In an earlier article I discussed the impact of two critical changes affecting not only the financial sector, but also the wider business sector and the public at large. The first of these was the development of new information technologies, including Artificial Intelligence(AI) likely to radically change business models and supplant many traditional jobs. The second was the forthcoming implementation of the EU’s Second Processing Services Directive (PSD2). This second major change, is still something of a mystery to most people, including many in the banking and financial sector so I would like to start the process of de-mystifying it. (PSD2 cheat sheet)
Why this PSD2-directive has created so much confusion?
Let us begin by trying to understand why this directive has created so much confusion. Well it is certainly not due to the directive itself, which, by EU standards, is neither long nor complicated. It is rather because the directive is concerned with the arcane subject of ‘financial transfers’: payments, credits, debits, timings, etc.
These are parts of the ‘engine-rooms’ of finance, a world away from the popular public image of banking as the province of suave young men in dark suits and narrow ties talking in billions. Yet ‘payment services’ is one of the fundamental elements, not just of banking, but of the whole economy. We all use payment services every day: buying a coffee with a contactless card, buying books on-line from Amazon, food from Tesco, music from I-Tunes, houses, pensions, investments… the list is endless.
The second reason there is still some confusion about what PSD2 means, is that, most commentators have concentrated upon the business effects of the directive, winners, losers, challengers, and defence strategies; they have too often skated over three fundamental questions: “What does it do?” and “How will it affect me as an individual?” and “Why are we doing it now?” I will to address these three fundamental questions in three blogposts and then, in later pieces, deal more closely with the specific business effects on different sectors.
Why now? The answer lies in three factors
Dealing first with the easiest question, “Why now?”
Firstly, the regulators have time. While the issue of harmonising and improving the efficiency of the EU payments system has been around for a long time, there have been other, more pressing (and less difficult?) things to do first: like MIFID and the implementation of the Basel II & III regulations.
Secondly the technology to allow PSD2 has only become mainstream in the last five or so years. Problems connected with high speed, secure data transfer, user account visualisation apps and open API architecture, have now been largely resolved, allowing PSD2 to be operationalized.
Thirdly the EU markets are in danger of being overtaken by events. The increase in the number of financial payments intermediaries (PayPal, Apple Pay, etc.) and the new breed of challenger banks, (Atom, Starling, Metro Bank, etc.) means that traditional payment structures are being overtaken – but in a haphazard way – due to the differences between various EU countries’ existing infrastructures.
So the time is right for the PSD2 change. But what is that change? In my next blogpost I will turn to the question of what it does.