The implications of PSD2 have been felt across Europe since it launched in 2018. The second iteration of the Payment System Directive followed on from PSD which was implemented back in 2007. Since PSD2 was established, it has completely changed how payment systems in Europe work. One major sector that has felt the impact of PSD2 is banking.
What makes PSD2 different?
Nearly all financial regulations have focused on tightening the business and operating models of banks. However, PSD2 requires banks to open their payment infrastructures to third parties. These third parties can then help to develop payments and information services for customers.
PSD2 is therefore not only a technology challenge or regulatory compliance, but also a strategic and operational regulation. For banks across Europe to meet this challenge, they need a clear strategy, a clear focus on assessing and managing risks. and accurate execution.
Banking before PSD2
Before regulations came into play, banking was much more closed. Banks would be the only ones with access to personal information and they were not allowed to share it. But with PSD2, banks have to share information about their customers.
Payment System Directive 2 has had many implications on banking. One of these is the creation of open banking. Open banking relies on APIs which have the ability to enable the software at one company to retrieve information from software at another company, allowing for the easy exchange of information between banking institutions.
Since the adoption of PSD2, banks have had to compete not just with other banks, but also every organisation offering financial services. This has made it harder for banks to attract new customers and business with so many other companies offering the same services or better ones. PSD2 has completely changed the payments value chain and customers’ expectations. This means banks have had to improve their customer interface and overall experience to help them keep up with higher targeting competition.
The directive has also posed substantial economic challenges for banks. It made IT costs higher due to additional security requirements and the opening of APIs. The fact that PSD2 has also increased the competition of non-banks in the space has made it difficult for banks to stand out against the crowd. This may be a reason why we are seeing banks experiment with APIs and fintech companies as they want to up their game and try and reduce costs at the same time.
PSD2 created the requirement for all of the nine largest banks in the UK to release APIs to enable third-party providers to access accounts and create new independent services. This was implemented to give customers greater control and visibility over their money. However, this decision has seen the rise of online banking. Whilst traditional banks are at the moment staying in line with these modern technologies, it won’t be long before other non-banking companies take over and create new and improved ways of online banking and transferring money digitally.
Final thoughts – the future of banking
PSD2 was not implemented with the intent to destroy current banks, but to improve and facilitate modern technology. Whether we will still need banks in 20 years is a matter for debate. But if new payment companies keep on cropping up, banks might start to find themselves short on business.