On 24th July 2013, the European Commission outlined proposals around the Payment Services Directive 2 (PSD2). One key 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.
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.