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March 31, 2016

In the last few decades, the global payments and remittances industry has seen remarkable growth. Coupled with technological advancements, this has introduced several non-traditional players in the ecosystem, such as Payment Service Providers (PSPs). Given the increase in business volume, regulators globally felt it necessary to control the payments landscape, following which, the European Commission enacted the Payment Services Directive (PSD) in 2009.


Coming into force on November 1, 2009, PSD offered a legal ground along with a set of rules for payments in the European Union (EU). Thereafter, the payments environment saw significant innovation, growth, and technological advances, coupled with radical changes in customer expectations, all of which have compelled the EU to reconsider the provisions of the PSD. Besides, regulators became concerned about several payment services firms working outside the boundaries of this regulation since the definition of certain business entities was misinterpreted. As a result, the European Commission has come up with the Payment Services Directive 2 (PSD2). The scope of the directive has been considerably redefined certain provisions of the original PSD have been dropped and some new ones have been added.

Likely to take effect in 2018, the PSD2 is expected to provide further impetus to innovation in the payments space. This will specifically be the result of the Account Information Service provision which necessitates banks and payment service providers in Europe to standardize integrations through application programming interfaces (APIs), allowing third party service providers access to any bank account information in the SEPA area. This would create several avenues for banks to partner with like-minded institutions, innovate, and provide customer account information to external service providers, of course, post customer consent.

Thus, the stage is set for unique business and revenue models to take form, creating more competition and process transparency in banking and payments. Further, as market participants reorient their financial services in the wake of emerging profitability models and business strategies, they are likely to get introduced to newer avenues for revenue generation and customer acquisition. This new regulatory framework would also be advantageous for smaller banks and non-banking financial firms, who will begin to compete with the larger, traditional financial institutions on the same plane.

Once implemented, the PSD2 will have a widespread impact. Financial institutions offering payment services, payment platform providers, and technology providers will have to ensure that their payment platforms are modernized to enable open access and collaboration with the partner ecosystem. This in turn necessitates putting in place a strong and robust customer authentication process for electronic transactions. Technology providers will need to rebuild or create new platform architectures if they want to continue offering new services.

The PSD2 thus enables more transparency across market participants, better protection of end customers, and a tighter control over the financial transactions and proceedings between new and traditional players. Financial institutions mustnt think of PSD2 merely as a compliance exercise, but consider it as a foundation for innovation the key to success.

With the strategic intent of fostering an innovation culture and driving up market competition, the PSD2 is paving the way for immense business opportunities. Financial institutions must therefore embrace these changes to reorient their businesses for the competitive times that lie ahead, and come up with innovation strategies that help them pull out all stops and stay ahead of their peers. What is your organizations strategy in this regard? How do you see your business model transforming in the wake of this directive?

Chandra Shekaran is a Senior Consultant with the Cards and Payments practice within the Banking and Financial Services (BFS) business unit of Tata Consultancy Services (TCS). He has over two decades of experience in implementing retail and wholesale payment systems for a host of firms ranging from card issuers, acquirers, and remittance players to regional and international networks and wholesale payment firms. Shekaran's areas of expertise include core transaction processing and risk management platforms, and he anchors strategic consulting and transformation programs for TCS' leading clients.


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