The interconnectedness of instant payments and PSD2

Regulation, fast-evolving technology, increasingly demanding customers and a vibrant competitive landscape rich in innovative new entrants, continue to be powerful regeneration drivers for the payments business. In this blog, I aim to focus on two major developments in particular that are currently influencing the way banks and financial institutions must respond.  One is the unstoppable rise of instant payments and the other, an increasing transition to openness and open banking underpinned by API technologies.

Whereas instant payments initiatives are on the whole driven by customer demand with progress being led by country specific projects, the revised Payment Services Directive (PSD2) is acting as the major driver for the move to open banking and openness - with this being more widely accepted as the way forward for the payments industry.  Designed to foster innovation, enable the creation of new services, yet protect customers further, PSD2 has an important regulatory role to play.  Similarly, so does instant payments and the benefits such global initiatives will deliver to end-users.  However, both create a host of technology and operational challenges.  To ensure they can be tackled effectively and efficiently and in a manner that is future-proofed, I’d suggest that  banks’ approach their RTP/instant and PSD2  strategies in parallel.  This will allow IT and operational teams  to consider new developments in a coherent or interlinked way.

On the basis that instant provides the ‘rails’ upon which new payment initiative services will run and PDS2 provides the regulatory framework for financial services firms to deliver new and innovative services to market, in my view both initiatives should be strategically and wholly interconnected.

Indeed, Yves Mersch, Member of the Executive Board of the ECB, acknowledged this when he spoke in May 2017 at the Deutsche Bundesbank’s payment and securities settlement symposium in Frankfurt.

“There is a certain demand for instant payment solutions by end users, and the industry has to deliver solutions to support innovation. Instant payments are coming and will most likely be the preferred payment method for the new generation,” he said. Mersch added, however, that “in order to thrive, innovative financial services need a clear legal and regulatory framework” – and PSD2 lays “the groundwork for this.”  Overall, he said, “it is essential that we respond to the increased digitalisation of our society, delivering innovative and efficient services to our economy”. Within this mission, instant payments and moves to both foster and regulate innovative new payment services are important, and interconnected strands of activity. In other words, real-time payments will underpin the new API economy.

With the acknowledgment that the combination of open banking and instant payments will likely result in new solutions to benefit customers and merchants alike, it remains to be seen however just how banks will master the twin strands of open and instant.