|In innovation-based sectors in most cases, like in FinTech, companies start developing and offering services/products before governments have created legal framework that applies to them. At first companies introduce new services, then consumers see the benefits, then countries come in and put things in order, regulating what can or can’t be done to protect consumers.
Banking and financial services have always been highly traditional and monopolistic, arrival of FinTech companies have been quite beneficial to consumers, since competition brings out better, cheaper and more available services but whole system is still very restricting.
Revised Payment Services Directive (PSD2) could revolutionize the payments industry by ending banks’ monopoly on their customer’s data. The goal behind directive is to create a single integrated market for payment services across European Union and ensure transparency and fair competition, and break down the entry barriers for new payment services.
The Author of Thesis works within IT industry and is interested in researching practical aspects of providing innovative financial services under the new Directive. Licensing, technical and security requirements are considered in order to determine viability of such new services from standpoints of providers and consumers. Additionally, implications on economy, banking and IT sectors are analyzed to better understand how such innovative services might function and affect existing demand for financial and digital products. Author looks at emerging and successful FinTech startups across Europe and discusses growth and adoption of digital skills among people and businesses.
Term “open banking” is used to describe effects of the Directive. First, with use of open APIs to enable third party providers, commonly known as FinTech companies, gain access to data of large financial institutions (e.g. banks). And secondly - providing greater financial transparency for consumers, such as forbidding hidden fees and charges.
Two new services are introduced - Account Information Service, which allows financial technology companies to access customer’s accounts (with given consent) in multiple banks and provide consolidated account management, financial advisory services, credit risk scoring or others. And Payment Initiation Service, which allows financial technology companies to make payments on customer’s behalf (with given consent) and eliminate intermediary payment processors and classic use of payment cards (e.g. VISA or MasterCard).
On paper this will benefit both consumers and new market entrants, however certain conditions must be met in order to succeed in practical applications. First, consumers have to accept principle that somebody else besides banks will be able to handle their most sensitive financial data and make decisions on their behalf.
Strong Customer Authentication, which is also introduced by the Directive and requires more than just a password to access online banking account, will make those transactions and interactions more secure but more security always comes with more complex and burdensome interfaces - specially initial phases of PSD2 adoption might turn out unwelcome by end users. Also authentication alone will not guarantee security of data which will now be available outside banks’ secure networks, especially in mobile applications - more providers will mean more previously unseen security threats.
And finally banks themselves are required to open their most guarded information and make it available for third parties. This raises a lot of uncertainty about how they will react and what strategies will they implement. Banks can lose a lot of customer interactions and take a defensive position but they can also become innovative and help transform financial landscape.