I sat down with the marketing team at Anthemis to discuss the opportunities and geopolitical challenges of open finance. This is the second part of a series of five articles. You can find part one here.
So to start, what is PSD2?
PSD2 is legislation, which at a technical level, seeks to increase competition and reduce the cost of payments in the E.U.
What do you mean “at a technical level”?
Well, there are significant geo-political undertones to PSD2 that don’t often get highlighted. PSD2 is a bullish initiative to generate global digital businesses in Europe and lay the groundwork for financial, data and identity rails within Europe. Essentially a new data grid in the world’s largest trade block with preferential treatment for European businesses. But that’s a conversation for another time…
Tease! Ok so what are the component parts of PSD2? What will actually happen?
It’s a broad piece of legislation but key aspects include improved security, protection of data, increased transparency, regional payments harmonisation, institutional passporting and home country selection, new institutional licensing, direct account payments, limits and amendments to existing exemptions and of course standards around broader open finance themes and architecture.
That’s a lot of stuff. How come I’ve only hear about the the API stuff?
People tend to focus on the aspects of change that are 1) exciting, 2) understandable or 3) most relevant to them. Consequently, fewer commentators or participants focus on adjacent or derivative ramifications of change. In the case of PSD2, XS2A, the access to accounts provision is exciting, understandable and relevant to many of the media and content generating participants and accordingly it dominates the commentary.
Does that mean we’re overweight on XS2A? Are we overhyping it?
I think it’s more a case of the market being underweight on the other component parts of PSD2 like the new rules on exemptions and home country shopping that are likely to have real implications on the post brexit financial landscape of Europe. Access to accounts data and direct account to account payments are hugely meaningful and the implications for the industry are obvious but in reality it’s only expediting the inevitable. Open finance is not a consequence of PSD2, it is only enabled by it.
OK, so a quick overview on how XS2A is expediting Open Finance?
XS2A mandates that banks provide three APIs to help facilitate a more competitive payments landscape. Those APIs are 1) A balance check, 2) a statement check and 3) a payment initiation. It is the statement check specifically that has everyone quite excited. For many, it suggests that a licensed third party will be able to leverage that data in order to provide competitive or novel services to customers. Examples include potentially being able to offer credit to another bank’s customers by using their payment accounts to credit score them, aggregators who can bring all of your financial information into one place and comparison sites that can contextualise offers to meet your specific needs like auto-swapping utility providers to save you money. It expedites open finance by obliging banks to begin developing and considering their interoperable architecture.
It will lead to increasing aggregation through interoperability in finance and the provision of premium APIs from traditional incumbents. Customer will no longer be locked within the walled garden of one brand, only able to buy their products or use their infrastructure. Instead, users will be able to curate their own financial infrastructure and experience. PSD2 significantly advances that eventuality.
What other aspects of PSD2 so people be paying more attention to?
I’d highlight the higher burden of competence being placed on local regulators, especially when it comes to managing the various exemptions and exclusions changes on limited network, limited scope, specific purpose, telecoms and three party schemes. There are some obvious impacts for companies like Stripe, Paypal, Braintree, Skrill and their new responsibilities to merchants as well as purchasers. There are many companies who are naturally evolving into general purpose schemes who will now require licensing. I expect that many local regulators do not currently have the necessary competence to fulfill some of their new obligations when it comes to PSD2, in particular when it comes to their ability to impose certain checks on regulated extra-jurisdictional companies with local operations. The most significant impact, in my view, will be the changes to home-country shopping in the E.U. post brexit but we’ll get into that in the coming weeks. Nadja vander Veer has written some great blogs on the technical ramifications of PSD2 if you’re interested in getting into the detail ( You can find them here)
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