At first glance, PSD 2 and MIFID 2 sound like two names of science fiction movies.
And somehow, you’re not that far off, because both of them aim to turn a heavy, retail sector into a light, digitalised cornerstone of the global economy.
Both directives follow right into the steps of EIDAS, the electronic signature regulation, and the feared GDPR (General Data Protection Regulation), aiming to bring a more digital common market and to help companies benefit from the digital economy. PSD2 stands for the Payment Services Directive 2 and MIFID stands for Markets in Financial Instruments Directive 2.
Both of them are on their second iteration. And both of them aim to digitalise the financial sector through a complex set of packaged laws that give more power to the citizen in the EU. (and the customer)
Let’s break them down into two (see where this is going?) to judge exactly what is this going to mean for digitalising the financial sector and where this will actually lead us in the next 5 years. Consider PSD2 as a sort of GDPR for finance – wide ranging, protecting consumers and encouraging a more transparent digital financial market.
2 by 2, we have PSD2, which offers the following:
- a EU-wide legal framework for the usage of payments, standardised and followed by every member state
- compared to the original directive (PSD1), the updated PSD2 focuses on protecting consumers especially within financial transactions; think here of open, mobile banking and increased safety for online transactions which have become the absolute norm today
- retail banks, fintech & other financial services operate now on an even playing field; finance is now considered one big block, rather than split into multiple parts that adhere to different directives -> PSD2 applies for everyone who does financial transactions
- increased security requirements (no more data leaks hopefully – but this also means much higher costs for banks, for security)
- innovation – probably the most significant aspect is this -> PSD2 opens up financial APIs to everyone interested in the financial sector, making a fintech startup all of a sudden much easier to develop
Plus, PSD2 is actively encouraging usage of blockchain. But that’s a different story.
So we’ve got PSD2. What about financial brother MIFID2?
- increased regulatory oversight for all types of trading
- shifting reliance from phone trading towards electronic devices, with all types of audit trails and logs (digitalisation)
- increased reliance on automated trading machines
- possibility of the usage of AI to determine trading patterns (side-effect)
Whilst not directly aimed at creating a digital market, MIFID 2 has wide-reaching impact on an industry that was dominated by ear-to-ear phone trading.
Now, 1 by 1 we now reach the overall impact. It’s all nice and great but…
…what does this team for digitalisation of banking / finance / fintech?
Well, quite a lot. We’re not going to move in 2 by 2 now, but more like 5 by 5 because fintech investments are expected to balloon in the next 5 years by a significant margin. Adding to that, we’ve got:
- electronic signature usage becoming mainstream (no more paper, finally)
- blockchain projects developing at a faster rate
- fintech investments that make banking / financial easier for everyone
- less overhead costs to develop financial projects
- streamlining of heavy, burdensome financial regulations through fintech innovation
- increased confidence in the financial sector
- more people using banking facilities (yes, this is a topic of discussion!)
All in all – most people benefit. Apparently. But given the complexity of PSD2 and MIFID2, plus GDPR, this is going to be complicated and heavy especially in the first 2 years until all of the financial companies and the financial sector will become accustomed to all of the rules and regulations. Clearly, there are rumblings in the sector, as not everyone is happy with the new regulations, but they aim to create a better digital market overall.
And after those 2 years, we can accurately judge.
But if all goes well, we should have a much safer and digitalised financial sector.
Edward Cretescu – Business Consultant Digidemat