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PSD2: move with the times or get out of the race

Heads up guys. PSD2 is coming to a payment screen near you. And for those who don't know about it, here’s a quick trailer.

So, just what is it?

In essence it's an overhaul of PSD1 (the Payment Services Directive), launched in 2007 to modernise and standardise how the payments system operates across the EU. The aim was to make cross-border payments as safe as payments made nationally within a member state and encourage transparency.

PSD1 achieved some success but is often described as a rocky road to navigate with some ambiguous guidelines leading to legal uncertainty regarding how some institutions and providers should operate. With the addition of the prolific amount of innovation and change to how consumers purchase in the years since its launch, a revised PSD2 really was needed.

What’s the big idea?

The commission says it: ‘will help the payments framework to better serve the needs of an effective European payments market, fully contributing to a payments environment which nurtures competition, innovation and security’.

Cutting through the jargon, this has implications for both industry and the general populace.

For the general public it means quicker, more transparent services, access to money and digital apps which gives them a global view of their finance and more help to manage funds. They should also be able to purchase more securely on mobile devices with better options to retrieve funds in the event of fraud.

For the industry, this means a much more competitive, innovative, regulated environment where each player needs to move with the times or get out of the race.

Unregulated third party service providers (TPPs) have been operating successfully for some time in a number of member states, but they will now fall under the PSD2, forcing them to comply to certain security and insurance measures but equally remove barriers on them from entering more of the market. Crucially, new providers can now also emerge.

Payment Initiation Services will offer an alternative to cards by 'pushing' money from the buyer's account straight to the merchant. This will undoubtedly decrease revenue streams for banks and card companies and allow merchants better visibility of payments.

Data shows that banks could be poised to lose 43% of retail payment revenue streams by 2020 if they don't act and make themselves more appealing to both merchants and customers.

Card fees will also be capped under PSD2. This is good for consumers who will save on products as merchants will no longer have to pass card fees on to them but looks gloomier for the traditional players. Banks should be reassured though, because after the initial negative financial implications this could mean that smaller merchants are willing to accept cards - thus making it a volume play.

Time to turn the juggernaut

Most banks are currently struggling with outdated legacy systems, once so efficient at dealing with their core products. Dismally unequipped to support new functions, services and products that 24 hrs consumers are demanding, research shows only 14% are ready for PSD2. There is a dire need for them to embrace developers quickly to build scalable solutions to deal with the new competitors.

What banks do already have, however, is customer loyalty. They can build on customer trust by creating intuitive and easy-to-use application suites so that businesses and consumers know what's on offer and how to use it. Both merchants and consumers, particularly businesses, will be unsure how they can benefit and change under PSD2 and banks should be leading the way in showing them.

If the commission wanted to create a level playing field, they have pretty much achieved it. Whilst new TPPs have the upper hand with innovations, they will have to jump through regulation hoops that they are perhaps not used to. Banks, on the other hand, are seasoned at dealing with regulatory bodies.

If they see this as an opportunity rather than purely a compliance task they can use PSD2 as a launch pad to truly flourish and everyone will benefit.

Comments: (1)

Philippe Guenet
Philippe Guenet - Henko - PURLEY 26 May, 2016, 08:54Be the first to give this comment the thumbs up 0 likes One key point of the API economy is that Fintech (and many of the Internet Giants) could exploit the interaction layer without the costs of running a bank.... And relegating Banks to become mere Utilities. From that point it is easy to desintermediate by establishing some netting of transactions the banks become more and more out of the loop. Risk and Compliance may calm down all this. Big change ahead for sure.