JOHANNESBURG – We have already seen huge changes in the world of banking. Digitalisation means that people are banking from their mobile phones, making payments via barcode scanning and even in some cases transacting using cryptocurrency.
Home loans can be approved in almost real-time, and a selfie can be used to open a bank account – all without ever physically entering a branch.
However, this is just the tip of the iceberg: the banking world is about to be shaken up, thanks to a legislation known as the European Union Payment Services Directive 2, or PSD2.
PSD2 is not a new concept, having been adopted by European Parliaments in 2015 with the express purposes of contributing to a more integrated and efficient payments market, levelling the playing field for payment service providers, driving competition which lowers the cost of payments, and protecting consumers by making payments more secure.
South Africa will not remain unaffected by this legislation, and local financial institutions, their customers, and the payment industry stand to benefit as much as those across the seas. Open banking has been fuelled beyond the borders of Europe as regulators of more than half of G20 countries being expected to create open banking API standards by the end of this year.
The rise of third-party FSPs
Essentially, PSD2 means that banks will no longer be the only, or main, stakeholders in both the control of consumer financial data and initiation of payments. The legislation gives rise to the inception of two new types of players that will create a more competitive banking environment by lowering payment costs and providing more choice for consumers.
Account Information Service Providers (AISPs) are emerging as new operators in a world traditionally dominated by banks. AISPs are able to access consumer financial information from multiple financial institutions at the express permission of consumers.
They analyse this data in order to determine a consumer’s spending habits, financial behaviour, and financial history. This data is then collated and consolidated into a single overview on the consumer, which the consumer can then request to be shared with third parties who can tailor services around their specific profile.
Payment Initiation Service Providers (PISPs) are providers who initiate payments on behalf of a consumer. Although we currently have many payment options, they all still pass through a bank. PISPs will enable services such as peer-to-peer payments and bill payments without touching a traditional financial institution.
The rise in competition for both banks and competing PISPs means that the cost of payments will lower significantly, and consumers will be able to better control how they make payments. The future looks bright for the creation of new business opportunities, fuelling competition and driving the economy. From a banking perspective, however, it means that banks are going to have to up the ante to remain relevant and competitive.
For consumers, there are scores of benefits. They will be able to access multiple payment providers, choosing whomever offers the best rate, promotion or deal at any given time. Cost of making payments is likely to reduce as the payment process will be more direct with fewer intermediaries and greater efficiencies. PISPs will create more competition in the payments industry.
It also gives an opportunity for the unbanked to do away with carrying cash and access credit.
Gerhard Greyling, Financial Services, Wipro Limited, Africa. The views expressed here are his own.