With national implementation of the Second Payments Directive (PSD2) required by January 2018, the banking and payments industries now have less than two years left to prepare.
With PSD2 extending and revising the original Payment Services Directive of 2007, there are considerable changes to be managed which will affect financial service providers of all sizes. I believe this will create three key pressure points:
1) Customer identification and verification.
PSD2 requires the use of strong customer authentication for accessing online accounts, initiating electronic payments, and undertaking “any action through a remote channel which may imply a risk of payment fraud or other abuses.”
Under the guidelines prepared by the European Banking Authority to support implementation of PSD2, “strong customer authentication” is defined as an authentication based on the use of two or more measures, based on knowledge, possession or inherence.
The challenge for the industry is, ensuring all customers are able to make payments that comply with PSD2; but not so complex that they become unwieldy, costly, or a disincentive to innovation.
2) Pressure point from APIs
The directive’s promotion of Application Programme Interfaces (APIs) stands to revolutionise key parts of the payments world. This is significant for business parties involved in the transaction – particularly the banks.
An API is a piece of code that allows two pieces of software to communicate with each other. If applied to the payments industry, it threatens significant change. Transaction revenues will be spread out differently than they are today. Acquirers and card schemes might be disintermediated. Additionally, we can also expect that the supporting IT, required to support an API, will require considerable investment and effort.
3) The creation of Account Information Service Providers (AISPs)
We expect “consolidation services” to be created as a result of the directive, which becomes possible as PSD2 requires payment providers to share consented customer information with approved third parties.
This development will allow merchants to forge deeper relationships with their customers while enjoying lower costs when compared to the interchange fees that they pay today. Customers are also likely to benefit from the directive, by having the option to access, in one place, information drawn from various accounts, making financial management far easier.
However, the directive may have an adverse impact on banks, which we expect to experience a weakening of their customer relationships; a loss in revenue following changes to their payments business; and increased costs, driven by the need to invest significantly in systems upgrades.
PSD2 is much more than just the updating of the first Payment Services Directive. It is an attempt by the European authorities to inject further competition and innovation into the financial services market. We believe that it presents significant challenges and opportunities for the industry.
The most immediate issue is to decide how to make the most of the two years or so that are still available to the industry before the new regime comes into force.
This post is drawn from an article by the author, published in Banking Technology in April 2016.
In addition to advising numerous UK and continental European financial services organizations, Anthony has also held senior line management positions, including as Director of Strategy for a FTSE-100 bank; Deputy Managing Director of a UK commercial bank; and Managing Director of a UK asset finance company. He has also worked in central government, advising Cabinet ministers of the development and passage of company legislation.
Anthony joined Fujitsu in February 2012.