Nadja van der Veer, PaymentCounsel: “The intentions behind PSD2 are good, but they have backfired a little”
EPS Speaker Spotlight
Traditional regulation cannot be truly effective when criminal tactics and technology are constantly evolving. What are the regulatory hurdles in today’s payments world? How can the market develop further market towards Open Banking? Should we already expect a PSD3?
Just a few weeks before our EPS event, we seized the opportunity to invite Nadja van der Veer, Payments Lawyer & Co-Founder of PaymentCounsel and one of our key speakers this year, to share her views on current industry developments.
PSD2 has opened up the EU financial market to new players building on, and developing further, the banking system. Has PSD2 reached its goals?
The intentions behind PSD2 are good, but they have backfired a little in the way it has been executed. For example, the detailed EBA guidelines around how TPPs obtain a license are very strict – it was actually easier under PSD1 to get a full license than it is for a TPP license or registration under PSD2. Furthermore, in certain countries there are additional burdens for TPPs. For instance, in the Netherlands, they also need to perform CDD checks and transaction monitoring. You have to then question: what is the incentive for new players to enter the market?
PSPs and acquirers are now confronted with new regulatory bodies that were historically focused on banks, like the EBA and ESAs. The impact of their involvement is tremendous from the perspective of payment providers who have only become regulated in the last 10 years, as opposed to banks who have an intrenched compliance mindset and are far more accustomed to heavy regulatory burdens.
The ‘big idea’ was that PSD2 would create a level playing field and stimulate competition. In fact, the complex requirements under which it has been shaped, are holding back small-sized companies and creating a huge amount of additional compliance burden for everyone. While it does, to some extent, open up the market to companies that were not focused on financial services before, it does so in a limited and costly way.
Ultimately, PSD2 was contemplated in 2013 and now nearly 6 years later it is finally in effect. The world has moved on a good deal in that time, so it stands to reason that it doesn’t quite serve to meet today’s requirements and that more needs to be done.
They say regulation is sometimes a hurdle to innovation, say for example in broaching topics like cryptocurrencies. How should regulators tackle such innovations with potential to even change the traditional financial paradigm, but with unforeseen consequences?
This is an interesting area – because there are many points of view and different facets to address. I am currently drafting a blog on my view around this. I believe that much of how you view the interaction of regulation and innovation depends on the viewpoint you choose to take.
It is important to encourage and support innovation, but trying to do this through regulation is not an effective tactic. As I’ve already mentioned, regulation can often create so many hurdles that it is hard for businesses to simultaneously put their efforts into innovation.
In the case of PSD2, there is certainly a degree of overkill caused by the EBA mandates and ESAs guidelines taking a rule-based approach on addressing particular topics. However, there is also a huge opportunity for payment providers to innovate off the back of the systems put in place to address PSD2 and it does also present a number of broader innovation opportunities which undoubtedly will cause a big shift in the payments landscape. For example:
- The regulation sets possibilities for non-card based payment schemes and the issuance of cards for accounts that are not held by the card issuer.
- PSD2 opens up the market for non-traditional payment companies but provides less disruption opportunity for existing players.
- The APIs built for XS2A can serve as a means to provide a more enhanced, personalized customer experience to consumers and an opportunity for traditional financial services companies to transform their customer relationships.
Ultimately, regulation does create hurdles, but the industry must also look to how best to collaborate and leverage the opportunities that are still there for the taking.
In the longer term, there does clearly need to be more consideration from the regulators about how to empower businesses to deliver innovation – and that will not be achieved by creating further regulatory hoops for them to jump through.
How can the upcoming 5th AML Directive improve financial companies’ fight against money laundering, as opposed to the current 4th Directive?
When the 4th Directive was being drafted, there was already talk of the 5th version. While this is an effort to keep up with changes in cybercrime, I don’t believe further regulatory updates are going to be effective. There is something tremendously wrong with the efforts to combat money laundering if less than 1 percent of global financial crime is caught. The amounts involved are staggering and ever increasing. Technology, ecommerce and globalisation are also benefiting the criminals, who are getting more and more sophisticated. Something else needs to change.
My article in the forthcoming PayTech ebook explains my view on this further. Essentially, I think that the whole AML framework needs a redesign. Traditional regulation cannot be truly effective when the criminal tactics and technology are constantly evolving. A more modern, dynamic approach is needed, which may not involve actual regulation, but instead a combination of cultural and technology change.
Until that happens, we will always be playing catch-up.
How do you see the EU financial services landscape evolving in the near future?
There is likely to continue to be a huge amount of change, with many payments players shifting positions as they try to find their competitive niche post-PSD2. One thing I would expect (and hope) to see is the market embracing XS2A under PSD2 and building on the innovation opportunities this new era can offer.
The question is often raised about whether we can expect a PSD3. While I think it is to be expected, I do have hope that the market will develop further towards Open Banking without the need for more regulation. Because of the time it takes for regulation to be drafted and to take effect, it is not the key to further innovation and development of the payments landscape. Some of the more agile and forward-thinking players already appreciate this and are planning their own innovation roadmaps, which is encouraging.
Another issue I have previously raised, is that current EU regulation does not provide sufficient guidance on what constitutes a payment account. Currently what you see via an API depends on which country you are in, because of local interpretations. We need a much more standardised view of what constitutes an account and more industry collaboration to help create this standard.
Ultimately as a consumer, I would like to get one app that shows me my current accounts, credit card balances, savings, pension savings, mortgage, insurances etc – all my financial information in one centralised place. This will be possible in the future, but it might not be short term. We have already seen already how much commotion PSD2 has caused. But once we are all accustomed to it, the path to real Open Banking and beyond will be in reach.
At EPS 2019, Nadja will be joining The Brave New Payments World – A Regulatory Challenge panel debate on Day 1.
Register today and join the EPS sessions for unique insights and latest developments from payment industry experts and thought leaders who will be sharing their knowledge and payment experiences through various insightful presentations and networking discussions, re-thinking transactions.