Pulse of the industry: exploring various sides of the PSD2 story

In the light of the recent announcement on the Payments Services Directive 2 (PSD2) being adopted by the EU Council, The Paypers has caught up with various thought leaders, industry experts and players, inviting them to share their views on this particular topic. Why is PSD2 regulation an opportunity? Why the change? How will it impact industry players? Can it help boost innovation? Are banks really prepared for this? Will PSD2 achieve its ultimate goals and ensure not only “a high level of consumer protection (…) across the whole of the Union” but also create “a downward trend in costs and prices for payment services users and more choice and transparency of payment services”? Without further ado, here is what we found:

John Broxis, Managing Director, MyBank: “It seems that the PSD2 understanding is still a process underway. Bankers feel that PSD2 exists to get rid of banks. It doesn’t!”

Bill Gates famously said: “People will always need banking service, but they will not always need banks”. That was 17 years ago and PSD2 shows that banks and other regulated payment service providers are even more important than ever. The truth is that people like to pay from their account and in Europe we have a network of 4,000 financial institutions linking half a billion citizens who all want to transact with each other in the new digital world. This is handy for those banks which are wondering how to ensure they stay relevant in the digital age. Which is all of them.

It seems that the PSD2 understanding is still a process underway. Bankers feel that PSD2 exists to get rid of banks. It doesn’t! Commentators feel that the operational and security details so far missing will be answered by the EBA’s “Regulatory Technical Standards”. They probably won’t and it is most likely that the key criteria will be set to ensure a levelled playing field, leaving the technical details to the market to favour competition.

To deliver PSD2, the industry has a compliance project in its hands and the industry must organise itself around a few trusted solutions that can orchestrate the different players in the ecosystem and achieve reach, while avoiding fragmentation. Implemented properly, PSD2 can bring benefits to all parties and even create new services like Identity Verification and the ability to agree contracts at distance. MyBank provides the operational tools needed to deliver PSD2 compliance and to go beyond. Let’s take this opportunity.

John Fernandez, Senior Legal & Regulatory Counsel and Ralf Ohlhausen, Business Development Director, PPRO Group: “Many banks may find the increased scope of PSD2 a threat or challenge to their incumbent market position.”

Obviously for new players such as payment initiation service providers (“PISPS”) and account information service providers (“AISPs”), PSD2 is a great opportunity. The major positive is that these firms will have an official legal framework in which to operate. Banks will no longer be permitted to draft consumer T&Cs which forbid their customers from sharing login credentials in order to authorise payments. Nor will banks be able to shut out PISPs or AISPs from accessing accounts other than for “objectively justified” reasons related to fraud or unauthorised access.

PISPs/AISPs will, however, need to prepare themselves for an application and authorisation process with their domestic regulatory authority before being granted authorisation as payment institutions in order to offer their services. The application will include providing a programme of operations, business plan, descriptions of governance and internal controls as well as security policies. These entities will not be permitted to hold consumer funds and will need to obtain professional indemnity insurance.

Many banks may find the increased scope of PSD2 a threat or challenge to their incumbent market position. However, on the contrary, it should be viewed as an opportunity to create synergies between fintech and banking. Fintechs are typically smaller, more agile businesses that can act quickly to take advantage of new opportunities and this will certainly take place. Banks should actively seek out key partnerships with fintechs in order to leverage the market opportunity they present. This is a great opportunity for banks because:

a) they have the chance to let their customers pay directly from their own bank account without a card, wallet or other payment instrument
b) it will trigger further opportunities

PSD2 is forcing only minimal cooperation between banks and third parties. We expect that in the future both sides will cooperate in a much broader fashion than that suggested by PSD2. There will be an exchange not only in regards to basic consumer payments, but also for business payments, mortgages, credit ratings and the likes. Banks will certainly look to benefit from the delivery of data to third parties in the future. We are just at the beginning.

Mark Fabian Henkel, Co-Founder & CEO of PAYMILL: “Too much regulation can complicate processes.”

Increased online security is always good and we support any efforts in that direction to reduce fraud to a minimum. However, we will see what impact stronger payment regulations will have on ecommerce. Too strong regulations could negatively impact revenues. Strongly secured payment systems at which customers need to enter multiple passwords or biometric data, have been rarely used so far.

