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How PSD2 will get banks out of their comfort zone

European UnionThe Payment Services Directive 2 (PSD2) will affect the banking world starting in 2018. Traditional parties wonder whether this European legislation means the end of their share of the payment market and the start of a new era for new players. On the other hand, the new legislation seems to offer opportunities. But where is the truth in all of this?

PSD2 forces banks to think about their role in a new financial world. Research done by Finextra shows that the banks expect competition from non-banks with a role in e-commerce, like Paypal and Google. They think that this will be the biggest business challenge posed by the regulators. In addition, the established order has to invest in their IT landscape. Legacy software has to be replaced or updated to get ready for PSD2. How do banks do that? Do they have to invest or collaborate with third parties? The regulations also bring some security issues to the table: 96 percent of the respondents in the Finextra research said that security is a major concern.

Stimulate innovation

PSD was first rolled out by the European Union in 2007, to stimulate competition in the payments industry. Traditional banks currently control the game, but new players will get a chance to win their place once the EU regulations are effective. PSD2 is the updated version of the 2007 guidelines. The legislation should stimulate innovation. In addition, it enhances consumer protection and improves the security of payment services. This way, the market is encouraged to create a better product.

But one of the most discussed points of the PSD2 guidelines is the sharing of costumer information by banks. When customers of the bank give their consent, third parties have access to the bank accounts to either initiation a payment or retrieve information from the bank account. This will happen under the name XS2A (acces2accounts). At the moment the account information is only accessible for banks, but from 2018 other parties (like fintechs and start-ups) can access the information as well, enabling them to provide better online payment services. Other parties have had access, but now the access is being legalized and standardized. These parties will also be able to make payments on behalf of an account at a bank, which is called payment initiation service and is an element of XS2A. Many banks still have some concerns about the liability around XS2A and they question the protection of data.

How to deal with concerns?

How can banks deal with these concerns? Fintechs and start-ups generally have a better time to market and they are not afraid to use new techniques. What will remain if banks also have to give up their trump card? Well, that might be a bit short-sighted. Banks obviously have a lot of knowledge of the payments market. New parties do not have the experience to secure transactions and are not (yet) familiar with the industry risks and therefore cannot directly use it for their own good. In addition, banks are way ahead in the area of transaction security, an item that keeps coming back to the discussion about digital payments. Third parties, on the other hand, are trusted more and more while the trust in banks decreased after the financial crises.

Banks can do two things with this knowledge. They can try to update or replace their IT infrastructure, so that the bank is on par with its competition. This will require an advanced digital infrastructure though, something that practically no bank has. Such an infrastructure is needed to support applications that facilitate the payment convenience for customers. And the required architecture is not only complex to set up, but is also very expensive. Which brings us to the second option: working with existing companies that specialize in this.

Save time and money

By opening the door for new parties, banks can save valuable time and a lot of money. The other party will build the infrastructure, while the bank supplies their knowledge of the market. By working together, they can offer a better product for the end users. Knowledge of the banking giants would be combined to a fresh digital breeze. Those qualities would be shredded if the two parties would compete. Now could be the time to approach each other for such a collaboration, so there will be plenty of time to get ready. Things will change, that is for sure. And it will change with increasing pace.

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