What (Really) Goes Into PSD2
The European Commission and other regulatory bodies issue dozens of new guidelines and directives every year. At first glance, PSD2 might seem like just another one of those directives which simply tweaks a few things in the background.
However, it is anything but that – PSD2 has been designed to revolutionise the way payments are made. And it does so not by working in the background but by fundamentally altering the front-end experience.
PSD2 refers to the European Union’s Revised Payment Services Directive. The suffix “2” alludes to the fact that this is a new and revised directive that supersedes the original one from 2007. The main aim of the directive is to allow for interoperability between banks and third parties. PSD2 provides a mechanism for independent developers to tap into a bank’s core systems using open APIs and provide services that until now could only be provided by banks. Bank customers can now, therefore, use applications developed by these third parties, called AISPs (Account Information Service Providers), to access their financial and bank related information.
If we go one step further, it is also possible to use the services of PISPs (Payment Initiation Service Providers). These third parties provide applications that allow users to initiate and conclude banking transactions. Think of this as having a send payment button right next to the send message button on your favourite social media platform or phone’s contact list.
But what about security?
Security is usually the primary concern with any new technology, especially if it is related to financial services. Additional features and functionality is all well and good, but do we want third parties accessing our bank data? Notably, PSD2 provides for several safeguards and leverages other tools like the eIDAS Regulation (electronic identification and trust services) to create a much safer environment. (We will be covering the relevant security aspects in greater detail in a future article.)
What does it mean for finance departments across Europe?
PSD2 will allow for the development of new and better ways to make payments to vendors or to collect payments from other channel partners. The potential exists for ERP (Enterprise Resource Planning) software to be directly linked to the firm’s bank accounts saving considerable time, reducing errors and providing greater security whilst performing transactions. It will also allow for more powerful analysis tools to be created to optimise cash flow, CMS (Cash Management Services), Channel Finance, Trade Finance and the use of many other banking products and services.
PSD2 will further enable the consolidation of various bank accounts into a single interface. This interface could be part of the firm’s ERP or be some other third-party tool tailored specifically to meet a company’s requirement. The potential time savings in accounting and reconciliation being substantial.
These are just some of the most obvious applications already visible to us. PSD2 essentially opens the banking front end to independent innovators and Big Tech companies. The only real limitation being the depth of creativity of the start-ups that tap into this entirely new segment of the payments industry.
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