The second Payment Service Directive or revised Payment Service Directive, widely known as PSD2, is a European Nations (EU) Directive that has been composed by its member states. It came into effect in January 2018, designed to manage payment services to its providers throughout the EU and European Economic Area.

An era of ‘Open Banking’

The directive is set to refurbish the way banking and payments have been done so far; and shift to a new era of ‘open banking’, where clients can gain immense transparency and flexibility in the way they manage their accounts. However, while some banks have started implementing the rules of PSD2, others are yet to do so.

Commenting on this fact, Paul Riseborough, Chief Commercial Officer of Metro Bank (UK), opined: “Banks are certainly gearing up to support PSD2, however it’s disappointing that in the UK, not all the banks mandated to adopt the Open Banking initiative proposed by the Competition and Markets Authority, were ready to do so by the deadline.

“A lot of this is related back to legacy systems. We’re in a fortunate position at Metro Bank where we have a state-of-the-art tech stack. We’ve been able to work with global leaders like Apigee on designing our API platform, which gives us the ability to partner with organisations quickly and build compelling digital products and experiences for our fans. For some of the larger players, implementing PSD2 across their extensive systems is not so simple.”
Along with Riseborough, Ferenc Kementzey, CEO of Hungary’s Raiffeinsen Bank has been part of a bank that has implemented PSD2. “PSD2 directive was implemented at beginning of this year, so we are fully compliant with the regulation.”

Security and its implementation

The features that set PSD2 aside are its economic benefits, protection of consumers’ rights and enhanced payment security protocols. Specifically, new security requirements included by the directive will oblige all payment service providers to step up their security measures around online payments, including banks and makes electronic payments safer and more secure, It calls for payment service providers to apply strong customer authentication (SCA) for electronic payment transactions.

Moreover, PSD2 aims to widen the EU market for electronic payments that will help e-commerce consumers and merchants to gain completely from the internal market.

In addition to firming up security provisions, PSD2 also updates the Telecom exemption by constraining it to miniature installments for advanced administrations and incorporates exchanges with third nations when only a single payment service provider is within the EU. It also enhances cooperation and information exchange between authorities in the context of authorisation and supervision of payment institutions.

Talking about how PSD2 will be an aid to the payments market, Shiv Kumar Bhasin, Chief Technical Officer of State Bank of India and Member of Advisory Board at Gartner, said: “PSD2 opens the door to any company or Fintech interested in eating a bank’s lunch. With the aid of PSD2, enterprise wide urgency for open banking can be created. Today, Google ‘Tez is using banks’ payments APIs to facilitate funds transfer and bill payments on the UPI Platform. It will be interesting to see whether the consumers will stick to traditional banks despite having digital applicationsor trust non-banks for making payments.

The ability for customers to aggregate all their financial relationships down to a single dashboard will be transformational for the entire banking industry, requiring banks to embrace artificial intelligence, advanced analytics and instant payment systems. RBI had also released directions on account aggregator service in 2016. Personal Finance Management providers are not that useful for customers, and this provides banks time to respond — especially given that they are trusted by customers. Banks could also become third-party aggregators using PSD2.”

The road ahead

Riseborough said PSD2 encourages competition and improves quality, choice and service for both for consumers and businesses.

He added: “PSD2 provides an opportunity to create sophisticated products that give consumers more control over their finances, as well as greater protection against fraud. In the long-term it’s going to be a game-changer, but to fully realise this, banks need to ensure they bring consumers along with them on this journey.

Consumers need to have trust in both the mechanisms and output of PSD2. By using consistent language and creating a clear set of standards that third party providers (TPPs) can access the data, banks and other fintechs can help build both understanding and confidence among consumers.”

PSD2 expands the scope of PSD1 by upgrading its existing services, and adding new services and market entrants, which would let them access payment accounts. It will also help new market entrants, as they would no longer have to deal with several complications and can indulge in offering cheaper solutions for payments to more and more consumers throughout Europe. For the future, banks are required to share their application programming interfaces (APIs) with outsider applications, numerous of them have still not yet been successful in providing that securely.

Bhasin considers PSD2 will definitely openup the banks for various innovative partnerships. “It will make the APIs sandbox a mandatory partnership service for the banks. PSD2 will reduce interchange fees on credit and debit card transactions. Acquiring businesses will have severe hit to profitability.

Multiple new entrants will most likely cherry-pick different parts of the value chain or selected bank customers. Although in India, apart from PayTM, no other Fintech has made any impressive offerings, inspite of APIs being published by different banks & partnership programs.”

Talking about the road ahead for PSD2, Kementzey said: “Regulatory Technical Standards, which reserve the biggest impact and business potential on the financial industry, especially for commercial banks and Fintech companies, will be introduced just next year. In addition, the brand new domestic instant payment scheme is going to start on 1st of July, 2019, so according to me, our customers will experience a remarkable change in payment ecosystem in Hungary in a relatively short time.

As far as Raiffeisen Bank concerned, Kementzey said they are investigating different the scenarios to introduce innovative and valuable solutions in new PSD2 world, either of their own accord or by partnering with Fintech players for our customers.

While many are being positive about how PSD2 will redefine banking as we know it, however, as Riseborough mentions it’s too early to define and comprehend the end-to-end significance of the directive. The actual impact will be known only after all the banks and financial institutions execute and apply it for its operations on regular basis.