Myles Stephenson of Modulr Finance weighs in on the new EU legislation.
The 13th January deadline for the Second Payment Services Directive (PSD2) to be enacted across EU nation states has now passed. The UK’s Financial Conduct Authority (FCA) obliged, incorporating it into its 2017 Payment Services Regulations.
When it comes to PSD2, the spotlight has been on the principle of Open Banking. This is paving the way for third-party providers to access customer bank account data – with the customer’s permission – to provide services designed to add value by improving and simplifying the user experience.
Most PSD2 commentators have concerned themselves with the security implications of opening up [customer] account information to third parties. But this isn’t the only challenge presented by Open Banking.
A closer look at the fine print of PSD2, and an in-depth perusal of the FCA’s new guidance for UK payment service providers, called Payment Services and Electronic Money – Our Approach, reveals that the legislation has a number of other implications for companies in the AltFi sector that are less well understood.
It is crucial that the industry fully comprehends these issues, so that it can take steps to ensure companies meet the requirements of the regulations:
1. Global scope
PSD2 doesn’t just apply to transactions firmly within the territory of the EU. Its reach encompasses non-EU transactions, in addition to those where one leg is carried out by a payment service provider (PSP) outside the EU.
This means that, regardless of where your business is headquartered, if you are processing transactions – wholly or partly – within the EU, you need to be fully versed in the finer details of PSD2 in order to comply.
2. Payment Service Providers
In addition to banks and building societies, payment and e-money institutions, PSD2 introduces two new classes of payment service providers: Payment Initiation Service Provider (PISP) and Account Information Service Provider (AISP), which offer specific types of service. AISPs provide aggregated bank account information and analysis services, while PISPs – capable of initiating “a payment from the user account to the merchant account by creating a software bridge” – could potentially offer services such as bill payment and peer-to-peer transfers.
3. Card surcharges
Under the terms of PSD2, card surcharges on consumer retail transactions have now been (mostly) scrapped. This is good news for consumers, who will find they no longer have to put up with hidden fees when purchasing goods.
It should be noted, however, that charges on corporate cards remain outside the scope of the regulation. Businesses, then, will have to continue to put up with surcharges.
4. New definitions
PSD2 has also tightened its interpretation of “commercial agent” and “limited network” exemptions. This [may have] implications for eCommerce platforms or digital marketplaces that handle or control client money. Some of these platforms may have relied on these exemptions to avoid the challenges of being a licensed provider of regulated payment services.
That isn’t the only terminology that has changed in the new legislation, however. PSD2 introduces a new definition of what constitutes a payment account – this term now refers to an “account held by one or more payment service users, which is used to conduct payment transactions.” The term encompasses savings and current accounts or accounts that combine savings with mortgage and payment facilities, so long as the account is being used to make payments.
This differs from the definition in the EU Payments Accounts Directive and the FCA’s 2015 Payment Account Regulations, which does not class some savings or credit-card accounts as payment accounts. This is unhelpfully vague and it is not clear, at this stage, which definition firms should comply with.
5. Monthly account statements
It seems anachronistic, given PSD2’s focus on making account data available in innovative ways, but the FCA’s approach document explains that PSPs must now “provide” monthly account statements to customers on paper or a “durable medium”.
These terms now have specific definitions under the new legislation. According to the FCA, a durable medium is now “any instrument which enables the payment service user to store information addressed personally to them in a way accessible for future reference … and which allows the unchanged reproduction of the information stored.” This can mean printouts, CD-ROMs, DVDs and, in certain circumstances, websites. “Providing” also has a specific meaning, referring to proactively pushing out information to customers on a regular basis.
6. Notification requirements
In its guidance document, the FCA states that organisations must now provide notifications of major operational and security incidents within hours of them occurring, in addition to regular updates.
In a twist, the guidance suggests that social media may no longer suffice as a reporting tool. While many challenger banks have been praised by their customers for their openness and commitment to customer engagement on social media, it seems that, in future, it will not be enough for organisations to simply post apologies on their Twitter feed.
Finally, under PSD2, all existing e-money and payment services businesses need to go through a re-authorisation process to continue operating beyond the middle of July. The FCA wants to have all completed submissions by mid-April, to process applications within the three-month timeframe.
However, there is evidence to suggest that many organisations still haven’t submitted their applications. It will be interesting to see how the FCA copes with the deluge of applications once they start to arrive. There is a possibility that it will struggle to review and approve them quickly enough to meet its own deadline. AltFi professionals would be justified in feeling concerned that their company’s application for re-authorisation won’t be approved in time for them to continue to operate and serve their customers.
A new era
The arrival of PSD2 heralds a new era for the financial services sector, including AltFi. While it presents challenges for banks and traditional financial institutions, it offers considerable opportunities for newcomers to disrupt the market, giving consumers the benefit of more choice and control over their money.
To fully realise the benefits of the new legislation, however, it is imperative that companies and their compliance officers are fully versed in its finer details. By drilling down into the documentation now, they can ensure that they have all the information they need to work towards being PDS2 fit.