PSD2 could revolutionize the EU financial sector – if banks and fintechs learn to get along
With Silicon Valley in the West and Shenzhen in the East having long dominated the tech scene, European leaders have called on the EU to achieve technological sovereignty. This means having local tech companies strong enough to compete with big foreign tech players, making EU-based companies less dependent and giving the bloc a stronger position to shape the future of tech.
With the development of major fintech hubs in London and Frankfurt as well as new regulatory changes accelerating collaboration between banks and fintechs, some believe Europe could become a global leader in this space.
This was taken further with the introduction of the Payment Services Directive 2 (PSD2) in January 2018. The directive ushered in a major shift in the dynamic between banks and fintechs with open banking, a practice which allows banks and third-party financial service providers to share secure access to users’ banking and financial data. This results in frictionless collaboration between banks and fintechs, which will subsequently provide more options to users.
Have you ever used an app to split a dinner bill with friends? To help you save more each month or invest your savings directly in crypto? And there are many more innovative possibilities that this could bring.
But what exactly does it entail, and will it actually herald the groundbreaking change the bloc needs to become a fintech powerhouse?
What is PSD2?
PSD2 is a broader and more comprehensive update of the original Payment Services Directive, adopted in 2007, which aimed to develop a single market for payments in the European Union in order to promote innovation, competition and efficiency. This update extends the scope of the original directive to all payments where at least one party is in the EEA, whereas the original directive required both parties to be in the EEA. EEA.
The game changer for PSD2 is the requirement for banks to open up their payment services to other companies, known as third-party payment service providers (TPPs). TPPs are authorized online service providers that exist outside of banks, but may be involved in online transactions that a bank customer may make.
TPPs are classified into two types:
Payment Initiation Service Providers (PISPs) are external parties that can initiate transactions. This means that transactions can take place without the need for credit or debit card details. For example, with your permission, some digital money management and savings apps can automatically transfer a small portion of your balance each week to a savings account.
Account Information Service Providers (AISPs) are external parties that can connect to bank accounts and retrieve information such as account balances and transactions. A common example is a money tracking app that helps you understand where you spend your money. The app aggregates data from your various bank accounts so you can see an overview of your spending history.
The presence of these TPPs means that each bank is required to provide TTPs with access to their customers’ accounts through open application programming interfaces (APIs). It is this requirement that facilitates the transformation to a more open financial sector, also known as open banking.
Implementation of Open Banking APIs still unclear
PSD2 provides a tipping point for API technology to break through to large traditional banks that have been slower to innovate. The fact that banks are required to build an integration point means that fintechs will have more opportunities to collaborate, which opens up new financing possibilities that result in new applications or solutions for users. This will be particularly important for Europe’s big banks given the pressure they are currently under from neobanks and big tech companies moving into the space.
However, in the beginning, there were limited standard technology guidelines on how to implement APIs. Koen Adolfs, Senior Product Owner Open Banking & Enterprise Integration Technology at ABN Amro, said: “As this is new legislation, regulators and banks are determining what this means for the technical application in an agile way. . We are still working together to shape this world.
Is regulation really enough to stimulate innovation?
While PSD2 may have removed barriers to open banking, regulation alone is not enough to foster a fintech boom in the EU. Koen Adolfs believes that the power lies in the companies themselves and in their ability to discover opportunities in the areas of open banking. He gives the example that, “when we look at the genesis of Silicon Valley, it was not born of a regulatory impulse, but rather of a community of companies and people who wanted to innovate together”.
Adolfs also asserts that “it is essential that businesses and fintechs continue to collaborate together on more initiatives,” in order to unleash the full realization of open banking. He believes that currently the EU is only at the beginning of this journey and that many more applications for open banking are yet to come.
Privacy Drives Progress
Although consumers are still hesitant to embrace open banking initiatives with open arms, the EU’s emphasis on privacy could help ease this transition. As with all facets of the bank, trust remains at the heart of the service. Unlike the world of technology, for banks and financial institutions, giving customers control over their personal data and how it is shared is essential. It is therefore important to let customers choose what and where their data goes, as well as to implement good security measures to prevent leaks.
Positive examples to learn from
While open banking in the EU still has a long way to go, there are a few examples of collaboration that businesses and fintechs can learn from. For example, Adolfs shares that “Tikkie, a payment request platform, has an API that allows businesses to send bulk payment requests through the channel of their choice (e.g. Whatsapp, Facebook, e -mail).”
Similarly, “a travel agency that helps personalize travel to Australia and New Zealand, called TravelEssence, protects itself against currency risks by automating the process of bulk FX trade conversions through the FX Trade API d ‘ABN AMRO’.
While PSD2 and open banking launched the EU’s journey towards a competitive player in fintech, regulation alone is not enough. Businesses and fintechs need to collaborate more and find new open banking implementations to streamline manual business processes or improve the consumer experience. From now on, the focus should be on creating an innovation ecosystem led by EU-based companies.