The European Union’s PSD2 regulation has two major phases: first, the price transparency that has been in effect since January 13, 2018; and second, payments security and third-party-provider (TPP) access to customers’ bank accounts, which will go into effect starting September 14, 2019. Particularly in relation to phase two, there’s a continuing debate on how to interpret the PSD2 regulation, the Regulatory Technical Standards (RTS) on Strong Customer Authentication (SCA), and the opinion papers from the European Banking Authority (EBA) and Euro Retail Payments Board (ERPB) application programming interface (API) Evaluation Group. The EBA even recently formed the EBA Working Group on APIs under PSD2 to work on ongoing issues including a pan-European API standard and more.
We’ve seen a wave of API standardization initiatives such as the Berlin Group’s NextGenPSD2 and the UK’s Open Banking Implementation Entity. However, when it comes to building a harmonized, open and innovative ecosystem in Europe, API standards are just one piece of the jigsaw puzzle. Other key components include standardization of the performance and availability of APIs, harmonized SCA, identity services and common infrastructures. Progress has been made in these areas—but is it enough?
Breaking the duopoly of card schemes in the EU
To reach a view, let’s start by taking a step back: Why did the European Commission intervene in the European payments market with PSD2 after the Single Euro Payments Area (SEPA) harmonization in the original PSD? What was the initial intention of PSD2? Was it solely to introduce Open Banking and foster innovation with fintechs? While PSD2 is not an Open Banking regulation itself, it does create the right conditions to form an Open Banking ecosystem. The main intention of PSD2 was to support the creation of new pan-European payment schemes that use the merits of Open Banking and instant payments to break the dominance of the duopoly of the established international card schemes, which between them handle 80 percent of all cross-border card transactions.
Does PSD2 open the way in this direction? Partially. PSD2 itself only allows access to accounts to initiate payments. To compete with existing payment schemes, the payment initiation must be in real time to ensure the payment guarantee. With SEPA Instant Payments and the other domestic instant payment schemes in Europe, the infrastructure is a given. However, even though the PSD2 and instant payments timelines are not synchronized, the two are still a match made in heaven.
PSD2 + Instant Payments = the solution?
In a blog from last year, I described how PSD2 and SEPA Instant Payments could be the ideal combination for creating new payment schemes in Europe.
However, two main challenges remain:
- With PSD2, there are issues in areas including API standards, API performance KPIs, fragmentation of SCA methods, different customer journeys, different RTS interpretations, directory services and dispute processes.
- With SEPA Instant Payments, the 10-second turnaround time is not synced with PSD2.
Over the past two years, the European Commission, EBA and National Competent Authorities (NCAs) have gone through a huge learning curve with PSD2. There was a long and intense discussion between the regulators, banks and fintechs around developing a workable PSD2 ecosystem. The regulators have realized that the construction of PSD2 and the disconnect from instant payments isn’t helping the timely creation of the hoped-for European payment players, and the complexity and cost of the evolving PSD2 ecosystem will be higher than initially expected. So, what happens next? PSD2 and instant payments can already be leveraged by non-banks and non-EU tech giants that have gained E-money licenses in the EU and hence access to accounts.
We are seeing some encouraging industry initiatives; for example, the move by the International Air Transport Association (IATA) and Deutsche Bank to combine account access and instant payments to create a new online payment scheme for airline tickets. However, this isn’t a multi-purpose pan-European online or card scheme – yet.
The European payment scheme is coming—either through the market or PSD3
The experience with PSD2 underlines the complexity of regulating the market and stimulating the desired outcomes. It’s now up to the European banking market to take a collaborative approach and build a payment scheme model that serves the European Single Market and generates new revenue streams. Otherwise, they risk the possibility of tech giants creating their own model —or the regulator doing so through PSD3.
PSD3 could eliminate fragmentation by including a more precise and concrete specification of API standards, directory services and infrastructure. Another option would be that the regulator or the central bank could build the infrastructure on their own, as with the ECB’s TIPS for instant payments.
The message is clear. Banks should take the opportunity now to join pan-European working groups on common standards and infrastructure. The clock is ticking!
Why bother with this failing initiative when we have UK Open Banking and you’re investing in Ripple?
Thanks for your comment. I just came back from our APAC Open Banking tour, meeting regulators and banks in the region. Open Banking is a global trend and topics such as identity services, directory services, API standards, performance KPIs, content management are of interest to establish a functioning Open Banking ecosystem. UK Open Banking has covered relevant parts of these infrastructure parts and is indeed leading in setting up a new ecosystem. However the blog was more about what the European regulator might do next and that European banks should join forces.