PSD2: The banking system evolves

European banks are diverging from their traditional role to become providers of a wide variety of technology-driven third party services. Banks, consumers and merchants, bricks and mortar and online retailers, must understand what this trend means to them.

The Payment Services Directive 2, which was passed by the European Parliament in 2015, is behind this trend. PSD2 is building on its predecessor PSD1, which introduced the concept of a regulated, non-bank Payment Institution. Examples include PayPal and WorldPay. As a result of PSD1, hundreds of smaller players, nimbly deploying technology to create new processes and business models, have become able to compete in a growing market.

PSD1 also introduced the Single Euro Payment Area (SEPA), standards to encourage competition to drive down prices for low value payments in the Euro zone. PSD1 and 2 have enabled consumers, in lieu of paying with debit or credit cards, to use their mobile phones execute payment on an internet banking site. Sellers communicate using an open Application Program Interface (API). The European Banking Authority (EBA) sets standards for APIs – i.e. data to be transferred, security protocols, processes for when things go wrong.

PSD2 lets third party providers of financial services operate throughout the EU if they are licensed by the state where their headquarters are located.

These are only some of the impacts of PSD1 and 2. These directives and the legislation and regulations that accompany them will increase competition among European financial service providers. The fact is that consumers are turning to non-banks for financial services. Much remains to be worked out. Banks and credit card companies have not yet encountered the total cost of implementing the new standards. It is not yet clear how well non-bank hubs will protect their customers against fraud.

These and other questions remain to be answered. But it is also clear that the technology genie is out of the bottle. European banking environment has changed forever.