deep dive into PSD2
Is Open Banking All It Can Be?PSD2's aim to usher in the era of open banking and the sudden increase in the number of third party providers (TPP) bring great opportunities for both fintechs and customers, lowering costs and increasing competition.
the world of tpp
Who are these third-party providers? Well, there are the AISPs, or Account Information Service Providers, which aggregate online information from a customer's payment accounts so that they can offer them an overview of their daily finances. And there are the PISPs, or Payment Initiation Service Providers, which provide online banking services and payments. TPPs can provide their services because PSD2 requires banks to allow them access to their API, or Application Programming Interface, which in turn allows TPPs to connect their own payment services to the banks' ones.
The key benefits of API are:
Security Comes First
Under PSD2, the customer gives a TPP consent to access their payment account, which allows the TPP to make payments on their behalf. Of course the TPP, the bank, and the account holder must have clear and secure channels for both payments and communication.
In practice, SCA requires the use of several independent elements to approve a payment. These elements can be passwords or PINs, cards or various biometrics like fingerprints or voice identification; and there is also the unique authentication code that links the transaction to a specific amount and a specific account.
However, there is the fact that large acquirers and merchants won't be happy with SCA's implementation because it's certain to lead to cart abandonment when customers are confronted with an authentication protocol that affects their desired frictionless payment experience.
Other Changes
SCA is, of course, not the only change PSD2 brings. There is
the EPC SDD Core scheme rule that provides customers with an unconditional
right of refund for direct debits up to eight weeks after the payment is made,
and the regulation also places a ban on surcharges for most card payments.
In their search for improved customer experience, many fintechs are also turning to alternative payment methods in order to draw in new customers. While any fintech worth their salt will be offering mobile wallets, payment via mobile phone is already an expected feature and there is a growing interest in payments via wearables such as fitness trackers.
Outside the EU: To
PSD2 or Not to PSD2?
What about transactions that involve at least one party not located in the EU, do they also fall under PSD2's scope? The answer is yes, and it is PSD2's aim to provide customers with better information and protect the EU-based part of the transaction.
As expected, tech giants are throwing their hats in the ring.
Facebook has obtained e-money licenses and payment processing authorizations
for Ireland, while Amazon did the same for Luxembourg. And there is Google as
well, who has entered Lithuania's financial market and is also competing with
Facebook in Ireland.
Source: Berlingske
Of note is the peculiar asymmetry of PSD2 implementation
where Google can request and will receive bank customer data, but the tech
giant is at the same time not obligated to share its user data with the banks.
While it's obvious Google is not keen on attracting unnecessary attention from
data protection watchdogs and regulators, it is also clear that its very large
user base provides it with much more clout than most other companies have in
Europe.
The PSD2 Whirlwind in the Payments Industry
Open banking has motivated
banks and PSPs to consolidate, with the acquisition of Citrus Pay by PayU being
just one of recent examples.
There is also the example of multiple European banks, from the German Neobank N26 to the French Groupe BPCE partnering with TransferWise, a UK-based money transfer service.
TransferWise's forte is international payments and its API makes its simple and efficient services available to all its partner banks. Fintechs are looking towards improved cross-border payments, with Ripple, BTL and Wyre using distributed ledger technology.
The ledger technology is truly the backbone of a new infrastructure that should facilitate an easier and smoother experience. PSPs and banks are also increasing their offers of contactless transactions via mobile and wearable devices. The trend of contactless payments has been steadily rising for years - 2.86 billion transactions in UK alone reported in 2016 - and is expected to reach $95 billion annually.
