I sat down with the marketing team at Anthemis to discuss the opportunities and geopolitical challenges of open finance. This is the third part of a series of five articles. You can find part one here and part two here.
So John, You’re our in-house expert on PSD2. You’ve said before that it’s broadly misunderstood. Care to elaborate?
Sure. Banks, customers, consultants, politicians and start-ups don’t understand PSD2. They think that they do but they don’t. They understand the aspect of it immediately relevant to them like strong auth or licensing requirements but they’re yet to piece together the broader implications.
What are the broader implications?
Well, step back. First consider the motivations for the legislation. PSD1 was about increasing payments competition and reducing cost. Banking licences protect banks when it comes to deposits business because it’s of systemic import but why should it give them an unfair advantage anywhere else right? PSD1 wasn’t a failure but it failed to do everything it set out to do. It’s fair to assume then that PSD2 would be a direct continuation of PSD1, correcting the course and setting mistakes right, but it’s not.
What do you mean, why not?
PSD1 was formulated and signed off on prior to the financial crash. A lot has changed since then. E.U. rehabilitation and growth has lagged behind the rest of the world, youth unemployment in the region continues to grow, political unrest is destabilising the continent, the progressive socio-economic pledge of Europe is being challenged and vitally, Europe has failed to develop any new corporate global powers for the digital age.
The E.U. understand that 1) massive amounts of European capital flow to the U.S. every year in the form of digital and technological consumer goods and services, 2) huge amounts of European citizens’ data now sits on U.S. company owned servers and 3) regional jurisdictional data, payments and identity infrastructure is inevitable and the most effective way to manage those threats is by giving would-be-global European firms a competitive edge in the form of regulation. In a way, PSD2 is a new, particularly European, kind of trade tariff. One that requires a certain level of sophistication to gain entry.
So is PSD2 about payments or a U.S. — E.U. trade dispute or both?
It’s both. In many ways it’s the most avant garde financial regulation of our time whilst also extending a long middle finger to our American cousins. The changes to the regulation on direct account to account payments and four party payment schemes show that American card schemes are obviously unwelcome in Europe in their current form but I suspect that Facebook, Apple et al will also continue to fall afoul of both the EBA and the GDPR. It’s worth remembering that two weeks after Apple, America’s biggest company, were ordered to pay €13bn in back taxes in Europe, Deutsche Bank, formerly Europe’s biggest bank, were fined $14bn in New York. That’s quite the coincidence.
Why? I thought we’re friends with the U.S.?
Of course we are. That’s not the point though. Creating global European digital businesses is the fastest possible way to solve for Europe’s stagnant growth and unemployment problems. Europe needs to become more digital and finance is an amazing place to start. It’s long been what we’re best at anyway. The important take away is that global banking is becoming increasingly heterogeneous. An industry that used to be broadly similar in every part of the world is becoming increasingly distinct. Africa focused on mobile, Asia innovating without regulation, Europe innovating through regulation and North America relying on the market to fund start-ups that can circumvent retrograde infrastructure.
So it’s not just about XS2A then?
No it’s not just about XS2A. People have become obsessed with XS2A due to the potential implications but that’s just one small part of the legislation and to be honest it’s not even close to the most significant piece of it.
Will any of this impact roll out?
My expectation is that, due to the broader ramifications, there will be significantly less leeway given to banks who don’t comply on time. Additionally, I expect that the banks who produce a full suite of premium APIs in in time for the roll out of the mandated standard payment APIs will have 24 months of runway ahead of their peers before they can even begin to catch up. It’s likely to be the beginning of the thinning of the herd.
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