Currently, the European consumer finance sector is rumbling. Bureaucrats are stamping documents, bankers are frustrated like never before, lawyers are trying to figure out how things will work, programmers are working tirelessly while FinTech startups are going wild. What’s happening?

No, it doesn’t seem to be another financial crisis — although you can never be sure about those. And no, to the disappointment of millions of fans on the continent it’s not cryptocurrencies — they have much ground to cover, but their turn will come eventually.

The cause of all this immense commotion is encoded in several abbreviations — PSD2, AISP and PISP. For an ordinary European these mean nothing and no reason to put much effort in understanding them. But if you’re into FinTech, for you these letters and the number “2” hold the keys to the future of European consumer finance.

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Demystifying the abbreviation

PSD2 stands for “Revised Payment Service Directive”. The first directive was passed in 2007, and this is the second — revised and upgraded — version. That’s why the number “2” is at the end.

Also known by the name Directive (EU) 2015/2366, PSD2 is an international legal act that was proposed by the European Commission and adopted by the European Parliament in 2015. It directly affects countries that belong to the European Union or the European Economic Area, although its influence will be felt worldwide. PSD2 is already in effect since January 13th, 2018 and will come into full force in national laws of EU member states until the end of this year.

Ok, so what does it do? Well, it’s a Directive — it directs.

PSD2 is simple in principle — it provides a set of rules and regulations on how to do payment services. It’s like a guidebook for national regulators and finance-related companies, one that everyone needs to follow.

The grand aim of PSD2 is to help build a single consumer finance market throughout Europe. This means everyone — from traditional banks down to innovative payment service providers — are beginning to compete for customers on an expanded and open European market, spurring innovations and driving efficiency in the process.

However, beyond the stated grandiosities PSD2 has many wide-reaching effects that cut deep into the status quo of the current consumer finance sector.

The great decoupling

For several centuries banks have been completely dominating the consumer finance sector. Consumer banking use to function on an all-or-nothing basis — either you use the services and tools that the bank provides you, or you use none of it. For example, you usually couldn’t hold your money in an account of one bank but use the financial management tools of another bank. It’s a single package, no mixing and matching allowed.

All this up until PSD2 came into the scene. What PSD2 causes is a great decoupling of the two main services of traditional banking — personal accounts and account management. They are no longer artificially tied together and for the first time real choices lay at the feet of the consumer. Want to hold your funds in a highly reliable bank, but monitor the balance through a simple and convenient tool? How about several bank accounts connected to a single payment app? And what do you think about several cost-efficient accounts in different countries and banks, holding funds in different currencies and linking all of this together into a cutting-edge third-party mobile financial management app? A handful to read and quite questionable if you might ever need this. But all of the three mentioned scenarios become available thanks to PSD2 and decentralization of banking services.

How are banks reacting to the great shifts caused by PSD2? Some are still slumbering and constantly expressing dissatisfaction about the loss of domineering positions. Meanwhile, others are fully embracing the new paradigm and are looking at PSD2 not as a challenge but as a unique opportunity. Whatever strategies banks do adopt — all of them will be required to be fully PSD2 compliant until the end of this year.

PSD2 will definitely cause rearrangements in the consumer finance sector. While well established and high trust names will likely survive and thrive, many will be faced with challenges — in a rather short period until 2020 around 9 percent of retail payments revenues are predicted to be lost to PISPs (more on them later).

Consumer control

Despite the many critiques one might have at the European Commission, over the years this institution has held a steady course in promoting consumer rights. PSD2 is just one of the many initiatives and legal acts in this direction and certainly not the last one.

Under PSD2, consumers are regaining the right to their own financial data. Sure, even before you could view the financial report on your bank account balance. You could copy it and perform some rather simple data analysis operations, but not much beyond that. However, in the digital age it’s not just a question about having plain access, but a question about the efficiency of access.

If a consumer cannot easily share personal financial data with a preferred third-party service provider, then this situation causes a host of negative effects — restriction of consumer freedom, reduced innovation rates and suppression of market competitiveness, just to name a few. Current digital technologies can perform wonders, but no digital wonder can work without efficiently accessible data.

What PSD2 is saying to banks and similar institutions boils down to this — you hold personal customer data, so be sure to provide the necessary technical means for your customers to use this data efficiently and share it in the way they see fit.

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Springboard for innovations

By now it should be quite obvious, that decentralization of banking services and increases in consumer choices are opening up many possibilities for various FinTech startups. For them, PSD2 outlines two new financial service provider roles — Account Information Services and Payment Initiation Services.

Account Information Service Providers (AISPs)

AISPs are service providers that have authorization to access information of customer payment accounts, as long as the owner of the account grants clear consent. These can be payment accounts in banks or in other service providers.

All banks will be required to provide access for all authorized AISPs to their customer account data through APIs and share data such as account balance or transaction history. Using it, AISPs will be able to provide their customers with analysis, insights and suggestions on their financial behaviour. Furthermore, AISPs will be able to aggregate data about separate accounts from several different service providers and present the information in a consolidated way for the account owner. Through just one platform, consumers will be able to conveniently view all their financial data in one place, without the need to spend hours sifting through outdated pages of different service providers.

Payment Initiation Service Providers (PISPs)

PISPs function in a very similar way as AISPs but have one additional distinctive feature — PISPs will be able to initiate payments on behalf of the customers. Yes, you read that right — initiating transfers of funds from your bank account and sending them directly to merchants or companies providing you services.

Sounds scary to give so much control to some third-party service provider? Well if you’re a credit/debit card user, you’re basically already doing that — you allow Visa, MasterCard or similar companies to initiate financial operations on your behalf. Sure, they are well tested and quite reliable. But eventually with robust regulations and high-security requirements in place, there’s no real reason why innovative PISP startups wouldn’t be able to challenge some of the more established market players — new market opportunities are opening up and the competitive ground has been somewhat equalized by PSD2.

Needless to say, all of the aforementioned operations that AISPs and PISPs will be able to perform will require having robust security measures in place. All actions performed by AISPs or PISPs will require full consent and authentication by the account owner, while all transfers initiated by PISPs will go directly to the end destination without the service provider ever touching them.

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( PSD2 + Crypto ) ^ AI

PSD2 is undoubtedly one of the biggest forces currently shaping FinTech in Europe. And probably for many of you reading this the obvious question arises — can the potential of PSD2 be paired with innovative technologies such as cryptocurrencies and Artificial Intelligence? Here at ORCA Alliance we are asking not if it can be done, but why shouldn’t it be done?

The cryptocurrency sector is still very young, yet in some areas it already operates on similar principles as espoused in PSD2. Most crypto exchanges already provide quite advanced APIs for integrating their services with third-party applications. Connecting different crypto wallets into a single platform and managing them without sharing your personal keys or passwords is also already possible. And when both of these are done it’s quite easy to show your crypto portfolio right next to your PSD2 enabled bank account balance. Just a few simple examples of the things we are building into our ORCA Platform.

And what about AI? With so many different data points becoming accessible (with the full knowledge and consent of the customer, of course), AI applications become not just additional features, but amplifiers of potential. For example, in ORCA users will be able to receive personalized AI suggestions on which service providers, accounts and currencies can be utilized to deliver the desired outcome with the best price and quality.

Thanks to innovative legislation such as PSD2, ORCA will be able to integrate bank accounts with cryptocurrency portfolios and AI infused analytics — all of the three on a single, user-friendly platform. The task of creating the most advanced and extensive financial management platform up to date is a tall one, but with FinTech currently booming in Europe the opportunity has never been better before.