Bank Regulation

PSD2 And The US, Too

More innovation. Less smoke and mirrors. Those are the goals of Europe’s second Payment Services Directive (PSD2), which goes into effect in 2018.

In short, the point of PSD2 is to loosen what regulators say is European banks’ monopoly over data, and to allow external third parties to access customers’ accounts (as approved by those customers) to better serve end users.

If the first directive is any indicator, PSD2 will allow new market entrants to deliver services in new ways, potentially even at lower costs.

However, Europe isn’t the only part of the world that will feel the effects of this new directive. Increased innovation and transparency for European businesses will also have significant effects on how those businesses conduct cross-border commerce with other countries, including the U.S.

American businesses that use payment services in Europe can take advantage of PSD2 by partnering with a wide range of service providers, from banks and FinTechs to social media companies and retailers, to deliver the solutions they need.

For example, if a business sells its products to European customers on Amazon, it can now retrieve its customer’s account and automatically initiate a payment from the customer’s bank without having to redirect them to a third-party service, such as PayPal or Visa.

Some U.S. banks (e.g. Capital One) see this as an indication of where the industry is headed, and are getting ahead of the game by rolling out an open banking strategy now instead of later, which can help drive speed and cost efficiency.

In a recent interview with PYMNTS, Currencycloud head of U.S. product Arshi Singh said there are three key benefits that PSD2 could deliver to businesses near and far: a holistic perspective, lower costs and greater transparency.

“PSD2 introduces efficiency throughout the payment chain and makes it more democratic, because banks now have to provide access to their data, which historically hasn’t been easily accessed,” said Singh.

“To draw a comparison, our smartphones became smart only when the operating system of the device became accessible to third parties via APIs, which ushered the ‘app era,’” Singh went on. “PSD2 will bring about the smartphone moment for financial services, making it a win-win for both banks and third parties. Data is so underutilized when it’s sitting there in banks. Agile technology companies can now use this data to provide meaningful information to their customers.”

Holistic Perspective

Today, it’s difficult for businesses with a cross-border presence to collect a holistic picture of multiple bank accounts across different European countries. It’s not uncommon for businesses to have several bank accounts across multiple currencies.

To get the whole picture, they must log into each portal using a physical token, such as a username and password combination. Logging into each one separately to retrieve account information is a cumbersome process at best when undertaken by employees.

Singh said that because the process is so manual and tedious, organizations that can afford to skip it do so by consolidating balances using SWIFT, a vast messaging network that financial institutions use to quickly, accurately and securely send and receive information, such as money transfer instructions.

However, the infrastructure requirement and price tag of SWIFT can be prohibitive for smaller businesses.

Some of these smaller businesses turn to the quick solution of a screen-scraping application, which uses their username and password to simulate a login and pull the information. However, this method isn’t as secure or accurate as SWIFT, and it’s subject to changes in the bank’s user interface.

When PSD2 goes into effect, it’ll introduce the Account Information Service Provider (AISP) to improve the flow of information. AISP will be able to leverage APIs to pull information from banks and provide a consolidated view of multi-bank details in a single location. This allows for real-time, standardized and seamless access to information, decreasing the reliance on SWIFT or screen-scraping technology.

Cost

U.S. businesses and merchants that sell to European customers often get paid by credit cards, PayPal or through international wire payments. However, Singh said that all these payments come at a high price in the form of interchange fees or high spreads built into currency exchange rates.

With PSD2, APIs cut out the middleman and let corporations integrate with third-party providers to initiate payments directly from customers’ bank accounts, providing competition to the interchange fee-based payment models.

Singh added that the API approach isn’t just cheaper; it also improves security, because banks will be required to offer the APIs and must maintain them to a certain standard.

Transparency

Lack of transparency is a top-tier concern of many treasury professionals, Singh said – and in today’s digital age, there’s no good reason that greater visibility couldn’t be provided … at least, no good technical reason.

“Today,” said Singh, “even if you order a pizza, you can get step-by-step updates on the stage of your pizza’s preparation. But you don’t see that with wire payments and bank networks. In cross-border, once the transaction leaves the bank, there’s little to no visibility into its movements after that. If it’s stopped for any reason, it can take weeks or, in some instances, even months to find out it was rejected and why.”

If a payment goes missing, it’s costly and cumbersome to track it from the original bank through chain of correspondent and intermediary banks – another process that can take days or weeks to complete. Having staff dedicated to reconciling these missing or returned payments adds to the cost and isn’t scalable.

PSD2 requires banks to implement reconciliation and tracking capabilities via new APIs to streamline information and reduce costs. Instead of chasing payments through a maze, businesses with European suppliers can connect directly to the supplier’s bank to confirm that payments have been received.

If Domino’s can provide total transparency, why not banks? With PSD2, said Singh, they will.

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