What is PSD2 and Open Banking?
The Second Payments Services Directive (PSD2) took effect on 13th January 2018, bringing in a new legislation designed to improve consumer rights in the finance sector.
PSD2 follows on from the initial Payment Services Directive (PSD) that was released in 2007.
As technology and API’s grew alongside the internet, there was a push to change the legislation again to provide even more flexibility and connectivity within the banking and payments sector.
This proposed change would be revolutionary and cause mass disruption in an industry that is heavily saturated by a few large corporates. Of course, this attracted a surplus of opposition and lobbying against the new legislation, primarily from the key parties that have a monopoly over the market.
After years of negotiating and liaising between the European Union, governments, banks, gateways and schemes, the giants lost the battle and PSD2 was officially announced. This legislation established a flexible and transparent connectivity between consumers and their banks, opening the door to innovate payment services in many ways.
The key benefit is the availability to provide third-parties with a framework to access account information and read/write payment initiation. This essentially brings the power of the bank to the consumer, allowing them to control their money in a flexible environment operated through enhanced security and authorization via MFA (Multi-Factor Authentication).
So what are the key terms?
A Payment Initiation Service Provider is a framework or service that can execute and push payments directly from a customers bank account to another, operating via numerous payment networks such as Faster Payments. A simple example is accounting software; you will be able to log into and authorize Xero to push payments directly from your bank account.
Currently, this only narrowly relates to ecommerce transactions and does not address face-to-face purchases - something that Yoello is working to change.
An Account Information Service Provider is a customer service or product that provides consumers with the ability to provide their banking, financial and credit information to third-parties. This opens the possibility for the aggregated information to be processed, providing useful insights into your spending, financial products, loans, credits and many more.
Probably the key term behind PSD2, as this is the API suite that is required by any bank in the EU, enabling third-party providers such as AISPs and PISPs to access a suite of features and API’s that are used within the internal operations of the bank. These will produce a range of products that will deliver entirely new capabilities to a user within management of their personal banking and finances.
This hasn’t been an easy challenge for the banks, as their infrastructure is designed on thousands of legacy systems built on top of each other, developed in a time where serverless, threading and the magic of AWS wasn’t around. On a daily basis we receive updates from the OBD (Open-Banking Directive) reporting bank downtimes and service interruptions.
Fortunately for us, it is mandatory for banks to cooperate with Open-Banking. All EU banks will face extremely hefty fines if PISP and AISP functionality is not fully live to the OPD and ECB specifications.
The Third-Party providers will also require compliance with their relevant authorised entity, which is the FCA in the UK. This is a prudent procedure that ensures that the banks are being accessed in a secure manner, and the consumers information, payments and authorisations are managed correctly to prevent any breaches.
This is a very wide and expansive topic, and we hope to have given a light overview on the history and execution of PSD2.
Stay tuned to find out more about Open-Banking and how Yoello is utilising this to innovate for consumers and businesses.