PSD2 and Digital Transformation in Finance
After years in the making, PSD2 implementation became enforceable in the EU from December 2020. Explore what its requirements, including integrated accounts and Strong Customer Authentication, mean for Europe's banks.
However, despite the new rules fast approaching, few customers and just as few financial institutions across Europe truly understand what the new directive will mean for them. For instance, according to a survey carried out by ING’s Digital Monitor, an astonishing 82% of Dutch consumers did not know about the incoming PSD2 regulation. The numbers were similarly bad elsewhere! So, let’s delve into what PSD2 may mean for you and online banking, and how you can brace yourself for the impact…
At the heart of the online banking component of PSD2 is the desire to level the playing field between the different types of traditional and non-traditional companies operating in the world of finance. Under the new directive, third-party companies will be able to request access to customers’ financial accounts, with their permission. This will open the door to the development and improvement of apps and other software, giving customers easy, one-touch access to their bank accounts as well as simple remote payment options, for example.
That’s not to say apps like this don’t already exist. For instance, Cleo – a Facebook-based AI chatbot – can help manage spending through its automated budgeting software, providing individuals are happy to grant access to their bank account information. PSD2 will also make other third parties’ lives easier when wanting to build Application Programming Interfaces (APIs) that improve customer experiences. Now listen to all the developers out there breathing a huge sigh of relief…
The Pitfalls of PSD2
All of this doesn’t mean these new regulations are without their downsides. In some ways, they may even complicate the process of online banking. Imagine not only having to unsubscribe from all those annoying email subscriptions you signed up to years ago, but also having to unsubscribe from different apps or software that have access to your bank account once they’ve served their purpose. Despite the simplification of all your different bank accounts being available at the touch of an app icon on your phone, you may just land yourself with even more life admin to deal with later down the line.
For developers, the challenges will be even greater. PSD2’s requirement to allow third-party companies equal access to customers’ bank accounts will require banks to meet the new security and data risks that come with this. It’s possible that, despite the directive’s requirement for banks and third parties to harmonise their security standards, the latter will lack expertise or resources to match the high security standards upheld by traditional banks. This could be good news for hackers looking to exploit such weaknesses. More generally, complex API-third party relationships will naturally create more risk of something going wrong during backend development, meaning developers will have to meet this challenge using sophisticated planning and testing strategies.
The Future of Finance
All in all, though, it’s an exciting time to be a software-building company working in finance. Putting into place the new requirements of PSD2 will be difficult but will ultimately open several different avenues for banking innovation. Whether that means digitising all the facilities customers’ banks usually provide for them on their smartphones, or building AI that can help customers manage their finances better, the potential is enormous.