28 October 2015
PSD2 - heralding a new era of banking?
Three major European payment processors have published a significant white paper on the practical implications of PSD2. The paper, distributed by Equens, Nets and VocaLink, broadly supports the objectives of the PSD2 but emphasises the need for careful interpretation of the legislation and collaboration across the industry. With the PSD2 likely to become law in 2018, the time is right to study the detail and to move from theory to practice.
The PSD2 seeks to grant access to banks for information and payment services to third parties. On the face of it this may seem contentious but, as the white paper suggests, it can and should be a driving force of future innovation. Many other industries have harnessed the creativity of non-incumbent developers to offer a new approach that benefits all players. But it is also crucial that PSD2 is implemented in a safe, secure, open and fair way.
In practice, PSD2 seeks to drive open and fair competition through innovation. The legislation provides for the introduction of Payment Initiation and Account Information services by Third Party Providers (TPPs). These services form the basis of Open Innovation, which offers potential benefits toend users, merchants, TPPs and payment service providers. But these will disrupt the banking ecosystem in two specific areas:
How users will interact with and manage their bank accounts with Account Information services (AI)
How users will pay for goods, with more direct account to account transfers using Payment Initiation services (PI)
It is crucial that the industry is fully aware of these practical implications of PSD2 and that all are fully prepared. Time invested now will be well rewarded.
Open to interpretation
The white paper advises that the transformations brought by the PSD2 rely heavily on how the industry interprets the legislation: the current European Banking Association consultation process is crucial in defining governance, regulatory technical standards and securing support across the industry. But it also warns that being too prescriptive could stall future innovation, while being too vague will generate confusion. Specific challenges that the industry must overcome include:
The PSD2 must be accepted and adopted by the market as a way to boost innovation and competition. To work effectively, this must be underpinned by a simple, flexible API infrastructure and authentication methods
There are around 7,000 banks in Europe. There has to be a level of harmonisation to prevent banks creating individual PI and AI services
Rapid growth in the TPP market driven by open access may cause fragmentation, which could lead to difficulties and complications regarding reach.
The white paper concludes that the development and proliferation of an open framework for Controlled Access to Payment Services (CAPS) offers a centralised point of integration between banks and TPPs. This will promote adoption of the Account Information and Payment Initiation services as described in the PSD2.
As well as providing a ‘toolbox’ of services for emerging TPPs, the development and proliferation of CAPS should perform a key role in the adoption of account access services and the removal of some of the major barriers to entry. This will help build trust, drive market adoption and avoid fragmentation, all of which are central to drive uptake and deliver a successful PSD2.
With PSD2 moving from theory to practice, it is crucial that all market participants are aware of its practical implications before momentum builds. The white paper offers a consolidated, expert view from the heart of the industry.
You can read the white paper, Controlled Access to Payment Services for PSD2 here.