The 14th of September 2019 was the deadline for the last part of the Payment Services Directive (PSD2) to be rolled out across the EU. However, the deadline was missed and the directive has yet to come into force. The UK pushed the deadline for compliance back by 18 months to give banks more time to prepare.
The directive has been developed since 2015 and is expected to have a significant impact on banking and fintech regulations. Open banking paved the way for more innovative financial services, however, with those benefits comes the need for financial institutions to improve compliance, as well as services.
What is PSD2?
Intended to promote “the development of innovative online and mobile payments, more secure payments and better consumer protection” PSD2 is designed to “modernise Europe’s payment services”.
The September deadline was for the implementation of Strong Customer Authentication (SCA). This was intended to introduce more stringent security requirements for electronic payments, known as “strong customer authentication”, to better protect consumers against fraud by requiring three layers of authentication, such as PIN codes or biometrics.
One of the focuses of PSD2 is to encourage greater competition in banking by opening up banking data through open banking legislation. Third parties will be able to access banks’ application programming interfaces (APIs), so they can use the financial institution’s data and functionality to develop services.
By making information such as bank statements and spending habits available, with permission, it is hoped that customers will have better access to financial services such as apps that support customer control over finances, creating an environment in which fintech innovations will flourish.
“The introduction of the EU’s PSD2 regulation marks the start of a highly positive change for the finance and accounting industries: a move towards a more efficient and secure digital future and more valuable customer service. At its heart, PSD2 is designed to drive innovation for today’s digital consumers, all while giving them more control over their data,” Sage Vice President of Product Management, Compliance and Brexit Adam Prince said.
However, traditional financial institutions are not responding to the regulations, which is jeopardising the vision of PSD2, which is forcing others to work in a less desirable marketplace and slowing industry innovation.
“Due to a lack of preparedness, [the] deadline has been pushed back by another 18 months. This is despite a multi-year phased roadmap and readily available technology which enables SCA through multi-factor authentication like biometrics,” ForgeRock Vice President of Financial Services and Regulation Nick Caley said. “This is the latest in a series of shortcomings from banks, who have failed to provide robust APIs for years. The fintech community, who rely on these APIs for their innovations, have been frustrated by the lack of progress. However, the real losers here are the banks’ customers.”
It is predicted that challenger banks in the UK will triple their customer base in 2020. The slow pace of innovation among traditional banks could see more consumers switch to fintech.
Too many traditional banks are focused on box-ticking, rather than offering real changes or services that people want. This delay by the big banks could see innovation stalled, which is not only a stagnation of better customer service, but also a stagnation of industrial development, which affects the global economy. Fintechs that focus on advancing the development of open banking will gain the attention of loyal customers.
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