Impact of PSD2 on The Payment Services Market – General Objectives and Evidence from Polish and UK Legal Systems

Internet and mobile payments changed the way people are paying for goods and services significantly.

Stergios Leventis, Panagiotis Dimitropoulos and Stephen Owusu-Ansah, ‘Corporate Governance and Accounting Conservatism: Evidence from the Banking Industry’ (2013) 21 Corporate Governance: An International Review 264.

Worldwide payment changes followed different patterns. This depended on the country, its development and fiscal politics.

Tomi Dahlberg and Anssi Öörni, ‘Understanding Changes in Consumer Payment Habits - Do Mobile Payments and Electronic Invoices Attract Consumers?’ (40th Annual Hawaii International Conference on System Sciences (HICSS’07), Waikoloa, January 2007).

The subsequent years brought a short relief for payment services in the European Single Market,

Ruth Wandhöfer, EU Payments Integration. The Tale of SEPA, PSD and Other Milestones Along the Road (Palgrave Macmillan 2010) 77.

The article's objective is to explore the modern area of payment services in Europe and how it has been impacted by PSD2. For this purpose, the comparative research of the Directive implementation and its consequences was carried out. Section 1 explores reasoning and aims behind revising the Payment Services Directive. In Section 2, the overview of the implementation procedure can be found, and Section 3 indicates the most important changes introduced by the Directive. Section 4 analyses the legislations outcomes and reviews the payment services markets in the UK and Poland, comparing the effects with the assumptions from Section 2 and methods described in Section 3. Conclusions are included in the Summary.

The analysis has been conducted to scrutinize what PSD2 does change and whether applied changes were significant or irrelevant. The hypothesis of the article is that PSD2, as a complex directive, has impacted the market significantly and it should be visible in the structure of payment services market participants. The market should be joined by new entrants including FinTech companies, implying more intense competition. The conclusions will assess the accuracy of the hypothesis. The paper should also contribute to legal research on the use of new technologies in payment services.

The existing legal regulations were becoming out-of-date when compared to the rapidly growing market of financial services and the European Commission (further also as ‘EC’) had to react. Otherwise, it would result in a gap between acts covering the scope of the payments market and new, technology-driven ideas introduced to the market.

Recital (7) notes: ‘The review of the Union legal framework on payment services (…) have shown that developments have given rise to significant challenges from a regulatory perspective’.

The research made by the EC (targeted at introducing Single European Payment Area – ‘SEPA’) revealed difficulties arising from insufficiently integrated card or mobile and internet payments. The primary issue exposed was the lack of law relevant to the new techniques in electronic payment services.

The reasons were indicated in Recital (4) of PSD2, where authors stated that many innovative payment services products or services did not fall into the scope of the previous directive.

PSD2 had to open payment services to a broader group of service providers, specifically to those excluded from the bank-privileged system (laws at that time tended to limit entrepreneurial activity of non-bank entities, favouring banks at the same time).

Alexander Kern, Principles of Banking Regulation (Cambridge University Press 2019) 333.

The aim set by the European Commission was meant to be achieved on two levels. First of all, by introducing new legal entities that are well adjusted to the developing market of payment services. A service provider permitted to the activity available only for banks earlier. Secondly, by putting an obligation on banks to cooperate with recognized third parties on terms of the Directive.

PSD2, among many other solutions, introduced two legal entities dedicated to the companies working on processing payments or other software-related services in the area of payment services, like setting money aside. The EU Commission wanted to provide IT companies with all the regulatory tools necessary to enter the payment services market. To do so, under the category of third-party providers (hereinafter: TPP),

It's the common acronym for those entities, which provide services as third parties under the scope of PSD2.

The idea of introducing TPP came with the intention of creating an empty space in the payment services market and enabling new companies to fill it. TPP were modelled as somewhat similar to intermediaries between banks and end-users.

Yves Eonnet and Herve Manceron, Fintech: The Banks Strike Back (Dunod 2018) 74.

These companies under a PSD2 might provide two types of services, classified on the interference depth. The first service is called AIS (Account Information Service) and enables providers that are allowed to participate in the market (AISP) to utilize consumers’ bank account information to perform their services. AISPs are able to retrieve information from the consumer's bank account about ordered and pending payments or account balance. The same applies if the customer has multiple bank accounts. Therefore, a provider is able to give a client consolidated data or render advisory services. The information, as a bank statement, might also be proof of ordered payments. Many companies see it as an opportunity to conduct their businesses based on a possibility of using the information of a customer's bank account.

E.g. Mint.com used as an example in Alan McIntyre and Andrew McFarlane, ‘The Brave New World of Open Banking’ (Accenture, 2018) 8 <https://www.accenture.com/_acnmedia/pdf-77/accenture-brave-new-world-open-banking.pdf> accessed 17 December 2020. Although this view is not shared by everyone. See: Alan Brener ‘Payment Service Directive II and Its Implications’ in Theo Lynn and others (eds), Disrupting Finance. FinTech and Strategy in the 21^st Century (Palgrave Macmillan 2019) 117.

The second service is more intrusive in bank independence and autonomy. PIS (Payment Initiation Service) allows customers to pay directly through a TPP from a bank account. A client is able to process a payment using software external to the one offered by the bank, if he granted it an explicit consent and issued a process. The service accesses a payer's account and after authorization initiates the transfer. PIS ought to become an alternative to paying online with a credit or debit card.

