In just a year, the European banking industry will be going through major infrastructure related changes with the Revised Payment Service Directive (PSD2) coming into effect starting January 2018. While on the one hand, this change is expected to result in long-term benefits for consumers, it will likely stir up both the banking and the financial technology (fintech) sectors and open up new opportunities both for existing and emerging players.
What is going to change with PSD2?
The complete framework of the regulation is still to be released but there are definitely major changes to come. Most importantly, the PSD2 regulation will obligate banks to open up the authorised accesibility of customer data to third party service providers. This will establish a whole wave of new fintech services, allowing third party applications to initiate payments as well as provide account information related services. Financial management and card free online purchasing will be one of the many seamless services offered to consumers. All of these revisions will aim to benefit the customers and will definitely boost the fintech ecosystem.
Online Retail as of Now vs Online Retail After PSD2
Why is PSD2 needed?
Apart from the introduction of the new lines of service, the aim of the PSD2 regulation is to create a harmonised legal framework for the banks operating across Europe. Thus, the effort to operate across multiple borders is reduced and so are compliance costs. Additionally, the unified market will push banks to increase their transparency which will guide consumers to have better market information. PSD2 aims to redound innovation in the fin-tech sector and strengthen the security of consumers and transactions taking place inside of the EU.
To what extent will there be any potential security issues?
After PSD2 takes effect, banks will have to implement infrastructural changes in their outdated legacy systems. The regulation will specify standards for open API’s as well as require compliance with new security standards. The API system already in place in the US banking sphere has shown several weaknesses in the past. Paypal enables their users to connect their US bank accounts to their system. This allows for the omission of bank cards throughout purchases. During the authentication process, Paypal deducts a microfee from the bank account of the customer. Then the customer has to validate their Paypal account by typing in the amount of the deducted fee. This can be viewed on their bank statement. Unfortunately for the customers, fraudsters have found a way around this method of validation. Once a fraudulent user connects a bank account history tracking third party service through this open API system, they can than monitor the transactions of the account. Therefore, they can view the microfee that pops up as a charge on the account. Banks will definitely have to make use of intricate fraud prevention tools that analyze a wide scale of information. As of January 2018, European banks will be facing additional costs without a doubt.
Is this the start of a new era?
Consumer data will now be able to move freely across banks and third party service providers. This will definitely shake up the current financial sector. The new regulation also raises a number of questions for banks. How are they going to balance the issue of data security? How will the influx of new entrants affect the industry? One thing is for sure, out-of-date banking will be wiped out and this may be the start of a new era.
Key takeaways: PSD2 will shake up the legacy ecosystem of online retail and banking. A new line of fintech services will appear once the regulation will come into effect. (We have covered this in an extensive ebook presenting the state of fintech and online fraud issues. Banks will definitely have to keep an eye on the security issues related to the recent directive.
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Bence is the co-founder and COO of SEON whose vision is to create a safer online environment for merchants in high risk verticals.