PSD2: More than compliance
In conversation with Finologee’s co-founders Georges Berscheid & Jonathan Prince:
First, there were rumors, then confusion, then panic. Now, the second Payment Services Directive (PSD2) has cemented itself as an unavoidable reality for banks. But as the September 14 deadline came and went, many were still struggling to figure out if they were impacted and how to proceed.
While PSD2 initially seemed to belong to the retail banking arena, it soon became apparent that the Directive extends to any bank operating payment accounts.
“At first it was a bit unclear who was within the scope of PSD2. Retail banks knew they were in the scope, but private banks, payment institutions and e-money issuers hoped they would not be,” explained Jonathan Prince, Co-founder & CSO, Finologee. “They eventually realized that they were, but by then it was already a challenge to be on time.”
Around the same period, GDPR and MIFID II were well under way. Piling on a third regulatory demand could stretch resources thinner.
To add a further layer of complexity, by the September deadline banks could take either the contingency mechanism or fallback exemption path. However, lack of clear requirements in that regard thickened the PSD2 fog. Eyeing its potential pitfalls, banks are reaching out to external experts like Finologee to manage and implement the process from beginning to end.
The regtech company mastered the art of linking bank accounts securely to applications back in 2012, when it rolled out a PSD2-era solution ahead of its time: Digicash, a mobile payment product that banks could integrate and deliver to end clients. As it watched the industry’s PSD2 struggles unfold six years later, the team saw how its past experience translated into exactly the expertise these banks were after.
“Digicash was PSD2 before PSD2. So, for us, the vision and strategy were already there,” Prince added. “We were quite at ease building connectors to banks and managing the components, rules and operating infrastructure.”
For those familiar with the acronym but fuzzy on the content, PSD2 is a European Directive that compels financial institutions holding payment accounts to open up access to those accounts to third-party providers. This free, unimpeded access paves the way for new players ready to develop and offer fintech tools. Clients can take advantage of endless options while using their existing accounts.
“PSD2 triggers mixed emotions within the banking world – from hesitant optimism in retail banking to apprehension in private banking,” said Co-founder & CTO Georges Berscheid. “For that latter group, our immediate job is to get them through PSD2 painlessly and quickly, but our deeper objective is to get them out on the other side as a stronger business.”
In the long-term, the European Commission aims to foster innovation and competition in the industry through open finance. To get there, it needs banks to deliver on its demands, namely by securing these third-party transactions through customer authentication mechanisms. Steps include setting up a testing sandbox, development portal and production environment.
“Probably the biggest challenge of PSD2 is that it’s not only an IT challenge or a compliance challenge; it’s a mix of compliance, IT and, potentially, business,” Prince said. “It requires the IT people to understand the compliance impact and the compliance people to understand the IT challenges.”
Having spent years operating at this unique intersection, Finologee’s PSD2 for Banks gives financial institutions a technical solution that lets them comply with PSD2 with limited effort.
For banks, choosing to rely on an accredited company requires a tremendous amount of trust: “We find that clients appreciate our track record of delivering on schedule and maintaining products over time. Digicash, for example, continues to generate large volumes of transactions,” noted Berscheid, who steers IT, products and operations at Finologee. In May at the ITnation conference, he received Tech Talent of the Year, an award he attributes to an unrelenting focus on client needs rather than innovation for its own sake.
In addition to Digicash, Berscheid cofounded Mpulse in 2006, a telecoms messaging, routing and micropayment company that equally demonstrates the firm’s ability to manage complex architecture.
While clients initially engage Finologee to guide them safely out of the PSD2 jungle, they end up making it to safety with far more than they bargained for. That’s because when the company gives clients access to the solution, it simultaneously unlocks an entire catalog of APIs that can be swiftly integrated to optimize their operations.
“PSD2 is clearly a game changer and it’s not going to disappear,” Prince explained. “It’s the starting point for tomorrow’s way of interacting with a bank and should be seen not only as having an impact on the upcoming two to three months but a massive impact on the future strategy of a bank.”
When supporting clients, the regtech experts frequently call in specialists from adjacent fields, including from Big Four consulting firms and IT integrators, constructing a one-stop-shop around client needs. Once engaged, Finologee can have the third-party provider testing facility deployed within one to two weeks and needs as little as two to three months to launch the production environment.
PSD2 for Banks presents a way out for payment account providers ready to turn the page on this regulatory saga and emerge as a stronger company fit for the future of banking.