Michał Nowakowski, ‘Dostawca usługi inicjowania płatności – wymogi regulacyjne w świetle ustawy o usługach płatniczych i Rozporządzenia 2018/389’ (LEX 2019).

Both of these services can be provided only by the authorized entities (TPP – as above mentioned PISPs and AISPs). Once granted an authorization or entered into the register, a provider is able to connect with the banks. The possibility of accessing relevant information from the bank to provide a service is enabled through an API (Application Programming Interface). API is a set of rules in computer programming indicating how the programs communicate with each other, simplifying coding for programmers developing software.

Sascha Preibisch, API development. A Practical Guide for Business Implementation Success (Richmond 2018) 2.

For the purpose of creating a real opportunity for banks to cooperate with FinTech companies on the PSD2 legal ground, banks are obliged to share their API with the authorized TPP. An API should be programmed to ensure access to necessary data for payments. Consequently, a service provider is able to execute a transfer or provide a customer with the information he wanted to receive that was gathered on the bank account. In this way, TPPs are operating on the PSD2 legal ground.

The establishment of PSD2 was divided into two steps, each with its own period before it could be made fully exercised. The Directive entered into force on 12 January 2016, but its rules became applicable from 13 January 2018 for all correspondent states.

PSD2 was addressed not only to EU Member States but also to three Member States of European Economic Area (Iceland, Norway and Liechtenstein), enhancing its scope. See European Banking Federation, ‘Guidance for implementation of revised Payment Services Directive’ 8 (20 December 2019) <https://www.ebf.eu/wp-content/uploads/2019/12/EBF-PSD2-guidance-Final-December-2019.pdf> accessed 17 December 2020.

During the first step, the EC shaped new legal entities available to act under the scope of PSD2, under the category of payment services providers. It enabled all concerned to fit their services into the frames of newly enacted law under several different legal forms. A new legal framework not only provided rules adjusted to the market needs (which were also a factor in opening banking in Eastern Asia and Australia)

Countries like Japan, Singapore and Hong Kong had started with developing similar solutions within private sector. It was named market-driven approach. On the other hand, Australia introduced more specific regulation. For more information, see Basel Committee on Banking Supervision, Report on open banking and application programming interfaces (19 November 2019) <https://www.bis.org/bcbs/publ/d486.htm> accessed 17 December 2020.

PSD2 implementation into UK domestic law was done through the 2017 Payment Services Regulations

The Payment Services Regulations 2017, SI 2017/752.

In contrast to the UK, PSD2 implementation to Polish law was postponed. The Directive draft legal act was published in the Government Legislation Centre (Rządowe Centrum Legislacji) in May 2017,

Government Legislation Centre (Rządowe Centrum Legislacji), ‘Projekt ustawy o zmianie ustawy o usługach płatniczych oraz niektórych innych ustaw’ (Legislative procedure, 23 January 2018) <https://legislacja.rcl.gov.pl/projekt/12298151> accessed 17 December 2020.

While a second transitional period was fully dependent on the EU authorities’ introduction of the supplementary legislation, the first one occurred because of a delay in implementation at the governmental level. With the moment of adoption changes in the parliamentary act, the main process of transition was over,

Marcin Olechowski, Wojciech Iwański, ‘Poland: open banking when will it start?’, (International Financial Law Review, 25 February 2019), <https://www.iflr.com/article/b1lmxcd7qpmbsq/poland-open-banking-when-will-it-start> accessed 17 December 2020.

When the PSD2 was announced, as an upcoming legal act addressed to all Member States of the EU and three more EEA countries, it was seen as a game-changer. Many journalists in the financial newspapers predicted a revolution in the payment services market.

See The Economist, ‘Open plan’ (12 January 2019) 60.

The repeal of the first Payment Service Directive and introduction of PSD2 tried to alter the current payment services market by providing a fresh regulatory framework corresponding to the market needs. The legislation has brought in tools allowing companies without a banking license to provide payment services if properly permitted by the domestic supervisory authority. It also made a change in terms of unifying payment services across the EEA through the rules transposed to the domestic legal systems. But was the market revolutionized?

The research reveals two things. In terms of numbers, the payment services market did not change considerably. On the one hand, only some companies operating within the payment services market used legal solutions to assess the new possibilities, the vast majority continued to run as they used to before PSD2 implementation. The EC indicated an increase in competition as one of the PSD2 objectives. While in Poland only a few non-bank companies were granted either AISP or PISP status, in the UK the number of such companies was much higher, with a higher share of non-bank companies, although given the number of firms in the sector it is also only small percentage. This objective has to be assessed only partially positively.

On the other hand, introduced changes have covered the entire payment services market with the complex regulation. Despite delayed implementation in a few countries like Poland, all correspondent states eventually implemented PSD2 into domestic law orders.

The Directive made a step forward towards a digitalized payment services market. The legislation in force is definitely more relevant to the existing market. By means like SCA, the general level of security in electronic payments has also increased. All the goals seem to be achieved except for the principal one, banks seem to be at the very place they were before the PSD2 and minor competitors have only slightly entered the market.