PSD2 has completely changed the rules of the game in banking and no one is excluded, from users themselves to European Union states, as well as public administrations and private companies. Everyone is involved. It is enough to look at the main impacts of Directive 2015/2366 to realize that we are facing a radical change.
The entry into force of Directive 2015/2366, also known as the Payment Services Directive 2, i.e. the new directive dedicated to the regulation of online payments in the European Union, can be considered one of the most important events of the year.
The importance of PSD2 (the acronym commonly used to refer to the Directive) – especially in the banking field – is linked not only to the radical transformation that it entails but also to the cross-cutting nature of the changes. In fact, when it comes to all the parties who will be affected (and benefit from) by the transformation, you realize that, in one way or another, all the main economic actors are involved. That is why this legislation is considered a real turning point both for the field of digital payments and for the entire European continent.
Europe: a single market
Let’s take, for example, the main effects that the new legislation will have on all the Member States of the European Union.
One of the objectives of PSD2 is to strengthen the unity of the European payments sector. Many of the measures provided for in Directive 2015/2366 are moving in this direction and much more decisively than in the past. This is highlighted in the legislation’s “one leg” criteria, which provides that, in the context of a transaction where the payer’s payment service provider and the payee’s service provider are both in the EU and the currency used is the Euro, the entire transaction must be managed according to PSD2 rules.
This ensures that there is a single, pervasive set of rules for digital payments that can prevent users from being caught up in fraud. In this way, Europe will be able to have a “single market,” since all international transactions will have to comply with the regulations, which is essential for strengthening its identity as a single market and to be perceived as a politically and economically compact and credible counterpart.
Another important measure is that which attributes specific duties to the European Banking Authority (EBA), the European Union body that will oversee the European banking market. PSD2 charges the EBA with the task of harmonizing the sector. This includes, for example, taking part in creating a single set of banking sector rules or through the adoption of binding technical standards and guidelines to ensure that all European banking institutions operate on a level playing field, thus ensuring that customers (current account holders, depositors, or investors) enjoy the same service conditions.
In essence, the EBA must not only supervise, but also issue enforcement acts aimed at allowing the correct and uniform application of banking sector regulations, including PSD2.
This is the direction taken by the document drawn up by the same body, which outlines future regulations and technical standards regarding Strong Customer Authentication and the security of the various communication channels of financial operators.
This document provides a guarantee that all users who initiate any transaction relying on a PSP will receive, at their choice, a service that meets certain reliability requirements and that, consequently, does not put the user’s bank data at risk.
Member states and the importance of collaboration
The centralized role of the European Banking Authority, however, does not absolve Member States of their responsibilities. States have a fundamental role, especially when it comes to authorizing the provision of certain financial services by entities other than traditional credit institutions (the so-called Third Parties).
Each country, in fact, has the task of drawing up a register of all Third Parties who are authorized service providers following a verification of their reliability (both technical and procedural) through an interview with the national authority in charge. For example, in Italy, this authority is the Bank of Italy. This register must then be sent to the EBA, which makes it part of the Central Electronic Register of all Authorized Payment Service Providers, which is available to all.
It is clear, therefore, that PSD2 outlines an organization of the sector that provides for a deep synergy between central and national authorities, always with a view to ensuring a harmonious and efficient operation in all EU territories.
Involving Member States, among other things, is the right strategy, not only to ensure that the legislation is properly carried out, pursue a better transposition of the legislation, but especially because this makes it easier to ensure that the Directive requirements are met.
Users: more safeguards and a new customer experience
PSD2 will also have a significant impact on users.
In general, every customer will benefit from safer and more reliable payment services, thanks to the implementation of new enhanced security measures, such as Strong Customer Authentication (SCA) and 3DS 2.0.
In addition, thanks to PSD2, every consumer will be able to count on a much wider audience of providers to turn to for certain financial transactions, as Directive 2015/2366 stimulates an expansion of the market by including new players.
Theoretically, this greater competition would mean better conditions, both in terms of quality and cost. Although this is true in general, the increase in the number of entities authorized to provide certain services makes the market more complex and varied.
This can lead to a certain difficulty for the user in being able to choose the best products and services, and also because third parties will always be required to meet certain standards of clarity and transparency. Dealing with the various offers will not be easy and every consumer will be required to pay close attention.
Another expected effect is an increase in confidence in digital payment instruments, at least as far as Italy is concerned.
Despite the fact that Fintech services are widely used in Europe, Italy is still lagging behind in the use of digital payment instruments.
