The adoption rate of the European FinTech sector is just around the world average of 33% and it is estimated that it will continue to rise in the coming years hitting the projected 52% global average. A report commissioned by the European Parliament enumerates possible competition risks in the FinTech industry. In the study, the FinTech industry was divided into 7 groups. One group, payment services and transfers, is being watched carefully to prevent future problems that would create unfair competition, discourage innovation and shortchange consumers.
Authorities Pay Attention to Payment Services
Payment services are important to economies. It allows governments to keep control and order while ensuring that trading activities are legal. In addition, a strong and transparent payments system promotes trust and confidence maintaining stability. For example, e-commerce transactions are expected to grow in and out of the EU. Payment services and transfers are instrumental to implement trading or the act of buying & selling. It is important, therefore, to ensure that there is no monopoly in the provision of these services. Enshrined in the Payment Services Directive (PSD) of the EU, PSD1 provides a legal basis for an EU single market for payments making cross-border financial transactions easy, efficient and transparent.
A revised PSD2 widens the scope of services and players covered. It also aims to make payments safer and secure while protecting consumer rights. In effect, the PSD2 aspires to create an environment that is conducive to both existing and new financial service providers.
Benefits of the PSD2
The new rules under the PSD will hopefully bring in more players in the electronic payments market encouraged by certainty provided in the legal framework. Consumers will also have a wider range of options in terms of type of services and providers. This will, in turn, stimulate competition among the actors in the market. To demonstrate, in the last years, there were new types of online payments that were developed offering the customers the ability to pay for their purchases instantly without the need for a credit card.
These ‘payment initiation services’ (PIS) were, in the past, unregulated at the EU level. With the PSD2, PIS will be covered as well, that will address possible issues that will arise with respect to confidentiality, security or liability. Moreover, regulatory measures will enhance and protect consumer’s rights. They will also shield customers from fraud and payment abuses. Lastly, PSD2 will heighten payment security. All financial service providers must prove that they have instituted security and safety measures to protect customers when doing online payments.
How FinTech Services May Be Affected by PSD2 – Data Control
FinTech technology promotes economies of scale by providing efficient payment systems and services. Price, speed and security make a difference in holding on to clients or attracting new ones. FinTech also promotes the inclusion of customers who have no or limited access to financial services.
Unfortunately, Article 98 under the PSD2, mandating the European Bank Authority (EBA) to develop the Regulatory Technical Standards (RTS) on sound customer authentication, is a ground for disagreement. A Manifesto signed by 74 FinTech companies claimed that the RTS banned ‘a secure proven technology’ for it does not allow screen scraping or Direct Access using the bank’s online banking interface. The signatories of the Manifesto argued that banks will have ‘technological control’ over Europe’s FinTech industry.
Instead of encouraging innovation, encouraging competition and providing more choices for the consumer, it will be counterproductive to the objectives of the PSD2. Since then, the RTS was amended to include contingency/back-up measures for a ‘dedicated interface’ using the existing interface that banks operate on for their customers. This point just shows the existing misgivings between banks and FinTech services and the importance of access to clients’ data to promote competition.
The report merely lists the possible competition risks that the European FinTech industry might encounter specifically in the payment services and transfers category. To date, most have not occurred or have not been spotted. It identified though that customer data control is a risk that can reduce competition in the provision of payment services.