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Second Payment Services Directive sets new rules in European banking sector

Second Payment Services Directive

The Second Payment Services Directive, also known as PSD2, is an important new regulation focusing on retail banking across the European Union and the European Economic Area. By 13 January 2018 European banks were required to adapt technical and regulatory changes to be in compliance with the PSD2 and implement various technical solutions such as strong customer authentication on electronic payments. This game changing directive aims to enable FinTech companies which now play a key role in payment solutions to enter into banking sector and be able to provide new competitive services. As the trend of open banking grows, this is a revolutionary new law that enables Fintech companies to provide seamless payment experience to customers.

What is PSD2 about?

In short, when PSD2 will fully enter into force in September 2019 there will be not only banks, but third party providers who can offer financial services to customers. For example, it will be possible to make payments using such application as Whatsup while having your funds securely stored in a bank account. As the new regulation states, banks will be obliged to provide third party providers to access customers’ accounts through application program interface (API). Such third party providers can develop software for offering innovative payments solutions. On top of that, the PSD2 aims to improve internet security issues for safe transfers across the EU and EEA.

What are the goals of PSD2?

PSD2 aims to solve the following challenges:

  1. PSD2 provides a legal basis for any company offering financial services to be better integrated with payment industry which was traditionally occupied by banking institutions.
  2. It sets competitive rules for payment services with the focus on secure and easier international payments.
  3. It acknowledges the principle of open banking allowing non-banks to develop and offer new services for the customers to have better choice, competitive prices and quality services.

With the new directive there will be new players on the market. These are PISP and AISP. Payment Initiation Service Provider is a provider initiating a payment on behalf of a user. Account Information Service Provider is a provider with access to the account information of bank customers, analyzing client financial behavior and accumulating information from several banks on a client.

Different Fintech companies and startups are now considering to develop new services in order to facilitate better customer experience and offer new online products. Evidently, the PSD2 creates new opportunities for business.

How PSD2 will impact on banks?

PSD2 brings lots of challenges for banks as they need to adapt new rules and develop infrastructure to remain competitive in the future market. This all requires additional costs on security and integration of additional technical solutions. To remain demanded in the future financial landscape, banks need to develop their own APIs and make significant investments in innovative technologies.

For decades, banks were the only institutions allowed to provide financial services. With all heavy regulatory requirements such as license requirements, banking insurance and large capital, it was only banks who could afford to enter and remain in the payment solutions market. With PSD2 it might be changed as non-banks can now easily enter the financial sector in the European Union with less expenses.

Why PSD2 can be important for my company?

As foreseen in the past few years, globalization and digitalization are important trends in the financial market. Since PSD2 has partially entered into force, many of our customers are now developing new technological solutions for instant payments between individuals as well as solutions for cardless withdrawals, couponing, etc.

That’s said, the European market for financial services become open for providers of financial services in the entire European Union. Domestic and international Fintech companies may now consider EU market for providing financial services there.

According to recent statistics online purchasing of products and services becomes more and more popular among individuals. This shopping behavior increases interest among banks and financial services providers who aim to offer new financial service solutions. Customers around the world now tend to prefer making payments online with their mobile phones. They expect that such services are easily accessed, cheap, fast and customer-friendly.

The importance of the Directive is that it establishes legal basis for non-banks to easily enter into financial market that was traditionally occupied by banks. Non-banks can now offer their services through APIs. In the meantime, such non-banks are not obliged to develop infrastructure that banks need to have. This all allows new providers to be more competitive compared to banks.

We believe that financial service providers will be as important as banks in the future financial landscape.

Does PSD2 cover only European providers?

PSD2 allows third party providers of financial services to offer financial solutions in the whole European Union under the condition that such third party providers are licensed by relevant financial authorities in the country of their registration. In other words, such providers do not need to be licensed in the European Union with a few exceptions related to compliance requirements.

It should be noted that PSD2 will come into full effect on 14 September 2019 when all technical documentation and requirements will be set.