Many Italians, for example, find it difficult to rely entirely on e-payment services for their purchases. This is demonstrated by the fact that only 20% of those who habitually use electronic payment for day-to-day expenses feel fully confident in doing so. This emerged during a meeting of the Financial Services User Group, organized by the European Commission to encourage greater consumer involvement in the development of public policies related to financial services.
This is because there is a lack of education and habit in the use of these tools. In this sense, there is hope that PSD2 can make a decisive contribution in the banking field to reducing this gap, facilitating and spreading its use by all consumers.
Another important effect that will impact users is the change in the customer experience. Since the European Directive has made some additional authentication steps mandatory (such as the aforementioned SCA) every consumer will have to get used to inserting more identification keys before starting any operation. In this sense, the intervention of companies is fundamental, as they will have to find the most effective way to explain these transformations and their advantages to ensure that such procedures do not dissuade customers from completing the operation.
Poste Italiane, the Italian postal service, has a section of its website dedicated to PSD2. Here, it has included an interactive video explanation, made in collaboration with Doxee, to inform users of the latest news in an innovative and engaging way.
Credit institutions: an open approach to the sector
Finally, it is the credit institutions that are affected by the PSD2 banking revolution and which, in the final analysis, will have to face decisive changes.
Such changes include new security requirements, the new system of liability, which redistributes the burden of proof between the customer, Payment Service Provider, and Payment Service Provider where the customer’s current account is located.
However, the most important transformation is one that concerns the whole banking sector. With the introduction of Payment Services Directive 2, a new season in the field of digital financial services is opening, which should be under the banner of Open Banking.
What is meant by this term?
Open Banking is an innovative structure for the financial sector in which data is shared between various banking ecosystem players.
The beginning of this new phase in the banking sector coincides with the entry into force of PSD2 because it has made it compulsory for all European banks to open their APIs, the intermediary software that allow two applications to communicate. This means that traditional credit institutions will no longer be able to have a monopoly on the supply of financial services. From now on, in fact, this prerogative will have to be shared with Fintech companies, ì tech retail companies, and telecommunication companies. As a result, competitive pressure will be high, but there is more.
Open Banking is an opportunity to rethink the way you do business. Traditional banks will be encouraged to open up to new technologies and, more importantly, to work even more closely with Fintech companies to become more competitive. The opening of the API, in fact, will not only be functional for the provision of online payment services by authorized parties, but it will also allow banks to take advantage of the innovation and know-how of third parties experienced in digital technologies.
This will not only ensure more efficient services for the end customer, but it will also provide traditional credit institutions with the necessary tools to resist the assault of tech giants (such as Facebook, Google, Amazon, Alibaba) who have already been looking at the financial services sector for some time now.
For all of this to be possible, however, banks must rethink the products that they offer customers. It is no longer possible to think that the bank is just a counter. On the contrary, it must increasingly resemble an integrated platform capable of providing sophisticated digital services and meeting the expectations of customers, so that they have real added value for the consumer and the bank.
This is the key point.
This is also confirmed by Deloitte, who in a report on Open Banking and the bank of the future states that, after PSD2, it will be essential for each bank to develop its own vision of development, to define its position and identify how they plan to engage with ecosystem partners to create an infrastructure that leverage technology and evolve the user experience in customer and business models.
PSD2: Open banking is only the beginning
If it is true that Open Banking marks a change of direction and approach in the digital payments field, we are theoretically only at the beginning of the transformation.
The opening up of financial services to other players and the simplification of how banks operate is a prerequisite for the implementation of the so-called Open Finance & Insurance.
This term, coined by the Fintech & Insurtech Observatory of the Politecnico di Milano, means the extension of Open Banking, also understood as a more holistic concept that involves the entire financial and insurance sector.
The idea behind this concept is that banking services and insurance and financial services, in general, can be used independently of the provider offering them. In a sense, one is a direct consequence of the other.
If in the medium term, opening up bank payments to others means transforming banks into something more and offering innovative, sophisticated, and integrated products, then it no longer makes sense to talk only about banking, because this transformation will also have an impact on neighbouring sectors.
Not only would services become more “liquid” and impact different sectors, the players involved would be called upon to undergo a significant cultural change that would lead them to collaborate or even merge to provide more complete products, overcoming sectoral and market divisions.
On closer inspection, this also means opening up the financial market, developing it, and making it more competitive. Only time will tell whether this will be the beginning of a real upheaval of the entire financial sector.