How Europe is moving ahead with legislation that will revolutionize our payment habits.
In recent years, financial services, and payments in particular, have undergone profound changes in the regulatory environment in Europe, to the benefit of new uses.
Deciphered by Fanny Rodriguez, General Secretary and Director of Operations at Fintecture
The origins of Open Banking
The second European Payment Services Directive (PSD2) of 2018 laid the groundwork for Open Banking. It established a regulatory framework for fintech companies, enabling them to access customers’ banking data as part of the payment process, while requiring them to ensure a high level of transaction security. Rules regarding strong authentication were established, and banks encouraged merchants to implement them in order to secure their customers’ shopping experience.
PSD2 has thus given rise to two distinct services, activated on the basis of user consent:
- the Account Information Service (AIS), a process that allows access to payers’ banking information—such as their transaction history—to verify, for example, their creditworthiness when applying a credit scoring model.
- Payment Initiation Services (PIS), which allow individuals or businesses to initiate a payment transaction and automate account-to-account payments without an intermediary.
4 new "game changer" texts
The instant transfer will become mandatory with the implementation of a European regulation. All European banks will now be required to offer this payment method to their business and personal customers, at the same price as a standard transfer. Instant transfers allow funds to be transferred in 10 seconds, compared to 24 hours (or more!) previously with a standard bank transfer… and that is their greatest strength! Merchants receive funds instantly and can thus ship their goods, thereby improving their customer service and cash flow. There is no doubt that instant transfers will undoubtedly revitalize the world of payments—and, by extension, the Fintech sector, which is quick to embrace the latest innovations. While instant transfers are gaining ground every year, there are still many potential applications to explore to truly embed them in the daily lives of everyone, whether individuals or businesses.
In addition, Payment Service Providers (PSPs) will soon benefit from the PSD3 and the Payment Services Regulation (PSR). This new European regulation will clarify the liability framework between fintechs, banks, and their customers, to the benefit of all. It is highly likely that this precise framework of responsibilities will enhance the performance of existing APIs under PSD2, as banks will be required to share information even more seamlessly with regulated entities such as fintechs.
Finally, a scheme (European contract) and two other key documents are currently being drafted. One, to be implemented by the European Payments Council starting in 2023, concerns premium APIs, which will be paid features added to existing PSD2-based APIs. These could enable other types of services (for example, the current PIS allows for immediate or deferred transfers but does not allow for pre-reserving an amount on an account, such as a credit card pre-authorization system). The others concernOpen Finance, which would expand access to payers’ financial data to include financial data not necessarily linked to payment accounts (such as savings accounts). The goal is to offer solutions even better tailored to the market and to improve the fight against fraud. Here too, significant advances could emerge: PSPs will be able to collect customer data very quickly and automatically, with their consent, and thus become key players in the credit market by being able to respond almost instantly to financing needs. Furthermore, the regulation on the digital euro will allow the European Central Bank to create a new currency, which could be directly accessible to payment institutions.
The challenge of European sovereignty in the background
These regulatory changes in Europe are designed to promote competition between banks and fintechs to the benefit of users, with a diversification of payment solutions, whether instant, deferred or on credit... Against this backdrop, there is a strong political will to boost innovation via a European infrastructure and players. In a tense geopolitical context, it's a safe bet that this trend will only continue.
To learn more about these issues, check out our guide to European payment regulations, co-authored with the firm Onepoint.
