The revised Payment Services Directive (PSD2), heralds a revolution in the transactional industries in Europe, with far-reaching benefits for consumers around the globe. Michael Stachowiak, VP Europe at Airwallex, explains why he considers PSD2 the financial world’s unconventional hero.
In a sector driven by digital disruption, it was only a matter of time before the status quo of payments – whereby incumbent banks reign king – was challenged by a new, game-changing directive.
The driving force behind this defining moment for European banks, the revised Payment Services Directive (PSD2), heralds a revolution in the transactional industries in Europe, with far-reaching benefits for consumers around the globe.
At its core, PDS2 features similar regulations to Open Banking, driving financial institutions to build open APIs through which Third Party Payments service providers (TPPs) can access client data to debit, credit and analyse client accounts (with their permission).
It isn’t going to shake things up in conventional ways – for example, it is not necessarily going to make payments faster. Rather, it's all about breaking down banking dominance in the market.
The potential result? Better security, healthy competition and a world of innovation – including streamlined click-and-pay platforms, new third-party services and self-sufficient solutions that boast transactional capabilities, without the need for using a bank.
For example, PSD2 will enable the Facebooks, Googles and Amazons of the online world to make transactions on the behalf of their end-users – sans third-party payment services like Paypal and Visa.
The PSD2 regulatory changes are due to be wholly implemented by 13 January 2018. And at the risk of over-excitement, the potential for positive change and, dare we say it, user experience revolution, is extensive. Here are three ways we see PSD2 transforming the payments world:
1. Fighting fraud
While legacy security regimes do what they can to prevent online fraud, human error and inevitable holes in the fabric continually lead to stolen funds, identities and data.
With PSD2’s multi-factor Strong Customer Authentication (SCA) – which utilises passwords, possessions, biometrics and more – the cybersecurity risks associated with digital transactions will be drastically decreased.
In fact, PSD2’s customer authentication protocols are amongst its most disruptive. Rightly so, what with the heightened risks associated with open banking practices.
Giving relatively liberal consented access to identity and account data was always going to be a risky business, so PSD2 addresses those risks head-on with extensive transactional monitoring legislation and advocacy of first-class risk-based security services.
Account access and transactions over a certain amount or involving unknown beneficiaries will require stringent SCA-based measures, protecting all sides of the equation from the potential dangers of an open industry.
2. Fostering industry-wide innovation
With this newfound access to customer accounts (XS2A), the playing fields are substantially more level. No longer will established credit providers be denied access to customer data, leaving the industry wide open to industry-wide innovation on both sides of the banking-fintech equation.
With the right service offerings and strategies for customer attraction and retention, startups in particular have an unparalleled opportunity to enter the market, hard-won customer data already in hand.
But it’s not only fintechs who will relish the competitive edge – despite the substantial shake-up, banks aren’t going anywhere just yet.
They’ve still got decades of customer loyalty and reputably recognition on their side, and while new third-party payment service providers will be able to facilitate online payments and provide clients with an aggregated singular view of all their finances, the accounts themselves will, for the most, part remain in the hands of established financial institutions.
But banks are going to have to do some innovating of their own in order to gain and retain customers in a much more saturated industry. The power shift will see credit institutions partnering up with fintechs or creating their own offerings to remain afloat in the sea of innovation.
3. Saving the world
Whereas most recent government legislations and protocol have predominantly impacted their own nations, PSD2 has a more global mindset: any transaction involving just one EU party (as opposed to both parties in the EU) is included, no matter their currency.
This move gives added support and protection to the EU end of transactions, and will have far-reaching benefits for consumers around the globe. It may also expand international partnership opportunities, enabling cross-country collaboration and global service offerings under PSD2’s watchful eye.
Australia’s Open Banking regime is also just one example of PSD2’s global influence. The potential for PSD2-inspired regimes cropping up around the world is strong, as legislators in traditional “closed” industries take inspiration and begin the upheaval of their own local playing fields.
In essence, we should all be taking note of PSD2’s trajectory, wherever we are.