SMEs, AI and PSD3 – Everything You Need To Know About What’s Coming in 2025

This past year will hopefully go down as a transformative year for the UK’s economy in general and its FinTech industry in particular. The big news was that after 14 years we have a new government, but the small print was that this new government wouldn’t be doing much to distinguish itself from its predecessors. While we didn’t see a return to pre-pandemic exuberance in terms of investment, there was a definite improvement over previous years.  

Of course, at this time of year everybody wants to know what’s coming next. Below are my predictions of where I see the winds blowing, presented as just that – my predictions and suggestions. The only thing that we really know is that anything can and will happen. Let’s dive in. 

The ‘real’ year of the SME 

We were assured 2024 was going be the Year of the SME – did it feel that way? We had a budget that was lacklustre at best and actively hostile to small businesses at worst with little else that directly addressed the concerns of their owners. Inflation and energy prices remained high and ordinary people, whose spending is the lifeblood of SMEs, were cautious about the economy. The economic results speak for themselves: growth so low that it may as well be a rounding error, a weak pound and declining consumer confidence (though it is far better than it was in 2022.)  

We need 2025 to be the real year of the SME, and unfortunately, we can’t solely rely on the government to provide it to us. SMEs and the companies who work with them are going to have to start advocating for themselves and building the systems that can turn their fortunes around. Payments systems are a part of this – being able to keep more of each transaction and offer far more options for consumers. Being able to offer financing on orders, previously something only possible at larger stores, would be huge for many SMEs, and it’s something that could start the process of recovery for many companies. 

The AI backlash begins (kind of) 

AI has been the overwhelming press story of the past two years, with companies like Kraft Heinz, Coca Cola and McDonalds all beginning to use generative AI, with decidedly mixed results. The initial excitement has largely died down, and more people are asking what AI can really do beyond creating unsettling images. Goldman Sachs went from predicting that Generative AI could raise global GDP by 7% in April of 2024 to saying that it had ‘too much spend (for) too little benefit’ in June. A new study has shown that ‘When AI is mentioned, it tends to lower emotional trust, which in turn decreases purchase intentions’. Hallucinations have made one of its only business-focussed features, the ability to create summaries, no longer fit for task. The term ‘AI Slop’ has become a ubiquitous shorthand for the surreal, disturbing images and videos that are flooding social media.  

So, is there going to be an AI backlash? Not exactly – AI is used every time you make a payment, see an online ad or talk to a smart speaker – it is absolutely a part of our lives and definitely a part of the payments ecosystem. The issue is that a specific type of artificial intelligence (generative AI) has very limited applications and very few paths to profitability, either for the companies developing it or the companies using it. 

.Is AI here to stay? Absolutely. Will there be exciting, surprising and controversial developments in the near future? Definitely. But its groundbreaking, world changing development is yet to come.  

Open Banking 

Another year, another prediction about open banking. While open banking has been on the forefront of fintech conversation since 2018, I don’t think that it’s controversial to say that it hasn’t been as successful as its creators would have hoped. Many people either haven’t heard the term or have negative perceptions of it (‘I’m not going to open my bank account up to just anyone!’), but more importantly many people are using it without even knowing. A full half of open banking users shows that Open Banking is in fact quite popular – so long as you don’t call it Open Banking. 

It seems that while there is an appetite for the things that open banking can do, there is little appetite for the term itself. It might even be dissuading potential users from engaging in what should be a vibrant ecosystem of services. People don’t need another technology in their lives; they need solutions to real problems, and it seems that many are using open nanking as just that. 

What does this mean for the FinTech industry? It means that the general public don’t always get excited about the things we get excited about, and that’s okay. They don’t need to know that the app they use to apply for credit or manage their finances is part of a larger ecosystem of services created by the Payment Services Directive 2 regulatory framework, and we as an industry don’t need to spend time and funds promoting open banking as a concept, or even talking about it, when they can be promoting the individual services that open banking enables. 

We are not the USA 

One of the biggest stories of the previous months, the US election, has certainly generated its share of headlines and analysis, and the FinTech industry has joined the hype train. Frankly, a lot of what we’re seeing out of the US right now seems like it’ll be seriously watered down before they come into contact with reality: tariffs that would vastly increase consumer prices, a promise to reduce the size of the federal government that would leave millions jobless and constant reference to trendy topics like AI and cryptocurrency that may have little to no real world implications. 

What does this mean for us on this side of the Atlantic. Honestly, not much. Despite Brexit, the UK is always much closer to Europe in regulatory terms (as we’ll see from PSD3), so a flurry of red tape cutting in the US isn’t going to affect our own legislation. The UK’s economy is interlinked heavily with the US’s, that’s true, but not to the extent that major up or downswings will move our own economy too much. The only real problems – for SMEs at least – will come if Trump’s tariffs are enacted as he said they would be: 10% import tariffs on all foreign goods, including those from the UK would inevitably reduce them, but by how much we can’t tell.  

It's natural to be concerned about what a geopolitical six-hundred-pound gorilla like the US is doing, but we should be sober-minded about the level to which our economies are really intertwined – it’s likely the case that whatever happens there isn’t going to be the end of the world. 

PSD3 is coming 

Open Banking came out of PSD2, the result of an attempt to level the playing field between payment service providers by giving them access to account information. There is still plenty for the payment service regulators to do, especially when it comes to combatting fraud and expanding the capabilities of Open Banking, and PSD3 is going to arrive in 2026. With the final version of PSD3 expected by the end of 2024 or at most early 2025 we will have a more concrete vision of what to expect, but the core concepts are already being discussed. In a compliance sense, regulations and directives have key differences: a directive sets out a goal for EU member states to achieve whereas a regulation is binding. The UK agreed to be part of the original PSD1 and PSD2, but is under no obligation to adopt PSD3 – it’s likely that it will do so just to keep things simple when doing business in Europe at a time when Brexit has over-complicated it, but we don’t know if the UK will accept all, some or none of the directives.  

It is likely that PSD3 will be a continuation of PSD2 instead of a set of entirely new ideas, as PSD2 had been. There will likely be further streamlining of authentication for Open Banking, extended IBAN checks that will make credit transfers safer and a clearer framework for e-money. Ideally, fraud countermeasures will do something about APP fraud, which is a major cause of fraud in the UK and across Europe, but this may not fall into the remit of the directive.  

What we know for sure  

Of all the above only PSD3 is set in stone, and in the UK at least what it will mean will be up for grabs. In this environment the UK’s SMEs need all the help they can get, and that starts with a payments system customised to their needs. This is the crucial role that our industry plays and we need to do more than ever to equip businesses to ensure 2025 the best year yet.