What is PSD2
(and what does it have to do with APIs?)
A new European Union directive has come into force that will eventually change the way people bank as we know it. It’s called PSD2 (Revised Payment Service Directive), and it will open up the way banks do business. It will also create new companies for processing payments. If you are in the banking or financial sector, it’s important to understand what PSD2 means for your industry, and how to react to it and become compliant with all of the regulations that encompass it.
The nuts and bolts of PSD2
PSD2 makes it mandatory for banks to open up their records to third-party companies. And in many companies – particularly the UK – they must do so in a standardized format. This will allow third-party companies to see an overall picture of a given person’s financial state.
As it is now, if you have two or three bank accounts, it can be nearly impossible for a third-party company to see your full financial picture. With the advent of PSD2, it will now become very easy for them to do so.
The method of making banking data open and transparent is achieved through the use of APIs. This means that banks need to develop accurate, well-functioning APIs in order to be compliant.
This will be a great benefit for people who bank in different countries. For example, imagine you are from the UK but move to France. Currently, France would have no information on your banking history. This would make it very hard for them to determine whether or not they should grant you a loan – or even let you open a bank account at all.
With PSD2 in place, a French bank would be able to look at your file and see exactly what money choices you have made in the last couple of years. This would give them the information they need to help them decide whether or not to provide you with a loan.
Of course, this also has the added benefit – for the bank – of making more careful and reasonable choices about who to make loans and other financial tools available.
Cutting out the middleman
Payments will also be radically simplified under PSD2. Currently, when you try to buy something online, the information goes to a middleman, who then goes to Visa or MasterCard, who then sends the “yes” or “no” information back.
Having a standardized system in place will eliminate that middleman, and instead allow you to pay for the item directly from your bank account.
Banks, of course, will have to create APIs to make this possible. That is expected to happen at some point in 2020.
The biggest effect of PSD2 will be in the long term. Internet-only banks will be founded. They will be able to use the open data to decide who to open a bank account for. They will develop APIs in order to make all of their transactions open and apparent.
By not having to own commercial real estate in order to offer banking services, they will put a lot of pressure on traditional banks to find other ways to make profits. This will be disruptive to the banking and financial sector as a whole.
The challenges of monitoring
With 27+ regional regulators all with different remits and the European Commission not setting any actual performance or quality bars PSD2 is also going to to present some interesting challenges for monitoring and API providers. You can download our White Paper on this in our download zone – simply fill in the form on this page.
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