The second EU Payment Services Directive (PSD2) took effect in the UK on 13 January 2018, laying down the framework for more transparent, competitive and open banking across the EU.
The Directive introduces significant changes about how non-bank third party providers (TPPs) can access information from customers’ bank accounts and carry out transactions on consumers' behalf. It complements the work of the Competition and Markets Authority (CMA) in the UK, which has introduced Open Banking to accelerate interchange and communication between TPPs and banks so that this becomes the new norm.
These reforms could radically transform the financial sector, and banking in particular. Open Banking could prove to be the catalyst for a wave of fintech start-ups and new banks to disrupt and replace traditional retail banks. Thanks to such a vast amount of data being available for the first time, Open Banking will generate new digital banking services tailored to individual customers’ preferences and requirements. In the highly competitive environment that will emerge, only the most flexible and innovative providers will thrive as customers come to expect new and improved services – at least in theory.
In reality, there are numerous legal, commercial and technical challenges to overcome before this vision can be realised. But Open Banking does have the potential to produce a genuine change of paradigm in the banking sector. The revolution has begun.
The Open Banking and PSD2 reforms are founded upon precise legal frameworks, technical standards and changes to policy. If customers consent, the UK’s nine largest current account providers are now obliged to provide access to customer account data through an open Application Programming Interface (API) standard. Thanks to PSD2, newly regulated categories of TPPs, known as Account Information Service Providers (AISPs) and Payment Information Service Providers (PISPs), will also be able to access customers’ bank accounts. This will allow customers to share their account information with AISPs and enable PISPs to make payments on their behalf.
While PISPs and AISPs will not need to hold banking licences, they will need to meet regulatory requirements and register with the Financial Conduct Authority – the UK’s main financial regulator. Expect future PISPs to try to replicate models such as ApplePay, where Apple is not a bank but a PISP involved in the front-end of the payment process, thus short-circuiting traditional bank-to-customer relationships. In the PISP model, your money will still be paid out of your bank account, but the transaction will merely be processed by the bank upon the request of the PISP.
In the months leading to 13 January 2018 and the implementation of PSD2, the financial sector witnessed a burst of activity so that prospective PISPs and AISPs could hit the ground running and communicate with banks using open APIs. Despite the buzz from finance and tech entrepreneurs, lawyers and programmers, PSD2 has not yet created the new genesis some in the payments sector were looking for. The primary reason for this is that these reforms have not yet captivated and gained the trust of customers, which is a crucial factor in driving the adoption of new technologies and thus new revenue streams. At present, customers are largely unaware of the changes or remain cautious about experimenting with new providers and banking services. Concerns about data sharing and high-profile data breaches also feed into customers' misgivings.
While it’s still early days, PSD2 and Open Banking present a great opportunity for established actors and challengers alike to drive take-up of new banking and payment services and revolutionise the market. The technical and regulatory challenges are considerable and the market is currently far from mature – in particular, the potential benefits arising from Open Banking are only just beginning to be understood by customers. However, this means there is a fantastic opportunity for an innovative service provider to be the first to capture the hearts and minds of customers and establish a dominant market position.
By Dave Gardner, partner and Grace Roddie, solicitor at TLT.
This article was first published in Lawyer Monthly
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at February 2018. Specific advice should be sought for specific cases. For more information see our terms & conditions.
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