How PSD2 will make banking more beneficial for you

Isn’t it frustrating to see how something simple like your various bank statements are still separate per bank. Wouldn’t it be great to automatically import them into your favorite banking app? Well, Europe has you covered. With the new Payment Services Directive (Directive 2015/2366, 2015), usually shortened to PSD2.

Like with PRIIPS that I covered over a year ago, the European Commission (2015) aims to protect and serve it’s citizens with this new directive. Luckily, this time, PSD2, doesn’t seem to have a negative impact on us a retail investors. But what kind of impact does it have then?

PSD2 or Payment Services Directive 2 is European legislation that was first introduced in 2015. Its aim was to enable non-banking entities to provide payment services. PSD2 went into effect in January 2018 and has brought a disruption in the banking system.

Explaining PSD2 In simple terms, it gave access to account-related information of customers to entities looking to exploit opportunities in the payments space. With technology driving banking these days, PSD2 promotes a system of openness that allows new service providers to enter the market.

Thanks to this openness, banks are now playing catch-up with newer platforms such as Revolut or Trading212. PSD2 also forces banks to adjust their way of working and thinking. Where payments would usually take 3 days to get transferred, more banks now implement instant payments for their retail and business clients.

For ages, Europeans have had to rely on banks for their financial needs. No longer. With the arrival of PSD2, the monopoly of banks is expected to be broken. For instance, the savings account virtually earns no interest, but with the arrival of new players, this could change. Even if they provide a small rate, it will benefit consumers.

Additional competition would also translate into lower rates of interest on overdraft facilities and better exchange rates on foreign exchange transactions. By giving customers the flexibility to choose and enabling new players to enter the payments industry, PSD2 has promoted open banking.

While used interchangeably, PSD2 and Open Banking have a number of differences between them.

Firstly, open banking is a set of rules for the UK market only, unlike PSD2 which covers the European Union. Another significant difference is the way data is to be shared in both. Open banking requires a standardized format whereas PSD2 has not prescribed this. This could be because PSD2 caters to several countries. PSD2 is more focussed on expanding the payments ecosystem whereas open banking emphasizes how data should be shared by banks with other non-banking parties.

1. One stop-shop for all banking: With technology disrupting almost every industry, banking is no different. They are set to undergo a tumultuous change. Once data is available with relative ease, a consumer could have a single dashboard to view all the accounts he has with different banks. By integrating all the financial transactions of a consumer together, loan providers would be able to make more informed decisions as well.
2. Cheaper banking services: With the brick and mortar form of banking losing momentum, digital banking services can be provided by fin-tech companies without incurring major infrastructure costs. These cost savings could be transferred to retail customers through a higher interest rate on a savings bank account, lower credit card charges, and lower charges on online transactions. They would also have the flexibility to switch service providers at will, due to the influx of new players in this industry. Third parties could compare different products provided by banks and this could be used by customers in shortlisting the product they want.
3. Security: A free competitive market would also have a set of disadvantages. Even though approval is required before data is shared, IT security would be a serious concern once PSD2 is fully implemented. Banks generally are adequately capitalized and the chance of them going bust is limited. This may not be the case of non-banking participants eager to enter this new ecosystem.

It’s clear that yet another European rule will have a lasting effect on its citizens. Luckily, it looks like this one will have a net positive effect.

It will take some time before we as consumers will notice these changes, but the changes are coming.

Sources:

• Directive (EU) 2015/2366 of the European Parliament and of the council of 25 November 2015 on payment services in the internal market, amending Directives 2002/65/EC, 2009/110/EC and 2013/36/EU and Regulation (EU) No 1093/2010, and repealing Directive 2007/64/EC (Text with EEA relevance), O.J. (L 337, 23.12.2015, p. 35–127). http://data.europa.eu/eli/dir/2015/2366/oj
• Payment services directive. (2008, July 22). In Wikipedia, the free encyclopedia. https://en.wikipedia.org/wiki/Payment_Services_Directive
• European Commission. (2015, October 8). European Parliament adopts European Commission proposal to create safer and more innovative European payments [Press release]. https://ec.europa.eu/commission/presscorner/detail/en/IP_15_5792