This all started when the Council of the European Parliament passing the second Payment Services Directive legislation (PSD2) back in 2015. In a nutshell, PSD2 allows for, amongst others, digital role players to tap into payments systems traditionally considered the domain of the financial services system.
According to the regulation, banks must offer third-party service providers ways to access customers’ accounts through open application program interfaces (APIs). This paves the way for a dramatic shift in the banking sector, where it will eventually allow different types of companies and fintech start-ups to offer banking services to customers.
But what does this mean for banks? This effectively signals the collapse of the traditional banking infrastructure and a rebirth of banking as we know it. Banks are set to lose full control over account information, a key resource which, understandably, they never wanted to share with fintech companies.
Currently, online shopping allows for a number of role players in the process, which includes the merchant, customer, the ‘merchant acquirer’ that processes credit card payments on behalf of the merchant, card schemes such as Visa, and finally the customer’s bank.
But PSD2 creates a Payment Initiation Service Provider (PISP), a go-between which if given permission by the customer, initiates a payment bridge directly between the merchant and the bank. This is possible since PSD2 offers API access to the customer’s bank accounts, and it is in the role of PISP that fintech companies, such as i-Pay, will operate.
The question remains – who will ultimately benefit from this? That’s easy… the consumer. PSD2 is taking online banking infrastructure and gearing it towards an environment which is stronger and more robust – much more so than the current method of buying online with credit cards.
Ultimately, what open banking and PSD2 will mean for consumers is convenience. Not only will fintech start-ups be able to stimulate innovation, but it will eventually improve convenience. Consumers will soon be able to fulfill all their financial needs, banking, shopping by using one app.
