No one gets excited by financial regulation, right? It’s hard to disagree with that sentiment, but with the European Parliament last week reaching the final agreement of the revised Payment Services Directive, known as PSD2, a number of entrepreneurs in Europe’s financial technology community will be rubbing their hands with glee. The reason is that PSD2 threatens to usher in a radical transformation of the banking and payments market throughout the European Union.
According to Members of the European Parliament, the new regime will cut consumers’ cost of paying bills by allowing new market players to use mobile and online tools to make payments from a client's bank account on a client’s behalf. If that sounds like a recipe for disaster, the new regulations also include strong data protection and liability rules for all online payment service providers. Banks will only be able to deny a third-party service provider access if objectively justified and substantiated security reasons have been reported to the supervisory authorities. This safeguard is designed to prevent any “blocking” behaviors on banks’ part, thus opening the payment market to a broad range of new players.
Existing payment service providers and methods that stand to gain include Germany’s SOFORT (owned by Klarna), Trustly (based in Scandinavia), and the Dutch iDeal system, but many others are expected to join the party. The interesting thing about this is that it allows more secure and competitive payments to be made directly from bank accounts, instead of via credit or debit cards. Mobile payment services are likely to be a big winner, as the new rules will apply to all electronic transactions, both online and in a face-to-face environment.
Where does this leave Europe’s banking industry? Banks are prevented from charging for access to their customers’ accounts, and many are undoubtedly fretting about issues of security and disintermediation. The more forward-thinking banks have already accepted the change coming down the track and are planning for the new environment, but others remain confused over the new rules’ full implications—a particularly troubling matter when they continue to wrestle with legacy IT systems. Nevertheless, consumers and businesses should expect to see new collaborative payment and banking services emerging in the not-to-distant future that marry the risk management skills of the banking sector with the ideas and can-do attitude of the fintech community. The payments and retail banking industry will be transformed, ready or not!
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