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PSD2 Regulations explained

The business of banking is dramatically changing; this is what PSD2 represents: it’s driving open banking, open innovation, and it’s the future of our industry. The basic essence of PSD2 is simple: it expands the EU’s regulation lens, offering both benefits and hassle to all players.

PSD2 is the second service directive from the EU. Like all regulations it sounds a bit dull; but, when you take a peek into the details, it’s a revolutionary directive towards more fluid transactions and interactions. Effective January of 2018 across local levels: now is the time to really pay attention to the details and how the landscape will change.

The EU has 5 key aims through this regulation; from a global perspective, PSD2 can be broken down into:

• Robust security, particularly for online payments.
• Drives a single EU market.
• Increases competition and transparency.
• Higher efficiency and lower costs.
• Encourages innovation.

Many of these focuses overlap, and the EU may not have intended all of the industry’s expected outcomes and innovations that will stem as a result of this regulation. The bottom line is that PSD2 will change the landscape of the financial industry, here’s a closer look at the expected results of implementing these key elements and how you can leverage PSD2 to your advantage:

While PSD2 has been in the making for the past couple of years, the real fun starts now. Communications, interactions, and co-creation are going to increase exponentially between banks, startups, and that random person with a great idea: beyond talking, the industry’s key players and thought leaders will finally start sharing resources, create infrastructures that rely on each other, and really work together.


Article 36

“Access to accounts maintained with a credit institution.”

Article 36 is the most significant game changer in the directive and will fundamentally change the future of payments: it is enabling, collaborative, and forward-thinking.

Through PSD2, current banking institutions, along with their current roles, will maintain a foundational platform, the backbone of the directive: an open API (AIS, PIS, CAF). The other industry players, licensed third-parties (TPPs), will then be able to take on the role as architects, building upon the bank’s prebuilt foundation on behalf of the account holder. As a result of different architectural institutions being built on these platforms, all new services will become available to consumers.

While PSD2 is still a regulation, through Article 36, access to accounts, the directive is also a huge opportunity. Creating new opportunities for information and confirmation services. Out of all these possible new services, payment services is highlighted as the biggest game changer. Already, as a result of technological enhancements and innovations, the UK, US, Canada, Australia, and most of the EU will have instant payments by the end of 2017; but, as a result of PSD2, TPPs can join in and directly use this existing infrastructure that’s built on the idea of collaboration: working with each other, recognizing expert skills, working to build something together, and putting the best and brightest of the minds together.


APIs


APIs, in a simplistic form, assist in connecting systems together. When looking at the modern architecture of APIs, they are built in simple and efficient ways that can be replicated and standardized across the network. APIs further enable interactions and access: historically, APIs allowed system components to talk with each other; today, APIs allow for advanced and integrated business to business interactions.

Transparency and porosity have both been major themes for modern growth within the past few years, but PSD2 takes this to another level. The very architecture that makes up these financial institutions is being broken back into their basic components. In the case of the architectural design of a house, the building is built upon a concrete foundation and made up of bricks stacked and kept together with mortar; in the case of a business architecture under the regulatory lens of PSD2, banks take on the role of building the foundation and each brick represents a different player, a shared program, a mutual service, and so on. When building a new architectural structure under PSD2, each player inserts a brick into this co-created building and APIs then become the mortar that holds all these bricks together.

Banks can use additional APIs to their advantage through adopting a new motivation to offer up their abilities and capabilities to charge open innovation by building a really good, effective, and reliable API. The tech industry is driven by APIs, and by filling this role—to be driven by APIs within the financial industry—banks are also becoming tech companies.

The implementation of the directive is a huge success for those fighting for disruption. Previously, disruptors to the ecosystem relied on ad-hoc agreements, now PSD2 represents how the startup ecosystem is becoming deeply incorporated and interwoven into the existing framework, instead of attempting to smother it.

Ultimately, when the industry brings together internal and external APIs, services will be available at a lower cost and will enable a higher quality: which is done to directly benefit the customer.


New Business Models

PSD2 gives the right amount of heat to encourage rethinking current strategies and business models, and what could be leveraged in the changing financial landscape, without the risk of everything going up in flames.

Current banks or startups will need to consider how to innovate their survival and administrative functions and increase their profitability, these are the key topics that will be in the center of these considerations:

- Better services for customers.
- Collaboration with other players.
- Embracing and leveraging tech advancements.
- Observing the competition within and outside the financial industry.

IT is going to become the main force within the business of banking like it will eventually engage with and infiltrate ecosystems across all industries.


How can you leverage this?


The biggest challenge for all players is going to be agreeing on a business model that will enable and deliver more services and will create a completely new way of thinking and doing business, while fulfilling the other 5 key aims of the directive.

Existing banking institutions have a strong advantage in their current position. Through building a good and reliable API, creating an in-house innovation lab, or in providing the sand for a hackathon, the Fintech leaders and guys with good ideas will come when the doors open. Banks can also create additional services and can innovate internally to mimic the business model and motives of a TPP, taking further advantage of the regulations outlined in the directive. Banks have a wealth of information about security and fraud, and no matter what, banks still play a vital role, as people still significantly trust their banking institutions with their money.

While TPPs have never been regulated before, Fintech leaders still have a lot of freedom and many open-ended opportunities. There are chances to disrupt, collaborate, and teach through engaging with the industry. You’ll need to expand your existing team to include a few new roles or connect with an already licensed payment service provider.

As a result of the directive, PSD2 reestablishes the value chain and will coerce openness and initiate a continuous dialogue for interaction and innovation within the financial industry: it’s the dynamite that has already carved a pathway for the newly emerging future of the industry. While the EU had innovation in mind, it’s doubtful that they anticipated how PSD2 would be a real game-changer, not just for the financial industry, but for the whole of the startup ecosystem and humanity. In the end, this really does benefit the users by offering many more services at a higher quality and speed while lowering costs.