MONI: Pauliina Lämsä, Lauri Sommarberg

Second payment service directive (PSD2)

There has been a lot of discussion about the second payment services directive (PSD2), which was introduced by the European Commission with the aim of creating a single integrated market for payment services. As a fintech startup MONI is interested in exploring the new possibilities that arise from the directive. The changes from this directive are said to be game changing for retail banking and it has to be implemented not later than 18th of January 2018 in all EU member states.

The story started with the first directive on payment services (PSD1) adopted in 2007 and the objective was to create a single market for payments within the European Union. As usually happens with completely new efforts the results of PSD1 didn’t really live up to the expectations: retail banking and payment services did not undergo radical changes between 2007-2017. So as time went by the EU felt there was a need for more accurate regulations in order to increase competition and ease payment processing through uniform rules in the marketplace across the European Union.

Nearly four years ago The European Parliament introduced the PSD2 directive to bring new regulations so that not only banks but also completely new types of companies offering payment services are able to compete in the payments space. For example fintech companies have the chance to introduce their innovations in a fair market field and they can offer both completely new and also services similar to the ones traditionally offered by banks. The stated goal of PSD2 is to improve innovation, reinforce consumer protection and improve the security of Internet payments and account access within the EU and EEA.

What does PSD2 mean in practice

As PSD2 is implemented it allows third party providers (because people love acronyms, these are referred to as TPPs) to build financial services on top of banks’ data and infrastructure. The directive defines three (new) types of services:

  • Payment Initiation service providers (PISP) which can initiate a payment from a payer’s bank account and facilitate the transfer of funds to the recipient’s bank account.
  • Account Information Service Providers (AISP) to whom account servicing payment service providers (ASPSPs, e.g. banks) are obligated to provide access to the balance and transaction data on their customers’ payment accounts through application program interfaces (APIs).
  • Payment service providers issuing card-based instruments.

AISP = Account Information Service Provider

A great many blog posts and articles have been written on PSD2 and PISPs, but there hasn’t been too much focus on AISPs. An AISP is meant to be able to provide an overview of all the payment accounts the customer has with the aim of making banking easier for the customers. In very concrete terms if you have a current account with Santander, you will no longer have to log into Santander’s web bank or app to check your transactions and account balance. If you also have a current account at HSBC, you can view the balances and transactions from both Santander and HSBC from within the user interface provided by the AISP. If you happen to have a third, fourth, etc. payment account, you can view all of them from the AISP.

To be able to provide a comprehensive view for a customer an AISP will be able to retrieve customers’ transaction and balance information from all the payment accounts that customer has and has authorised the AISP to retrieve data from. (AISPs will typically allow consumers to have a global view on their financial situation and to analyse their spending patterns, expenses, financial need in a user-friendly manner.)

An AISP will not be able to transfer funds out of a payment account, they just provide an aggregated view of past transactions that have already occurred.

What is a payment account

You may have noticed that we used the term payment account above. And this is where it gets a bit tricky. PSD2 states that an AISP may retrieve balance and transaction data from payment accounts. Therefore it would make sense to define what is a payment account in extremely concrete terms. Unfortunately this is not the case.

PSD2 defines that a payment account means “an account held in the name of one or more payment service users which is used for the execution of payment transactions”. And a payment transaction means “an act, initiated by the payer or on his behalf or by the payee, of placing, transferring or withdrawing funds, irrespective of any underlying obligations between the payer and the payee”.

One can be fairly certain that a bank account is a payment account since it is very much “used for the execution of payment transactions”. But a credit card account probably does not qualify as a payment account. At the moment the most definitive definition for what a payment account is has been provided by the UK Financial Conduct Authority (FCA):

  • “In order to fall within the definition of a ‘payment account’, an account must have all the listed functionalities. It must enable the consumer to:
    • place funds in the account
    • withdraw cash from the account
    • execute payment transactions to third parties, including credit transfers
    • receive payment transactions from third parties”

  • “However, not every account with these functionalities falls within the definition of a ‘payment account’ under the PARs. This is because the definition states that certain types of accounts usually (but not always) fall outside the scope of the Regulations. These types of accounts are:
    • savings accounts
    • credit card accounts where funds are usually paid in for the sole purpose of repaying a credit card debt
    • current account mortgages
    • e-money accounts”

  • “Yet in some cases, these types of accounts will indeed be in scope. This exception applies when an account has all the listed functionalities, is one of the types of accounts listed in the preceding paragraph, and is used for day-to-day payment transactions.”

  • https://www.fca.org.uk/publication/finalised-guidance/fg16-6.pdf

So a bank providing e.g. savings accounts or credit card accounts might not have to provide balance and transaction data to an AISP. But on the other hand they might. It is all very clear now, isn’t it? It will be interesting to see if the European Banking Authority and e.g. BaFin will also define payment accounts as above because that directly affects how much information on his finances a user is able to see from within his AISP:

How will an AISP make money

It is doubtful in this day and age when consumers have become used to “free” services like Facebook and Gmail that they would be willing to pay to an AISP for the use of the service. Facebook and Google grew to be among the largest companies in the world not by selling something to their users but by selling their users! The same will happen with AISPs: service providers will pay to the AISPs to be able to market and sell their services and products to the AISP users.

Why would an AISP user allow himself to be sold

Because an AISP has all the transaction data from the user’s payment accounts, an AISP will undoubtedly utilise artificial intelligence and machine learning to analyse all of the payment transactions of all their users for potential cost savings:

  • “You’re paying 70€ each month to Vodafone. You could save money by switching your mobile subscription to O2. Click here to change to O2.”
  • “You seem to be paying 50€ per month for a car insurance. Click here and we’ll find cheaper alternatives for you.”
  • “Last month you spent in total 105€ and 560€ so far this year in Starbucks. The coffee at the office can’t be that bad, can it?”
  • The artificial intelligence of the AISP should be able to analyse all of the payment transactions of a user to find potential future cost savings for each payment he has made. It’s somewhat akin to having a personal finance guru go over your finances.

In the future it will not be enough that a bank or banking service provider only provides the tools such as current accounts, payment cards and apps to their customers. On top of the tools they will have to provide assistance and easy ways through which the customer can improve his financial situation: “Become our customer and we’ll help you save 2000€ per year.”