PSD2 to usher in new era of “open banking”

By Mohsin Khan | June 8, 2017 | Categories: Blog | Tags: , , , ,

We can already use an app on our smart phones to check our account balances, grab our morning coffees with a quick, contactless wave of our debit cards, and book an Uber on a night out using Apple Pay and a simple imprint of our index fingers, yet new payment services regulations looming on the horizon promise to make our financial lives even more efficient.

Despite Britain being busy negotiating its exit from the European Union having triggered Article 50 of the Lisbon Treaty in March, UK banks and other payment services providers continue to prepare for a Brussels-born financial payment services legislation.

Barring any Brexit blowback, the European Union’s second Payment Services Directive (PSD2) is due to be implemented in the UK in January 2018, and has widely been dubbed a ‘game-changer’ for financial services.

In an unprecedented move, the new directive will make it a requirement for banks to grant third party providers access to a customer’s data if the customer grants consent. So, what will that mean? Well, amongst other things, paying for goods and services using plastic may become a thing of the past, just as cash and cheques are increasingly being consigned to the scrapheap as payment and settlement methods.

Instead of entering card numbers and expiry dates when making a purchase online, in a post PSD2 world, in theory, the value-added services banks could offer their clients would allow you to authorise a payment directly from your bank account at the click of a button. Just as you can “log-in with Facebook”, you’d be able to “log-in with your Bank”, streamlining your e-commerce experience.

The new directive will also give third parties the right to extract a customer’s account details such as transactions, history and balances from their bank, paving the way for a plethora of possibilities for financial services innovation by challenger banks, hybrid banks and aggregators alike.

Security is unsurprisingly one of the five core areas the new directive addresses, along with extending the scope of the existing PSD (or PSD1) beyond Europe, Account Information Service Providers (AISPs), Payment Initiation Service Providers (PISPs) and my particular favourite, the prohibition of card sur-charges.

The repercussions of the directive for the major banks probably merit a post in their own right, but in short, the new rules represent both significant threats in terms of lost revenues from payment services and the less tangible but potentially even more costly sharing of customer data. Of course, the directive is also an opportunity for banks to adapt, evolve and play leading roles in the emerging financial landscape.

Of course, getting the technology in place to comply with PSD2 standards will be a major challenge. Open Application Programme Interfaces (APIs) will play a pivotal role in this new era of ‘open banking’, and banks with incompatible legacy systems may find this their biggest hurdle, making tie-ups with technology start-ups inevitable.

Some, such as the British arm of Santander with the American start-up Kabbage, and the Spanish bank BBVA with Finnish cashflow and invoice specialists Holvi, have already formed partnerships with FinTech firms. It is expected most of the major banks will follow suit.

But with customers soon likely to be able to view all their accounts from different banks and financial services providers, in one all-encompassing portal giving them a panoramic view of their financial state, the task of switching providers for better incentives, be that for current accounts, loans, savings or insurance, becomes far easier. All of which makes getting their business change management right, a more important aim than ever before for the major banks.