its own objectives by riding society’s thunderous wave of digitization.
The new financial Europe: what is really going to change on the short term?
Digitization, Application Program Interfaces (API), new technologies such as Blockchain and Artificial Intelligen- ce, surrounded by legal frameworks such as PSD1, PSD2 and GDPR, provide the new playing field for financial service providers in Europe. New players see opportuni- ties and enter the market that until recently was reserved for banks. FinTechs are sprouting like mushrooms. There will be a proliferation of new service providers in the coming years, followed by consolidation.
Concretely, PSD2 leads in the short term to the following changes in the market:
• New payment service providers: Companies will be given the opportunity to provide services that were previous- ly only reserved for banks. As an example: consumers in the shops now mainly pay with a debit card, whereby the debit cards are issued by the bank. With the arrival of PSD2, companies have the opportunity to customer contact. For example, Facebook has announced that it wants to provide payment services on its Facebook Messenger platform.
• Creation of financial aggregators: With PSD2, aggrega- tors will enter the market combining services and data from multiple banks in one service, app or platform for the customer. These can be very simple services, such as an app that provides insight into the transactions on the payment accounts that a consumer has with several banks to complex corporate cash management solutions for companies to
automatically manage balances across multiple accounts with several banks. Not only are new players going to offer these aggregator services. The banks themselves
will also do this in order to remain fully relevant to its customers and to maintain maximum customer contact. For example, Rabobank already offers the possibility to show accounts of other banks in the Rabo app, such as the account that a customer has with Bunq.
• Better services by the existing service providers: Through direct access to the payment accounts, existing service providers can improve and extend their range of services. For example, improved services being offered by accounting suppliers, such as Exact. With PSD2 they will be able to deliver better payment services from their solutions, such as direct payment of invoices, for which companies today mainly use the internet environments of the banks.
For consumers and businesses this leads to more freedom of choice with better and cheaper services. These are the exact objectives that the European Commission is striving for.
And what’s next? Will there be a PSD3, 4 and 5?
Back to PSD2 and the European Commission. The master plan for Europe is a long journey with a long breath. We cannot predict the future, but as long as we have a united Europe, the EC will implement new legislation to achieve its objectives: building a single financial Europe with an internal free market. There are still plenty of steps to be taken. That is why new legislation will certainly come. And we believe that we should only be happy with this.
In these turbulent times of very fast digitization, with a lot of uncertainty and lack of clarity, a good legal framework ensures protection, safety, stability and peace. The EC and the various European countries still have the task of ensuring that legislation is implemented
quickly in all countries so that the desired level playing field is created.
Finally, when the EC succeeds in getting this master plan more up-to-date, citizens will better understand the context and new European guidelines will be seen as part of a higher goal. This would be a good remedy against Euroscepticism, non-compliance with European rules by Member States and future exits from the EU. Sceptical citizens now interpret the movements of the EU as meaningless and money-consuming, losing the sovereign- ty and identity of their own country. The message, however, is that if we do not work together in a European context to protect the identity of the Member States within a united Europe, then the sovereignty of Europe and its Member States fall prey to technological, legal and economic domination from China, America or Russia.
About the authors
Edwin van Gorp is partner at Dexx Consultants, focussing on Banking IT strategy, architecture and innovation. He is executive advisor and architect at several leading Dutch banks.
Chris Barbiers is managing consultant and owner of EXIT/P, consultancy services for critical projects in IT and Finance. He is also IT & financial judicial expert, arbitrator, mediator and board member at Stichting Geschillen Oplossing Automatisering (SGOA).
Photo: Maurice Jager