2018 will be an exciting year for Banks and Fintech to start implementing PSD2

Since the financial crises in 2008, all regulators came out was the number of regulations to enhance controls, processing, and operation of Banking Industry. This is the first time the regulators are asking banks to open their payments infrastructure and customer data assets to the third party that can then develop payments and information services to your customers.

By January 2018 banks must comply with the EU’s Payment Services Directive (PSD2), intended to improve online payment protection, encourage payment services innovation, and make cross-border payments safer.

PSD2 is an important step towards a Digital Single Market in Europe, which aims to make the EU's single market fit for the digital age. The new measures will also ensure that all PSPs active in the EU are subject to supervision and appropriate rules. There will be wide-reaching implications for a range of parties including banks, other PSPs, Fintech, and customers. Banks should take lead to start interacting with AISP & PISP and try to advantage of the change. These banks will delay will might lose customers and having challenge to retain revenue.

PSD2 contains 117 Articles and covers a number of payment services. These services include:

• Enabling cash deposits and withdrawals

• Execution of credit transfers, standing orders, direct debits

• Payments through cards or similar devices

• Issuing of payment instruments

• Money remittances

• Payment initiation services

• Account information services

The major drive for PSD2;

• Contribute to a more integrated and efficient European payments market;

• Promote competition through a regulatory framework which encourages the emergence of new players (e.g. FinTechs) and the development of innovative mobile and internet payment services in Europe;

• Improve consumer protection against fraud, possible abuses, and payment incidents through enhanced security requirements including the use of strong customer authentication for electronic payments; and

• Encourage lower prices for payments. PSD2 preserves the structure of the original PSD in terms of the split into sections (Titles) and content areas but has added a number of new or amended provisions. It continues to distinguish between six categories of PSP, namely i- credit institutions; ii- electronic money institutions; iii- post office giro institutions; iv- payment institutions; v- the European Central Bank and national banks; and vi- Member States or their regional or local authorities, when not acting in their capacity as monetary authorities or other public authorities.

Under PSD2, Banks servicing customer accounts should have the ability to provide access to account information sought by PISPs and AISPs. Information sought via APIs can include Payment User Verification, Account Verification, Sufficient Funds check and Balance Information. Account Servicing institutions are mandated to transfer such information securely with 2-factor customer authentication through market standard APIs.

Third party account access

The PSD2 defines that third party may access the data of an account with the Bank. The external parties’ players are divided into two parts;

Account Information Service Providers (AISPs)

Payment Initiation Service Providers (PISPs)

AISP is the service providers with access to the account information of bank customers. Such services could use transaction data to analyze a user’s spending behavior or aggregate a user’s account information from several banks into one overview. This ability is obviously beneficial for consumers, but will also have a great impact on businesses and corporations: AISP will improve the integration between a company’s finances and relevant services, such as ERP functions and services within accounting and audit. Banks have to provide customer's data to third-party called AISP with the concent of customer and these Fintech AISP's will provide product and services on the basis of customer data. The data can be taken from multiple banks if the customer has an account in multiple Banks. This will lead banks to towards utility Bank, and obviously, banks are not very happy with the regulation. However, it is good for overall echo system, and the customer will be able to see some innovative product and better, faster and cheaper service.

A PISP, however, would create software “bridge” between the customer’s and the retailer’s accounts where the necessary information is exchanged to make the transaction. A PISP is the service provider initiating a payment on behalf of the user. This solution involves fewer parties and does not require the customer to reveal its payment card details. Peer-to-peer transfers between friends and bill payments are among the PISP services we are likely to see after PSD2 implementation.