PSD2 and Brexit: What You Need to Know
European banking reform started in 2007, with the Payment Service Providers Directive (PSD), designed to create a single payments market in the EU. There were several objectives, which is why amendments were implemented in 2013, creating PSD2.
The European Commission hopes that PSD2 will increase competition, consumer choice and innovation in the financial services and banking sector. In time, the aim is that this will pave the way for a simplified payments region, known as the Single Euro Payments Area (SEPA).
Banks, however, are concerned that new entrants – namely Third Party Payment Service Providers (TPPs) – could increase security risks for customers and merchants. Whereas challenger banks and payment providers are excited at the possibility of a level playing field across Europe.
Neither side has much time to waste since the Commission requires core compliance across 31 European Economic Area (EEA) member states by 13 January 2018.
What is PSD2 going to change?
Like it or not, PSD2 is happening. Payment providers and financial service companies are currently assessing how to adhere to the guidelines and take the necessary steps for compliance. In just over a year, retailers could potentially take funds directly from a customers’ bank using an application programming interface (API), with the customer’s permission.
In theory, this cuts out traditional ‘merchant acquirer’ payment methods. Instead, the regulatory burden would fall on TPPs, payment initiation services providers (PISPs), and account information service providers (AISPs), that can consolidate account information from multiple banks on one platform. Banks would need to provide the same information – and access – to these third parties as they make available to customers.
As part of these new guidelines, there will be higher levels of security (two-factor will be more common), customer complaints should be resolved quicker, and transaction surcharges could reduce. Banks are incurring significant costs implementing these changes. Whereas merchants may experience reduced costs and receive customer funds quicker than through traditional methods.
What about the impact of Brexit on PSD2?
British banks, payment providers and merchants are not isolated from the continent. Several banks operate in the UK and EU. So do payment providers. Customers shop both sides of the English Channel. Regulations are still expected to flow both ways.
Taking action to adopt PSD2 regulations is more sensible than hoping Brexit means nothing will change. At a minimum, British banks and payment providers should move forward regardless, since British access to a unified payments market is only likely if we meet the same compliance standards as other countries. The same standards will apply to banks and payment providers from outside the EEA.
We should work on the assumption that Brexit will have no impact on the implementation of PSD2 in the UK. Payment providers need to align around the potential opportunities that these regulations could deliver. Banks can draw learnings from how they interact with lenders and intermediaries, creating a platform model where different providers are assessed, to protect the value chain and security of customer data. Working with FinTech companies and seeing how other non-bank operators – such as Mint in the US – use customer data is another way banks can get ready for PSD2.
Once the practicalities are clear, merchants and customers will start to learn more about how payments could change in the next few years. Providing the rules are clear, and security continues to innovate, this could benefit everyone in the payments ecosystem.