The revised Payment Services Directive – more commonly known as PSD2 – was implemented into UK law on 13 January, providing legal effect to the government’s aims of open banking within the UK’s uncompetitive banking market.
It has been heralded as a game-changer for Europe’s financial services industry. But what is PSD2, and will it affect the alternative finance industry?
According to the European Commission, PSD2’s main aims are to contribute to a more integrated and efficient European payments market and level the playing field for payment service providers, including new entrants. However, from an alternative finance provider’s perspective, PSD2 has a couple of interesting implications.
First of all, it will require banks to grant licenced third-party providers access to customer payment accounts. These will be known as account information services providers, or AISPs. Access to a customer’s account will need to be provided to the AISP through an application program interface, or API, which should allow quick and easy, yet secure, access to the underlying data in the accounts. From a customer’s perspective, this means that AISPs can provide an aggregated view of all of a customer’s bank accounts.
Certain regulated providers will also be able to initiate payments on their customer’s request, replacing what has traditionally been a service only a bank could provide.
Such providers will be known as payment initiation service providers, or PISPs. A payment initiation service is an online facility which accesses a user’s payment account to initiate the transfer of funds on their behalf with the user’s consent and authentication.
Application in the alternative finance market?
By using APIs and the services of AISPs, alternative finance providers will be able to access detailed financial data of potential and current customers from their banks. One would assume that, with appropriate consent, a lender could access not only the business account of the corporate they are lending to, but also the personal accounts of the directors. This should have a significant impact on the credit process, as it will not only speed up the rate at which credit decisions can be made, but it will also verify historic information provided by the customer. Years of bank transaction data will be available to crunch which will allow new credit models to be built. Credit models will now be able to access specific data rather than relying on forecasts and projections.
Of course, the consent of the customer will be required for all of this. But would you lend to a customer who denied you access? What possible reason could they have to do so, unless they have something to hide?
It’s also worth considering the use of PISPs to provide additional functionality to your operations. Perhaps your customer will give you write access to their current account so you can dynamically sweep excess balances to pay down a facility. Under PSD2, this shouldn’t require a financier to be named on the bank mandate to effect such a transfer.
One thing is for sure – the use of technology to have constant read and write access to an account will provide greater oversight of a customer’s business and operations, and will cut down on the administrative load currently associated with running an ID facility.
With great power comes great responsibility
As I’ve mentioned in previous articles, when you are handling client data, you need to be mindful of your responsibilities under the new General Data Protection Regulation. PSD2, Open Banking and GDPR all go hand-in-hand, and a non-bank lender should ensure that it has adequate safeguarding procedures in place to protect any personal data obtained on behalf of a customer.
Of course, it follows – in theory at least – that better data should mean better quality loans and lower default rates. Volumes should also increase, benefiting UK SMEs and the wider economy. It is hoped that all the major banks play ball and don’t make access to open banking an administrative headache; a danger if the banks think that alternative finance providers are using open banking to eat their lunch…
Jonathan’s article is in the January 2018 edition of Business-Money magazine.