PSD2: Burden or boost for innovation?
Be ready for the launch
So it finally has happened – since 13th of January 2018, Payment Service Directive 2 (PSD2) is live! Albeit not in all European Member States as some countries, including the Netherlands, have had to delay the implementation of PSD2.
- PSD2 launch the Netherlands
- Innovation paradox
- Regulatory burden
- Limited movement in the Dutch market
- Real impact PSD2?
PSD2 launch in the Netherlands
For the Netherlands, it is expected that the Payment Service Directive 2 (PSD2) will be transposed into Dutch Law in Q2 of 2018. That means that until that time, PSD1 will still be applicable. And even when the Netherlands transpose PSD2, the Regulatory Technical Standards (RTS) on strong customer authentication and secure communication (SCA) are also yet to be finalized, with implementation currently expected towards Q4 2019. A transition period between PSD2 going live and the implementation of the RTS SCA will thus exist, where the Dutch legislator still needs to fill in some details about that transition period.
This all is resulting in a slightly unorganized start, especially with only 8 out of 29 Member States having timely implemented PSD2. But at least it is implemented in some Member States, hence a key milestone has been reached. That makes it a good moment to review whether we think that we are on track to reach the objectives of PSD2, which were clear from the start – the facilitation of innovation, competition and efficiency and more and better choice for consumers in the EU retail payment market. George Osborne, a former UK Chancellor of the Exchequer, perhaps formulated its objectives the clearest:
“There are no incentives for the big banks to deliver new and better services for users. The payment system isn’t working for the customer so we will change it…. We will make sure that new players in the market can access these systems in a fair and transparent way.”
At the time that PSD2 was conceived, banks were still dealing with (the aftermath of) the financial crisis and most effort was put into complying with new regulations to make banking safer. In that respect, innovation was not always top of mind. To a certain extent it is therefore somewhat paradoxical that with PSD2, more regulation was created to further stimulate the required innovation. That also is where it becomes interesting – as innovation was “enforced” by regulation, players cannot focus “just” on being innovative, but also need to do so in a compliant way.
For payment institutions licensed under the incumbent PSD1, proof of PSD2 compliance needs to be provided to De Nederlandsche Bank (DNB) by 13th of July 2018. Moreover, all payment institutions desiring a PSD2 license by DNB will need a statement from DNB of “no objections” by 1st of January 2019. As the requirements for this are not yet finalized, this represents a moving target, which requires a lot of time and effort to discuss, understand and comply.
New payment institutions need to apply for new licenses, thereby entering a world that was formerly only the habitat of Financial Institutions. Suddenly words like internal control mechanisms, contingency plans, risk management, security policy” are key. Quite a hassle if you want to be innovative and have a great idea you want to bring to market, especially for smaller players.
Also, larger players might be deterred by everything that comes with moving towards offering banking services, as besides PSD2 there are other relevant regulations when taking steps into the financial market, like General Data Protection Regulation (GDPR) and the 4th AML Directive.
Limited movement in the Dutch Payments market so far
Although we have still to be careful with our conclusions, PSD2 does not yet seem to cause a lot of movement in the current payments landscape in the Netherlands. Moreover, existing players seem to use PSD2 to streamline operations via using API’s to offer better and more reliable interfacing and potentially bring their products more easily to new markets, but not (yet) to develop new solutions for its clients.
Another view is that the market is moving first and legislation is following and institutionalizing, but not triggering innovation. Also according to this view, post PSD2 the world will be pretty much the same. Innovation is still happening in payments, disruption is still happening in payments, but this is not primarily triggered by PSD2.
Real impact PSD2?
That raises the question what then really will be the impact of PSD2. A broad glance at the draft RTS SCA seems to answer that question – in this new digital world, with ever increasing cybercrime and fraud attempts, security is key. PSD2 organizes the legalization of ongoing innovation, but much more that consumers remain protected against these new threats and will continue to initiate payments while trust in the payments market remains high.
In addition, the longer term impact is that the changes being made in the back-end and the movement towards an API-based economy paves the way for Open Banking. And although some people may claim this was the masterplan from the outset, probably this is an important collateral benefit which might be the real game changer finally.
Whatever the effect of PSD2 in the short and long term, it is clear that Incumbents need to continue to increase their customer focus and consider PSD2 in all their solutions. Potential new entrants need to prepare carefully and really think through what innovation is possible because of PSD2 and what the increased regulatory burden will be for them associated with the products they intend to launch.
Deloitte has a strong track record in the payments industry and is a frontrunner in handling regulatory issues of our clients in a robust but efficient way. We believe that navigating and overcoming the mentioned regulatory hurdles in an efficient way will further pave the way for the true intention of PSD2; new entrants, new products, more innovation and a competitive and efficient payment industry.
The future of banking
In the upcoming months we will share a range of articles with you on the future of banking, based on ‘seven wicked problems’ we have identified. Our research skills and day-to-day experience in working with banks have allowed us to dive into these challenges more deeply. By sharing our insights, we strive to help you with the choices you face in your day-to-day work and with aligning your leadership, culture and organizational structure to a fully digital mindset, optimizing the use of proprietary and external data.
Want to discuss the impact of PSD2 on your organization further? Please contact: Christiaan Visser, Edgar Mendelsohn or Roeland Assenberg van Eysden via the contact details you'll find below.