Before the arrival of PSD2…

2007 was bleak for banks for more reasons than most people know. On August 9, BNP Paribas announced it was pulling out of hedge funds specialising in US mortgage debt.  The global banking system promptly seized up, as you may recall.

Even if the financial crash had not happened, a time-bomb had already been set under the European banking industry. Long before its collapse, the European Union had noticed that the industry wasn’t working in the interests of ordinary people.

Just four months after Day 1 of the global financial meltdown, new EU legislation came into force. It would begin to expose the banks to a brand new source of pain.  The Payment Services Directive (PSD) was designed to give consumers more choice and better value. Banks were forced to comply with the new rules from November 2009.

What did PSD do?

The first PSD laws introduced a new category of Payment Service Provider (PSP) called ‘payment institutions’. Unlike banks, these didn’t handle deposits or issue electronic money.

A crop of non-bank PSPs rapidly emerged. They targeted services that had previously left consumers feeling over-charged and under-served. Business Insider summarised the fintechs gaining traction including currency exchange, card acceptance, cross-border money transfer and small business lending services. They sliced out cost while often delivering a better UX.

The market evolved quickly. KPMG stated that fintech officially went mainstream in 2015 and the PSD legislation needed updating.  The competitive playing field had to be extended and  consumers needed protection. The sequel became known as Payment Services Directive 2 and enforceable from January 2016. It replaces PSD1 in January 2018.

How is PSD2 changing things?

PSD2 is paving the way for a digital single market in Europe.

The headline news is that PSD2 enabled something called Trusted Third Party Account Access and the introduction of open APIs. These will force banks to make customer account information securely available to third-party providers. Fintechs can now become AISPs (Account Information Service Providers) handling account data or PISPs (Payment Initiation Service Providers) servicing customers’ payments and transfer of funds. For consumers and businesses, this means the ability to pay bills or check balances through third-party providers such as Facebook or Google.

But the new guys will have to play nicely. They must follow rules that support information exchange between authorities for the authorisation and supervision of payment institutions.

Fintech marketing and building trust

PSD2 has another important objective. To create the best chance of success, consumers and businesses must trust these new payment institutions. Compliance with strict security standards has therefore become more critical with increasing focus on customer authentication.

Reducing costs and improving UX are clearly essential to the consumer value proposition but fintech marketing needs to dig deeper to create confidence and long-term differentiation. Consumers are open to the idea that fintechs can offer greater value and improved services. According to the Capgemini 2016 World Retail Banking Report (WRBR), nearly two-thirds of customers (63%) now use fintech products or services. They are also far more likely to refer friends and family to their fintech provider (55%) than to their bank (38%). 

However, with no established base of trust to influence a buying decision, fintech marketing has a gap to fill. This is an area we will explore in more detail in an upcoming blog.

Have banks finished suffering yet?

No. Once the APIs are available, any startup can swoop in and add a cool UX to the banks’ data without the same burdens of compliance as banks in areas such as anti-money laundering (AML) and anti-terrorist financing (ATF). Banks will pick up the costs of IT investment while potentially watching profits shrink as they loose market share to those meddling fintech kids.

As reported by Forbes, many legacy banks are taking a progressive approach. Banks are collaborating with fintechs as a way to transition to a new model of banking that they hope will still somehow feature banks.

Implications of PSD post-Brexit

The UK Government, and we use the term loosely, is currently grappling with the its EU exit terms. We are still part of the EU so our banks must comply with its legislation and deadlines. How this might change in future is not certain but UK fintech and consumers will not want isolation. Our guess, supported by an article in the Economist, is that the UK is likely to remain generally aligned with Europe –  in matters of payments legislation at least.