The UK shores have been hit by a few storms this year, but nothing quite compares to what the EU has been brewing up for the banks. In case you have been living under a rock, the storm we’re referring to is known simply as PSD2, and it is scheduled to hit European shores later this week, Saturday, 13th of January. PSD2 will introduce a set of game-changing rules that will completely redefine how we all make payments. Read on to find out what this means for you and your money.
What is PSD2?
PSD2 stands for the Second Payment Services Directive. Made up of a set of rules proposed by the European Commission to regulate payment services throughout the European Union, it builds on the First Payment Services Directive, introduced in 2009, with the aim of creating a pan-European legal framework for payment services.
PSD2’s purpose is to promote innovation, to improve security of online payments and to create competition between traditional banks and fintechs of all shapes and sizes, with the ultimate goal of shifting the power balance from corporates over to consumers.
Why do we need it?
Although the European banking system is more advanced than other parts of the world, it still lacks in many ways. First of all, it uses a variety of systems which makes it complicated to integrate between one another. Secondly, the financial world is still riddled with hidden fees and charges that usually get passed on to us - the end consumers.
PSD2 aims to solve these problems by connecting all the different financial services together via an open banking API - a common language designed to be used by all of these banking systems. This means that your bank accounts, Revolut account, and any other financial service you use will be able to easily communicate and work together to provide improved functionality, offer a more streamlined user experience and help tackle fees.
So what does this mean to traditional banks?
Currently, the banks are very strict with whom they choose to share customer information and account data - most of the time, your bank can make money by selling anonymised ‘customer insights’ or ‘spending habits’ to businesses that are willing to pay up. Want more? Here are another 3 sneaky ways banks are ripping you off.
With PSD2, approved fintech startups will soon have the ability to request access to your bank account information via the open API (request is only granted with your explicit consent of course!). The effect - traditional banks will need to share their customers’ information in a secure manner. Ultimately, this means that more people, like you, could be tempted to choose a trusted third party digital alternative, like Revolut, to manage their personal finances!
What’s more, PSD2 is designed to serve you, the consumer, and has been intentionally drafted with your experience in mind, and not the traditional banks'. So what does this mean?
Simply put, through PSD2, you will experience a reduction in fees and an increase in transparency, which could be the demise of those opaque “service fees” we all receive on our bank accounts.
OK, but what does PSD2 mean for me?
The main goals for PSD2 are to promote competition in the financial ecosystem, increase the security of online payments and provide greater transparency between all the different banking systems. We expect to see new types of digital banking and payments services emerging and these are just a few ideas of what will be possible once PSD2 is fully implemented:
Smart Banking Solutions
Since different services will be able to connect to your bank accounts and pull information with your consent, you could soon see apps that aggregate your balances and transaction history from all your different bank accounts.
These apps could provide you with valuable insights into your spending habits, suggest ways to help you save more money and even recommend switching to another account with more favourable rates and features.
Secure Online Transactions
Under current regulations, when you shop online, your card details get passed to the merchant and other entities such as PayPal or MasterCard. They, in turn, process the payments from your bank account via intermediary companies. The problem with this process is that it involves a number of players. The fancy word that you may have heard people mention when they talk about PSD2 is “disintermediation”, and this is what they are referring to.
With PSD2, you can shop online without the need to enter your account details - this means you can book that hotel room from an internet cafe in Thailand securely and in confidence. Your transactions will be assured and protected by advanced authentication and the results will ultimately be secure, faster and cheaper transactions.
Accurate Credit Scores
Credit agencies are notorious for providing inaccurate credit ratings, not because they are not doing their job properly, but because they use static data points which only show a brief snapshot of your financial habits.
However, with the introduction of PSD2, these agencies could gain access to your transaction data (provided you give your consent), allowing them to conduct a more accurate assessment of your creditworthiness, or the likelihood of your ability to repay a loan on time.
No surcharging for credit card users
We said above that PSD2 aims to make transactions cheaper - and if you have read this far, we are guessing that is because you are interested in learning how you can save some cash (aren’t we all?).
PSD2 will prohibit merchants from surcharging customers for paying with a credit card. Unfortunately, you may still see a “booking fee” or something similar appear at the bottom of your bill before you check-out, that’s because under PSD2 merchants can still charge customers a fee, but it must be equally applied across all payment methods (so, you can no longer be penalised for using your credit card).
Although there is still much debate on this matter, PSD2 has the potential to make credit card spending free for consumers or, at the very least, reduce the amount of surcharging applied to these card payments.
When does PSD2 come into effect?
As we said in the beginning, unless you’ve been living under a rock, by now you should know that PSD2 requires all EU member states, including the UK, to implement these regulations as national law by this coming Saturday, the 13th of January, 2018.
The introduction of PSD2 will bring a number of exciting opportunities for Revolut and other innovative players to shake up the way we approach transacting online and how we manage our accounts. You can rest assured, however, because here at Revolut, we’re working hard to create the most useful solutions designed to take advantage of this new banking landscape.
Stay tuned for more updates on exciting new products and features we have in store for you!