For years, the European Union was struggling to standardize and improve the efficiency of their payment system especially because of their different accounting standards. With digitization, the need for a single payment system was beginning to take deep roots. As a result of this, the European Commission proposed the Payment Services Directive (PSD) which,
- Laid down the fundamentals of the scope of modern payment services,
- Increased payment efficiency, simplicity and innovation at reduced cost by banning additional or any hidden charges
- Introduced Single Euro Payments Area (SEPA)
What is PSD2?
The Revised Payment Services Directive (PSD2) was proposed to further intensify the payment process by enabling bank’s customers to manage their finances using third party companies. PSD2 will be effective from January 13, 2018, after which banks will no longer be the sole authority over their customer’s information and payment details. This is because through this directive, banks are obliged to open up their infrastructure to third party companies through APIs.
PSD2 architecture consists of AISP (Account Information Service Providers) and PISP (Payment Initiation Service Providers) through which the third party providers can access customer information upon their authorization and initiate that payment.
Do Banks Feel Threatened?
Well, with a massive disruption ahead, banks have every reason to feel threatened as their monopoly ends with PSD2. This is because PSD2 allows more fintechs to enter the market and build faster, cheaper and easily accessible payment solutions.
Traditional bank’s complex organizational structures, technology gap, rigid regulatory systems, lack of funding are some of the major barriers to digitization. With PSD2, banks will be forced to loosen up their reigns to work on their challenges and embrace advanced technologies because according to a survey by Fintonic, 1 out 5 Americans who earn more than $80000 a year believe companies like Apple and Google can do better banking transactions. Hence, for banks to survive this competition with new entrants along with existing tech giants, they must find ways to embrace technology and offer innovative banking solutions to customers.
Taking Advantage of Various Channels
Smartphones, wearables and tablets have become inherent devices where customers perform all their activities. With the growth of digital banking, Gartner predicts that there will be 20.4 billion connected things. This means customers prefer banks that offer them a unified experience across channels. This is all the more possible with PSD2 as it incorporates better clarity and efficiency on mobile and online payments, improved consumer protection for payments across EU and non EU currencies.
As 2018 is around the corner, both banks and other financial organizations should brace up to welcome PSD2 because in the end, only a customer centric model that is fueled with technology will determine the success of your financial solution or service.
Read our whitepaper to know more about the impact of PSD2 in European banking and what lies ahead in the future for banks and other financial organizations.