How PSD2 will impact payment service providers (especially their operating model) and consumers actually depends on the PSP. The minimum requirement will be to offer a 2FA for credit card processing, such as 3-D-Secure, to ensure payment security for merchants and their customers. PSPs who didn´t introduce those measures yet will have to follow on a short term.

The impact on the compliance department: if the strong authentication by customers or merchants is not used, the same regulation becomes effective as before. When goods or services are bought without the dedicated security measures, the merchant will be liable for potential fraud. If merchants follow the new regulations in case of fraud the liability will be shifted to their issuing bank.

What are the risks involved with payment initiation services and account information services? As already mentioned, we appreciate any efforts in increasing online payment security. However current PIS and AIS benefit from a high flexibility and ease of use. Too much regulation can complicate processes, especially when it comes to reporting, and slow down developments. It will be very important to keep the balance between regulation and allowance of innovation and quick development at the same time in this still very new market.

Konstantin Rabin, Head of Marketing, Kontomatik: “PSD2 brings a much higher level of confidence into the realm of fintech.”

For years fintech companies have been moderately regulated or just have not been under the radar of the financial inspectors at all. While this certainly allowed a greater degree of flexibility compared to such highly regulated institution as banks and brokers, many people from the industry feared uncertainty. If we look at the recent findings of The Fintech Mashup Survey, we can see that 43% of fintech companies in the US still see regulatory hurdles as the biggest obstacle. The views in Europe were roughly the same, until 8th of October.

PSD2 presents a great opportunity for the whole fintech community for a few reasons. First of all, PSD2 brings a much higher level of confidence into the realm of fintech, as it tends to protect the interests of innovators. Secondly, this directive promotes the usage of banking APIs, which subsequently will provide numerous companies with a missing link between their users and banking data. Finally, before PSD2 we were living in the times of disruption, but now it seems that the whole fintech world has a chance to become a full-fledged competition to conservative banking.

Simon Lelieveldt, Independent regulatory consultant for payments/banking: “We will witness a lot of new transaction mechanisms where apps and fancy identification tools form the basis of the shopping transaction.”

In order to achieve a true European level playing field ‘on the ground’, I would recommend regulators and local supervisors to discuss and publish –early on- a FAQ that explains how the PSD2 definitions will apply – in all member states - to the variety of business models and transaction mechanisms that will be around.

We should note that a number of definitions, such as those on limited networks and commercial agents, have changed. Whether or not local supervisors will all interpret these changes similarly is still uncertain. In addition, the technology that is being used is very versatile. Harmonised guidance will therefore be essential to establishing a level playing field.

In particular we need to be careful and not immediately label ‘the card’ or any specific technical tool in a payment business model as the payment instrument. We will witness a lot of new transaction mechanisms where apps and fancy identification tools form the basis of the shopping transaction. In such models, payments will become the afterthought rather than a primary service. The payment instrument itself may well be the account in the background rather than the technical device or application that initiates a commercial transaction.

Dick Clark, Principal Consultant, Consult Hyperion: “PSD2 is wide reaching and all financial services organisations need to be deep into the detail to assess its impact on their business.”

The EU decided the original PSD left innovative products outside its scope, so the PSD2 is expanding the scope of regulation to include as many of these innovations as possible, with the aim of improving choice and transparency. It is, however, likely to add complexity. For example, merchants will be able to decide the specific products they will accept, preventing them from being forced to accept cards with higher fees simply so the issuer can pay out rewards to their higher value cardholders. This is likely to change the dynamic in favour of the merchant and may reduce choice for consumers. How this will work out in practice, over multiple channels and with different scheme models, is speculation and it is likely the correct balance for each participant will remain open to different interpretations in different EEA markets.

Another notable new requirement is for access to account (XS2A). Banks will have to provide access to regulated third parties, such that transaction histories can be viewed and payments initiated, on the approval of the account holder, from within the third party service. Although this may be viewed as weakening banks’ customer relationships, banks also have opportunity to add new complementary services (such as identity management). PSD2 is wide reaching and all financial services organisations need to be deep into the detail to assess its impact on their business.

