Why PSD2–a Eurozone Consumer Banking Reg–Matters to Leaders Everywhere in Banking, Fintech and Payme
Yesterday I gave a brief overview of the Eurozone's sweeping Revised Payment Service Directive (PSD2) to the CFPB’s Consumer Advisory Board, which I’m summarizing here. PSD2 matters to industry leaders outside the European Union because it’s a rare opportunity to watch sweeping new ideas that are hotly-debated at home play out in real time, in real markets. As just one example, while U.S. industry leaders argue over the potential implications of giving consumers more or less control (or more or less transparency, standardization, or protections) of their transactional data, we’re about to see how a myriad of significant changes play out in real world environs. And yet, so few North American industry leaders have even heard of this sweeping change to how the financial services information technology fundamentally works. That needs to change, which is why leaders in consumer financial services or fintech need to tune in to PSD2 right now.
Disclaimer: I’m not an expert on PSD2, the topic is extremely dynamic due to pressure and developments from all sides, and much information is available online. (As one example, see http://fintechnews.ch/infographic/infographics-psd2-explained/10584/?utm_content=bufferbd313&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer)
PSD has been, from its start over ten years ago, intended to increase industry competition–with a particular focus on helping fintech or non-traditional payment firms more effectively compete for consumers’ wallets. It moves in a direction that is entirely the opposite of the rolling-back-the-regs energy coming from the U.S. White House today. PSD2 prioritizes the well-being of consumers and industry upstarts over large incumbent banks, and certainly everyone with a pulse will argue strongly about who wins as a result in the long-term.
Even Brexit won’t slow down the PSD2 train either. While Brexit changes much for the U.K., most sources agree that the British Isles are a bit ahead of the E.U. in all things PSD, and the British Exit will not apply to this sweeping and costly banking regulation.
While the likes of Jamie Dimon (CEO, Chase) and Bill Harris (CEO, Personal Capital and former CEO, Intuit) publicly debate the merits of enabling consumer ownership of their transaction data for personal financial management, payments, robo-advising and other tech-focused purposes, PSD2 goes much further than what anyone is seriously proposing in the U.S. PSD2 will make it easy for a consumer to extract their transaction data and move to a new provider, thus eroding the loyalty benefits banks have enjoyed from digital via bill pay and more. Considering that Europeans can also take their bank account number with them when changing providers (similar to phone number ‘portability’ in the U.S.), the stickiness factor will soon be even more greatly reduced in Europe. Fintech and other business cases will be upended for sure.
PSD2 radically changes payments and money transfers, building on one of the original intentions of its 1.0 PSD version (which was meant to standardize money movement and fees across all the Eurozone countries). PSD2 will standardize the way merchants or other transacting companies interact with the consumers’ accounts, while also capping fees and introducing greater transparency. PayPal’s third-party way of interacting with the accountholder’s bank is a fairly good analogy here, with one key difference being that PSD2 significantly limits the fees that payment services companies can collect for their service.
PSD2 is also all about consumer safety, calling for stronger authentication while changing protection regs. Interestingly, with the UK most recently reporting increased levels of identity fraud, some have prognosticated that PSD’s increased standardization of consumer account data and increased access may be to blame. As I have yet to see any convincing proof of this claim, only time will tell if the PSD train is found to drive improved or worsened levels of fraud.
While PSD was first hatched in 2007 as a simpler way of standardizing consumer funds movement across the Eurozone, PSD2 brings changes that are far more pervasive. With clauses touching on fraud liability, privacy, and many areas that directly affect each providers’ underlying technology, the impact to both revenue and costs are significant. My assessment is that the retail banking and payments industries will be greatly affected, the investment sector and any fraud-related departments will feel somewhat of a significant change, while other financial services verticals such as lending or insurance are not slated to experience as much impact.
While fintech and payments trends continue to upend the U.S. financial services industry U.S., we’re now experiencing a historic shift in regulatory-related legislative directions. While innovators, incumbents and policy-makers debate the merits of various future changes at home, it behooves everyone to watch PSD2 unfold, and treat it as a real-world sandbox that brings more substance to arguments about who wins or loses if similar changes were ever enacted in their home market.
Leaders in banking, fintech, payments industry consumer well-being need to keep a close watch on PSD2, to help markets outside the U and Eurozone learn from the inevitable setbacks and successes of this sweeping industry change.