How PSD2 is set to impact the payments industry

On 24th July 2013, the European Commission outlined proposals around the Payment Services Directive 2 (PSD2). One PSD2key element, is the ‘access to accounts’ proposal, which will require banks to open their customers’ accounts to Third Party Payment Providers (TPPs). So far, banks have been operating in a closed loop – this proposal will change that. This regulation would bring new players into market, drive additional value for end customers, improve customer experiences and also drive the mobile and digital momentum in payment space.

There are three key areas to note in the proposed PSD2 changes:

  • Payment initiation services: A service provided by a TPP service provider to a payer, which aims to help the payer to provide comfort to a payee that the funds needed for a transaction are available in the account; that the payment order is made; that it will be treated without discrimination regarding other payment orders.
  • Account information services: A service to initiate a payment order provided by a TPP service provider at the request of the payers, regarding an account held at another service provider.
  • Interchange fee: This regulation proposes the capping of interchange fees, i.e. a fee charged by a customer’s bank to a merchant bank, when the customer makes a card payment. This change will directly impact on revenue for impacted banks (e.g. card issuing banks).

These services will result in the elimination of multiple payment processing steps, allowing TPPs to work directly with banks. Furthermore, they will drive additional value to the end customer, by delivering better and cheaper service.

What next?
Negotiations on PSD2 are expected to be completed by June 2015. When the regulators have clarified open issues on who will certify TPPs, how TPP’s outside the EU will be regulated, and where accountability lies in the event of something going wrong – the way forward will be somewhat clearer. But banks and financial services businesses must not wait, but should initiate a thorough assessment now on how PSD2 may affect them and how they will comply with regulation.

While PSD2 opens the market up to competition, there are risks that security vulnerability may increase, resulting in a stronger governance framework. As such, banks and other financial institutions should come together to drive standardisation across the industry, that will enable common services and protocols. Not only will this mitigate risk, but will reduce to costs to banks to adopt the regulation requirements.

 

The article was originally published on The Digital Banking Club, March 20, 2015 and is re-posted here by permission.

Anil Awasthi

Anil heads the retail banking practice at Virtusa where he is responsible for capability enhancement, solutioning, building best practices and thought leadership. With over 17 years of technology experience in the financial services industry, he is regarded as a true agent of change and digital innovation by clients worldwide. Anil is an ROI driven business leader who is passionate about faster products and platforms. His financial technology experience spans - API banking, blockchain, cards & payments, core banking, customer experience, digital banking, fintech and lending. From an IT perspective, his expertise lies in IT strategy, business architecture, technology rationalization, application modernization, data science, program governance and solution delivery. Anil is an avid writer who has been featured in the American Banker, Data Quest and The Digital Banking Club. Prior to Virtusa, Anil worked with Syntel where he was the Engagement Manager for a leading American Financial Institution. His other stints include a technical lead at IBM and an associate consultant at Ernst & Young. Anil holds a B.Tech in Computer Sciences from the Open University of British Columbia and is a certified CSQA, PMP, OCP and IBM Blockchain professional.

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