Mark Beresford, Director, Edgar, Dunn & Company: “These changes are expected to be seismic for several stakeholders and end-users”

The PSD, in 2009, introduced a “Payment Institution” which was new for the European payments industry. PSD did not set the European market alight with new products and services. However, PSD2 widens the scope of the PSD by covering new services and players as well as removing the exemptions of existing services. These changes are expected to be seismic for several stakeholders and end-users across the payments value chain.

PSD2 is a complete refresh of the PSD regulations for Europe that will impact financial institutions already operating within the scope of the PSD of 2009 and introduce a whole new set of regulated third party providers (TPPs). Where PSD2 represents an opportunity will be for new entrants, such as Sofort, Nuapay and Trustly, who provide “overlay” services that sit between the consumer and their bank. New products and services have emerged where third party providers offer specific payment solutions or services to customers, for example, there are services that collect and consolidate information on the different bank accounts of a consumer in a single place – known as “account information services - AIS within the PSD2. These services will typically allow consumers and in particular, SMEs (small to medium sized businesses) who have traditionally been underserved by the main banks, to have an aggregated view on their financial situation and to analyse their spending patterns, expenses, financial needs in a user-friendly manner.

Other third party providers facilitate the use of online banking to make payments, known as “payment initiation services - PIS in the PSD2. They help to initiate a payment from the user account to the merchant or third party bank account by creating a software payment initiation between these accounts, populating the information required for a transfer and informing the merchant once the transaction has been initiated.

Paul Rohan, Founder, Rohan Consulting Services: “After PSD2, will private investors still want to buy shares in a bank?”

The most striking aspect of the PSD2 legislative process for me was how few “use cases” are described for Account Information Services. The cash flow information in bank data is vital raw materials in many financial processes. Auditors use bank data on historical cash flows. Lenders and Investors use bank data. Accounting software uses bank data. People also need to archive their bank data. People often need to retain payments records for 6 or 7 years, as evidence for their personal or business tax calculations. The ownership of that data has been a pivotal part of the banking business model. Historically, banks could cross-sell loans, deposits, wealth management and treasury services using the data that they exclusively owned. After PSD2, will private investors still want to buy shares in a bank? A bank would do all the expensive work of running branches, opening accounts, checking for criminals and settling payments – only to see competitors build new services that use the spin-off data. That data is obtained from banks without any contractual relationship, if the bank’s customer desires it. It will be many years before the full impact of PSD2 on industry structures is felt, but that impact could be profound.

Andrea Egertz, Attorney at Law: “It is questionable whether with PSD2 banks will be willing to give even a fraction of their market to newcomers”
Some 15 years ago certain products were still unavailable in shops especially in isolated areas. Today goods can be ordered quickly and simply online from anywhere and shipments are made across borders. It is now hard to imagine life without internet shopping. As a result, there is a demand for simple and secure online payment processes. Nowadays a wide variety of payment services are offered to meet merchants and customers’ needs. However, these methods currently expose them and their banks to various risks. The extent to which they are regulated also differs. With PSD2, payment services will no longer fall under the scope of banking monopoly as regulators had to respond to transformations in the payment market.

Although some years ago the market was dominated by banks mostly, now new entrants, so far outside EU regulations are attacking their positions. So far banks have operated on a cartelised and sensitive market under strict regulatory control and they enjoyed exclusivity regarding payment services.

It is questionable whether with PSD2 banks will be willing to give even a fraction of their market to newcomers and open up payment accounts’ data which could undermine customers’ trust. There is no doubt however that banks will definitely respond to such a market division and they will come forward with new services or enter into cooperation agreements with such new service providers.

For similar PSD2-related stories, please download the latest edition of our Online Payments Market Guide here. Last but not least, we would like to thank all our contributors for their valuable insights. Should you be interested in sharing your thoughts on this topic with us, please follow the discussion on LinkedIn here and drop us a line. We want to hear your thoughts, as well.

As an authority in the payments industry, our goal is to offer the most reliable and valuable information on the latest trends and developments, therefore we will keep you posted on any upcoming opportunities to bring your own insightful contribution to our readers. For more information, please don’t hesitate to contact us at editor@thepaypers.com.