3VB Commercial Awareness Essay Competition Runner up - PSD II

Choose one piece of EU legislation (proposed or enacted). Discuss the benefits of a similar provision being included in or excluded from the EU Withdrawal Act and what this will mean for UK business and commerce post-Brexit.

The Payment and Services Directive 2 (PSD 2) was adopted by the European Parliament and Council on 25th November 2015. The United Kingdom incorporated the Directive by enacting the Payments and Services Regulations 2017 in July 2017. The PSD 2 comes in response to the increase in internet and mobile payments and repeals the previous Payments and Services Directive from 2007. The primary focus of the new Directive is ensuring that banks share consumer data they possess, with authorized third parties in a secure manner. This essay simultaneously analyzes two key issues. Firstly, it considers how PSD 2 will increase competition and consumer protection in the financial sector. Secondly, it assesses the impact it has on businesses and firms and why the UK government should not repeal this piece of legislation under the European Union (Withdrawal) Act 2018.

The first key impact of the PSD 2 is that it will increase competition and innovation in the financial sector while providing a basic framework of regulatory oversight. It does this by, upon consent of a customer, requiring banks to provide third parties access to that customer’s account data. It recognizes two types of such third parties - Payment Initiation Service Providers (PISPs) and Account Information Service Providers (AISPs). PISPs make payments on behalf of a customer and AISPs are responsible for analyzing customer spending behavior and aggregating this information1. Examples of the two would be budgeting apps like Mint or peer – to – peer payment systems like Trustly. The access to consumer data has been hailed as a revolutionary step. This is because it would allow companies in the growing FinTech industry to gain insight into consumer spending habits and how they behave. They will be able to innovate and generate new payment services and apps that will compete with services traditionally provided by big banks. The biggest impact will be felt by the incumbent banks. Currently, up to 80% of bank customers in the UK are serviced by only 5 banks2 and new banks have faced a tough time competing and gaining a foothold in the market. The PSD 2 will allow for more competition in the financial services sector between banks and start ups. As a result, not only will consumers have access to new products and services, the increase in supply will lead to lower and more efficient prices. The increased competition will quell the complacency that has plagued the banking sector in the UK since 2008 and the mergers of various banks. The market is already starting to diversify as seen with the entry of mobile only online banks like Monzo and automated savings apps like Chip. Banks have started to acclimatize and respond; IMG recently introduced its own budgeting app called Yolt and the HSBC Beta app has been sent to upto 10,000 customers. Since competition between firms in any market is vital to ensuring sustained growth and efficient allocation of resources, the PSD 2 would secure London’s position as a financial centre.

The second key impact of the PSD 2 is the improved levels of consumer protection afforded to banking customers. This is important given the rising trend of online and mobile payments. It is estimated that up to 20% of online transactions in 2018 will have been made on a mobile device3. The increase in online interactions also brings with it the risk of consumers being defrauded or becoming a victim of identity theft. The prime focus of the PSD 2 when it comes to consumer protection is on data security and defending against fraud. Firms will in turn have to increase spending in making sure that consumers are duly protected. For example, since the PSD 2 requires stronger authentication measures to ensure that access to consumer data is consensual, banks and firms will have to put in place increased encryption measures in order to comply. While it could be argued that such regulatory hurdles may come in the way of innovation, they can be justified given the wide informational asymmetry that exists between consumers and firms. Moreover, given the still-developing nature of the industry, it would be prudent for consumers to, initially, be protected. As the industry grows and market awareness increases, these measures could be restrained and allow consumers to be responsible for their own decisions.

A key argument against implementing the PSD 2 is asking whether or not we have a secure enough understanding of the technology in order to effectively legislate around it? Do customers truly understand what they consent to when asked by their banks on whether or not they would like to provide access to their data? Moreover, the complex technological aspect of the FinTech industry requires more time for regulators, like the Financial Conduct Authority, to truly grapple with the nature of the services being provided and how firms interact with customer before enacting and enforcing regulations. The FCA recently inaugurated the Regulatory Sandbox - a programme allowing firms to check if they meet regulations before introducing their product/service to the market4. However, there is a long way to go as seen by suspicions that digital bank Revolut may be being used for money laundering5.

Nevertheless, the PSD 2 lays down a base that can be used in the future to keep up with growing trend towards Open Banking and advances in the FinTech industry. Furthermore, repealing the PSD 2 could possibly alienate the UK from European financial service providers. This is because they would come under a “double burden” – they would have to meet EU standards and separate UK regulations as well. Given the current tumultuous nature of the Brexit process and withdrawal proceedings, the UK government is incentivized to ensure uniformity and stability across the regulations of the financial sector. This is because it assures firms that they can continue to carry out business in a market that is legally clear and does not diverge from European regulatory requirements.

1 Payment Services Directive II (PSD 2), https://www.business.hsbc.com/hsbc-in-europe/payment-services-directive-ii-psd2 accessed 19 December 2018

2 Rowland Manthorpe, 'What is Open Banking and PSD2? WIRED Explains' (WIRED Magainze 17 April, 2018) <https://www.wired.co.uk/article/open-banking-cma-psd2-explained> accessed 19 December 2018

3 Payment Services Directive II (PSD 2), https://www.business.hsbc.com/hsbc-in-europe/payment-services-directive-ii-psd2 accessed 19 December 2018

4 Regulatory Sandbox, https://www.fca.org.uk/firms/regulatory-sandbox accessed 19 December 2018

5 Martin Arnold, 'Revolut reports suspected money laundering on its system' (Financial Times 17 July, 2018) < https://www.ft.com/content/6805af9a-8925-11e8-bf9e-8771d5404543> accessed 19 December 2018