PSD2 (Second Payment Services Directive) is an EU Directive with a huge impact on payment processing industry. The traditional role of banks in this sector is drastically changing as they are faced with the obligation to open their communication channels to external parties and allow access to payment account data.
The European Banking Authority (EBA) – a body that issued the underlying Regulatory Technical Standards (RTS) – has stated that the “primary goal of the directive is to create a single integrated market for payment services by standardizing the regulations for the banks and for the new payment service providers” and that “the banks’ monopoly on their customer’s data disappears”. What does it mean? It means that payments are now available through different channels and providers, who can – through an innovative, fast and flexible interface – connect to payment accounts opened at credit institutions and execute payments faster and cheaper.
Obviously, a series of questions and concerns have been, and are still being raised, starting from GDPR to cybersecurity. Which data will be accessed? How will it be monitored? Will our bank accounts still be secure? Will new providers provide a cheaper transaction price? The Directive is quite extensive and has covered most of the issues by setting strict rules regarding payment authentication, confidentiality and integrity of data, as well as the right of account holders to approve access of TPPs to their own accounts.
In this new setting, two new categories of payment services providers have emerged: Payment Initiation Service Providers (PISP) and Account Information Service Providers (AISP). These providers are collectively referred to as Third Party Payment Service Providers (TPP). Their services are based on the access to the bank accounts destined for payments and which are accessible online (via internet banking or mobile banking). Such right to access requires from banks to open their communication channels so that TPPs could access data of their customers’ accounts. The access is made through an interface that enables automatic exchange of data between the software of the bank and the software of the TPP, the so-called Application Program Interface or API or “access to account interface” (XS2A interface).
What are payment initiation services? The EU payment market is now open for companies to offer services based on the access to the information contained in a payment account. They cannot open and manage accounts on behalf of customers; this process is still restricted to credit institutions. For example, for online payments, they function as an alternative to credit card payments – the consumer only needs to have an online payment account. In order to provide these services, TPPs will not have full access to the account of the payer. They will receive only a yes/no answer whether there are sufficient funds on the account, before proceeding with the transaction. Transaction will have to be authorised by the account holder.
What are account information services? Account information services provide to their customers an overview of their financial situation on a global level, gathering information from different payment accounts from different banks and provide charts, forecasts, categorisations and similar, helping customers in financial planning and budgeting. Account information service providers will receive the information explicitly agreed by the payer and only to the extent they are necessary for the service provided to the payer.
Both types of service already exist, but through the PSD2 they are regulated on the EU level for the first time, removing thus national barriers for licensed providers and allowing them to offer services across Europe. In fact, Sofort in Germany, IDeal in the Netherlands and Trustly in Sweden already provide such services, allowing online shoppers to make purchases without a credit card. These are innovative and low-cost payment solutions and they have posed a threat to card issuing companies such as Visa, MasterCard and American Express. For the latter, the impact of PSD2 was too harsh and AmEx decided to abandon its business model adopted in the EU, which was based on licencing and exclusive cooperation with one bank in a country. AmEx withdrew from the EU until a new model will be relaunched.
Although somewhat revolutionary, the adoption of PSD2 shall be gradual. As a first step, the banks will open only information on current and gyro payment accounts, whereas the info on credit cards and other ways of payment shall be accessible in the upcoming years. Banks are therefore undergoing a significant digital transformation in order to adjust their systems and prepare for integration with external systems. It will be mandatory for the customer to have the opportunity and possibility to choose to which TPP he or she shall grant the access and TPPs will have to comply with the requirements of the so-called strong customer authentication (SCA) while initiating an electronic payment transaction. Strong customer authentication uses two or more operations for the transaction validation, e.g. PIN/password, and/or a token or similar validation code device, and/or fingerprint/voice recognition. The rules however are not unified and the EBA’s Regulatory Technical Standards are still just mere guidelines, so the full impact of the Directive’s implementation remains to be seen. The banks are confident that the account holders will give precedence to trusted, long-term partners (i.e. banks), whereas TPPs see their future in new generations, who are more inclined to innovative, fast, flexible, and cheaper providers available round-the-clock.
The Directive (full title: Commission Delegated Regulation (EU) 2018/389 of 27 November 2017 supplementing Directive (EU) 2015/2366 of the European Parliament and of the Council with regard to regulatory technical standards for strong customer authentication and common and secure open standards of communication) has been issued in November 2017 and entered into force on March 14, 2018 but the final deadline for the implementation is set for September 14, 2019. The Croatian government has issued the new Payments Act to adopt these changes. The Payments Act (“Zakon o platnom prometu”), published in the official gazette “Narodne Novine” no. 66/2018, entered into force on July 28, 2018, with the exception of articles transposing the article 30, paragraphs 3 and 5 of the Directive, entering into force on September 14, 2019, and the article 48 paragraph 8, entering into force on July 28, 2020. The latter concerns the right for refund of already authorised payments in Croatian Kuna, bypassing the conditions foreseen by the rest of the provision of the cited article 48.
The Croatian Banking Association conducted a research on changes brought by the PSD2. The research showed that 44% of survey participants are ready to consider mobile and internet banking payment providers which are not banks, 37% will evaluate the quality of such a new offer and 19% would never leave their bank. 53% of the respondents have stated that they will change the provider because of lower transaction fees, whereas 27% sees as a main motive the simpler and more innovative service. Croatian citizens expect from banks a higher level of security and protection and in fact almost 1/3 of survey participants would not grant access to their data by TPPs. A significant 46% would first have to be convinced about the security of data protection before allowing access. The majority (69%) feels that banks are more capable of providing higher security level of data protection, whereas 31% is more inclined towards new companies because they are more advanced in digital technology. 30% would choose a domestic FinTech company or a telecom operator.
The research shows that almost all Croatian banks are in the final stage of aligning to the PDS2, except for technical requirements on SCA, which will have to be done by September 2019. Some banks have already adopted new innovative business models and solutions and pose a significant threat to traditional banks with slower digital transformation strategy. The majority of banks already cooperate with domestic FinTech companies and are managing to follow the pace of western European trends. In fact, a taskforce group organised back in October 2017, comprised of 7 Croatian banks and FINA (Croatian Financial Agency) is working on issues related to the implementation of the so-called “instant payments”. The taskforce is considering a new platform to facilitate development of new payment products. The taskforce is organised under the Croatian National Bank and its members come from different professions and expertise areas such as legal, consumer rights, payment processing, IT, cybersecurity, central banking operations etc. The Croatian National Bank Guvernor, Mr. Vujčić has stated that the setup of this taskforce is a direct result of the intention to bring together and unify operations of different areas, considering the multidisciplinary nature of the PSD2 and payment industry as a whole. New instant payment products of Croatian banking community should be available to banks and their clients by the end of 2019.