PSD2 Explained. How Open Banking will change the way we manage money
What is PSD2?
‘Banking is necessary, banks are not.’
So said Bill Gates more than 20 years ago, in a prediction that’s now looking uncannily accurate following the recent introduction of new European policy. And – just as disruptive technologies transformed the way we consume TV and music – traditional banking now faces a huge digital challenge, as financial data becomes accessible to new players and services.
In this article I’ll try and make sense of how these changes will impact our everyday lives and explore some of the opportunities for business to develop, as banking is opened up to new products and services.
PSD2 – A quick definition
Officially known as the Second Payment Services Directive, new EU law requires banks to open up individual and business accounts – and the information they contain – to authorised third-parties. It’s goal is to create a level playing field and a more democratic banking environment across member states.
You may not have noticed yet, but January saw the introduction of European-wide financial legislation which could radically change the way we bank, save, spend and borrow. Put simply, PSD2 (also called Open Banking in the UK), marks an end to the traditional dominance of high street banks. It creates huge potential for new ways to manage our money – and what happens with the data our financial behaviour produces.
What differences will Open Banking and PSD2 mean?
The first change most of us will see is our online shopping getting cheaper, as the digital payment fees often charged by card companies are removed. That’s happening because – providing they have a cardholder’s permission – vendors can now take payment directly from customer accounts.
Lower prices and an end to hidden fees
Increased competition for our financial transactions means loans and overdrafts are expected to get cheaper. While digital payments, money transfers and the way we view manage our accounts should become quicker. As well as high street banks, the new ruling threatens the dominance of major online payment gateways – like PayPal and Visa – with vendors receiving money direct from customer accounts.
How PSD2 will change the financial landscape
The goal of PSD2 and open banking is to create a single integrated financial market that shares universal regulation across the European Union. As a result, banks will no longer have a monopoly on the financial records of their clients. Instead, they’ll have to share them with other companies, removing the entry barriers to new money management systems.
For developers PSD2 opens up a world of opportunity. Open banking provides access to rich information that can be harnessed to create new services. Don’t expect new tools or apps in their own right, just innovative ways of sharing and using data.
The opportunities created by PSD2 and a more open banking system
The potential to deliver innovative new financial products and services opens up a rich universe of opportunity. We’ve been working with German Fintech pioneer figo on a banking integration project for almost a year, developing APIs that deliver financial insights, retrieve transaction history and initiate payments.
Companies like figo aim to disrupt traditional payment value chains – or the money to be made through everyday customer transactions. Their work focuses on gathering complex data from accounts to create custom solutions based on account behaviour.
PSD2 will result in innovative new ways to move and manage money
Future services will make it possible to aggregate and manage multiple accounts via a single dashboard, even when they’re with different financial organisations or in more than one country. Other tools will analyse spending behaviour, find competitive deals for services or allow users to move money and switch accounts at the click of a button.
When you consider the information contained in banking records – like where we shop, our salary details and who provides our internet – it’s easy to see the commercial value of what’s now accessible. Providing you give consent.
The security factor
Key to making PSD2 a success will be security. Despite warnings of potential threats, Open Banking should make our data safer from attack, with the end of ‘static password’ logins in favour of 2 or 3 step procedures.
Access to and control of financial records will remain the responsibility of the banks, through Application Program Interfaces (APIs). In reality this should make PSD2 at least as secure as established online banking. And nobody using a third-party service will ever have to share login or password details with anyone but their bank, who retain the right to block access from suspicious sources.
What’s the future of Open Banking?
Analysts predict PSD2 will be a slow burner. While customers are expected to embrace direct payment methods, they’ll adopt a ‘wait and see’ attitude to new services and only companies approved by the Financial Services Authority will be allowed to use the system. Threatened by a loss of earnings from their monopoly on account activity, High St banks are expected to be among the early innovators, with new services and collaborations.
However, long term the shift from traditional banking models to a future where Fintech companies play a major part in the financial landscape is widely tipped by investors. The entrance of non-banks into the banking sector – fuelled by technology and intelligence – promises fresh ideas to shape the way we manage our money.
Popular or not, the Payment Services Directive is here to stay
A unified, safe and open market is the ultimate goal of EU legislators. So while there are many factors that could influence the short term success of PSD2, determination to implement Europe-wide financial legislation is expected to win out. Just as the shortcomings of original PSD ruling were addressed in PSD2, don’t be surprised if regulations are adjusted again over the next 3-5 years.
If you’d like to know more about the potential of PSD2 to change your business, or our work with German Fintech startup Figo, give us a call and ask for Richard, Rachel or Matt +34 928 359 902.
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