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PSD2 - A to Z of everything you need to know about the second payment services directive
The second payment services directive, known as PSD2, is a plan to change up the retail banking sector, and give consumers more choice.
The payment services directive is required to be implemented by all EU member countries by January 2018. This includes the UK, despite its plans to leave the EU in early 2018.
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This new EU payment services directive allows any company, with your permission, to access your bank account and build financial services on top of your bank's data to provide you with new services.
For example, in the future, Facebook might use your bank account information to help you transfer money to your friend at the same time that you post something to their wall. Google might be able to, for instance, provide you with a list of your recent purchases and give you tools to analyse them and create a budget.
There are countless tools that could arise from this payment accounts directive. This is because banks will be required to provide any third-party providers access to their customers' accounts through open APIs (application programme interface).
As a result of PSD2, banks will no longer just be competing with other banks to give customers better services and tools for managing their finances - they will also be competing with any company offering financial services. In theory, any company can offer financial services by building their product on top of what is already available from your bank account.
Consumers will likely welcome the second payment services directive, but banks and governments may be reluctant to implement every aspect of it, as it could cost them more to operate successfully.
Additional payment security requirements will be needed in order to accommodate so many payment services, which will mean higher IT costs for the banks.
We've put together an A to Z of everything you need to know about the new payment services directive, including how Brexit might impact it, and what it means to you and your money.
AISP
There are two main types of third party financial services providers who will benefit from the payment services directive: AISP and PISP.
An Account Information Service Provider (AISP) will be any third party with access to customers' bank account information. Such service providers will probably, for example, use this data to analyse a customer's spending patterns or take their information from several bank accounts and make it accessible in one place.
API
The API (application programme interface) refers to the way a software's components interact. With the PSD2, banks will provide open APIs, which allows third parties to build their own software on top of it.
Essentially, using an open API, a third party can take a bank's data and infrastructure and build it into their own software. It can result in more user-friendly software for customers, or link up data from multiple sources to provide information in one application.
Banks
The banks are heavily involved the new payment services directive, because they will have to open up their data, but will also have to make sure customers' valuable information is still secure.
For customers this might mean extra protection and checks when making payments in the future. As a result of the extra work and increased costs, banks are likely to be reluctant to support PSD2, but they will have no option but to implement it. On the other hand, banks may find it easier to open up and expand their services internationally as they will be able to operate with largely the same legal framework across Europe.
Brexit
Since the UK announced it would be leaving the EU, many people will question if the UK has to go along with the EU payment services directive.
The PSD2 will impact all the EU member states plus the non-EU, European Economic Area member states. The bulk of the legislation was put together in 2015, prior to the UK's EU referendum debate, and because of its far-reaching implications for the entire continent, it would be extremely unlikely that the UK would pull out of the plans.
However, the UK government, as do other governments across Europe, has power to decide which aspects of the payment services directive become law. The payment services directive is all about implementing a common legal framework, but each country may not follow every aspect to the letter of what the framework sets out.
Charges
The PSD2 states that payment providers can no longer get away with adding in hidden fees into their foreign payments services.
They have usually disguised hidden fees in poor exchange rates, usually by stating there are no fees but then making the exchange rate far worse than the market standard.
Most payment providers either list an upfront fee or use a poor exchange rate, and it is said that PSD2 will ensure that this can no longer happen. However, governments may not enforce this aspect of the payment services directive.
Consumers
Consumers are likely to benefit the most from the payment services directive. PSD2 will provide customers with more options for their financial services as more third parties take advantage of the banks’ open APIs.
This should create competition not just among the banks, but also with all the third parties providing financial services. In theory, this will mean that banks will have to innovate and provide more benefits to customers to keep them interested.
E-Commerce
PSD2 could increase the ease of making international payments and give consumers more confidence in making purchases online from around the world.
International payments providers will have to be clearer about the costs of transferring money from one currency into another, and that will likely bring the cost down.
This could lead to increased competition among international retailers online and bring prices down for consumers.
European Economic Area
The European Economic Area (EEA) is the area of free trade and free movement of people from the European Union (EU) member states, plus the non-EU countries signed up this agreement: Norway, Iceland and Liechtenstein. The entire EEA is signed up to the PSD2.
European Union
The European Union is a union of several countries. Among them they help to create legal frameworks that all countries can implement, including the EU payment services directive.
The EU has helped to negotiate as part of the PSD2 that banks have to provide open APIs and allow third parties access to customer data.
Open Banking
Open Banking, or 'open bank', is the industry term used to describe the API-led initiative that has come out of the PSD2.
Open Banking is the result of banks allowing third parties to access customer data and build their own financial services on top of it.
As a result of Open Banking, third parties are able to initiate payments directly from an individual's account instead of using their credit card or debit card.
They can also gather other information related to their banking service and compile it in a way that is easier to analyse.
P2P
Peer to peer (P2P) in financial services is an online technology allowing customers to transfer money from their credit card or bank account to another person's account using a website or mobile phone.
PISP
A Payment Initiation Service Provider (PISP) is a third party who will use the PSD2 to make payments on behalf of customers. This will likely involve P2P (peer to peer) payments to transfer between individuals, and to pay bills.
For example, an app that allows you to chat to your friends may add an option to allow you to transfer money to them at the same time.
PSD2
PSD2 refers to the second payment services directive. The second payment services directive is actually a response to the first payment services directive having a limited scope and a lack of support to be fully implemented.
PSD2 will have a major impact on the way consumers take up financial services, as there will be a significant increase in payment providers and banking services.
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With the switch guarantee scheme it has never been easier to move to a bank that works for you.