E-Commerce is a new norm in today’s world. Everything can be done digitally without ever leaving the comfort of a home or services ordered on the go straight from a smartphone. Whether it’s groceries or a taxi to go to – everything is accessible and conveniently placed online. The financial industry is no different and to sustain the constant growth of digitalisation banks had to offer innovative services online. The Second Payment Service Directive (PSD2) opened up data sharing via Application Programming Interfaces (APIs).
The PSD2 API enabled Third Party Providers (TPPS) to access customer account data and propose new, innovative services that could match today’s demand.
The basics of PSD2
The PSD2 is there to nurture innovation and new service emergence based on open data in the finance industry. It was designed to support European Union’s (EU) and European Economic Area’s (EEA) service providers. It implemented precise ways to perform Regulatory Technical Standard (RTS) and contingency mechanisms. PSD2 strives to optimise the banking industry and provide opportunities to operate most effectively and suitably for consumers.
PSD2 API specifications introduced all account providers as equals and enabled a well-functioning, forward-looking ecosystem to strive without limitations to TPPs.
The issue of the past was that legacy banks owned all the customer account information and were not willing to share it while not knowing how to effectively use it. The PSD2 forced banks to open that data and therefore stimulated the growth of alternative digital payment methods. Even more, it allowed TPPs to create convenient payments via commonly used technologies like smartphones or tablets.
PSD2 focused on the consumer ability to choose and mandated legacy banks to provide APIs to enable softwares to gather data and initiate payment within other softwares. In this instance, the friction between the legacy banks and TPPs have been eliminated since they were compelled to cooperate by law.
Last, but not least, in the long-run legacy banks must perform a huge shift in their operational processes to accommodate the innovation and demanding customers. Their business models must adapt and become collaborative with other businesses and financial institutions instead of acting strictly based on their own needs. By implementing cooperative strategy legacy banks will be able to easily adapt to future changes and identify new flows of revenue.
Changes driven by PSD2 APIs
Open data means more services for customers and more competitors to compete against. After the PSD2 APIs became effective it was easier for newcomers to enter the financial market and provide added value services to consumers. There were two main types of market entrees – Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs).
The AISPs mostly deal with providing access to consumer financial information, gathered from all their financial institutions or accounts, in one place. They have no direct access to the money, they only reflect the data. On the other hand, PISPs offer easy solutions to make online payments straight from websites without logging into a personal bank account. Even though PISPs have access to consumers’ funds, they can only initiate payment after the consumer has given their consent.