Flow June 2017

Newpayments playing field

Next January, the new European Directive on Payment Services in the Internal Market (PSD2) will open up the payments market to third-party providers. Shahrokh Moinian explains the implications and opportunities for the global payments community

T he revised Directive on Payment Services Directive (PSD1) established in 2007. Taking into account the far-reaching technological and market changes which have occurred since 2007, the impact of PSD2 on the payment community will be considerable. PSD2 should be recognised as a major step forward along the road to a more open, client- focused, digital payments market in Europe. A decade of change in the payments market Since the first EU Payment Services Directive (PSD1) was introduced 10 years ago, the European payments industry has undergone far-reaching technological and market change. Indeed, advancements in technology (including instant payments infrastructures, blockchain, mobile authentication and the Internet of Things) have given rise to a host of new payment services and operators not covered by the first round of regulations. But innovation in this area is still in its nascency and more significant advances are surely yet to come. Luckily, PSD2 will open up the field to more players and innovation. It introduces two new regulated roles: for Account Information Service Providers (AISP) – that equip users with consolidated and convenient online information on one or more of their payment accounts; and Payment Initiation Service Providers (PISPs) – that facilitate the e-commerce process and enable online payments to be initiated at the immediate request of a payment service user. Although some players existed in both these spaces before, regulating them will allow for much greater growth and development. Services (PSD2) is certainly not a minor update of the original EU Payment

– primarily regarding transparency and payment terms, specifically the value dating of incoming payments – will now be extended to apply to payments where only one party is located in an EU/EEA country (‘one leg principle’), and to payments made in all currencies. Second, from late 2018, PSD2 introduces higher levels of payment security and authentication. In response to the surge in online fraud in recent years, PSD2 stipulates that a payment service user must now adhere to stronger levels of authentication such as two-factor (2FA) customer authentication processes to each remote, online or electronic payment. In this context, a factor refers to something that asserts that a customer is the legitimate user of the service. One authentication factor might be customer knowledge, e.g. a password; a second, a customer’s possession, such as a smartcard; and a third factor a customer “inference” (something only the user is), for example, a fingerprint. Finally, kicking in by late 2018 or early 2019, PSD2 licenses third-party providers (TPPs) of payment services, including the aforementioned PISPs and AISPs, and obliges banks to provide them with the information they require to operate effectively (dependent on customer consent). In turn, PSD2 will help level the playing field on which innovative companies can compete with established banks, and inject a new dose of competition into the payments market. A directive to fear or embrace? At Deutsche Bank we view the changes to

xxx 65.6 % The amount that e-commerce sales in Europe grew between 2014 and 2015

The EU has already experienced a surge in internet shopping and an accompanying rise in online fraud. Between 2014 and 2015, e-commerce sales in Europe grew by a staggering 65.6% (from €156.28bn to €455bn), 1 while the EU’s 2014 figures on card- not-present fraud showed a 21.2% increase in fraud year-on-year. 2 PSD2 – a major regulatory overhaul In light of the developments that have occurred in the payment space since 2007, PSD2 provides a major regulatory overhaul – bringing three key changes to the first EU Payment Services Directive (PSD1). First, to help ensure better legal protection, and reduced risk for payment service users in the EU, PSD2 widens the scope of its predecessor regulation – a change that comes into effect in January 2018. Certain provisions


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