Europe has some surprisingly progressive ideas about retail banking.
In 2018, the new payments directive (PSD2) comes into force. This will change not only how we see banking, but also how we treat data.
A bit of background: the Payments Services Directive was adopted in 2007 to create the Single Euro Payments Area (SEPA), aimed at simplifying and modernizing the rules and guidelines for money transfers within the European Union.
An update (PSD2) was passed by the European Parliament in 2015, with the goal of further promoting innovation while enhancing consumer protection.
That may sound good for the consumer and the fintech sector, but it makes banks’ current situation even more tenuous. The sector is already pummeled by low interest rates, increasing KYC/AML costs and flourishing competition. Now, it has to invest in further compliance, and watch while its main competitive advantage is eaten away.
What main competitive advantage? Access to your information.
After 2018, when PSD2 comes into effect, banks have to share your data with third parties.
For end users, this streamlines payments and lowers costs. For innovative businesses, it gives them instant access to a significant resource: specific and detailed information about potential clients.
Retailers will be able to ask you for permission to access your bank account – the payment will be directly between your bank and the retailer. No intermediaries. Investment services will have access to your financial history and be able to offer more tailored advice. Payment portals will be able to compete for the lowest fees and creatively combine financial and social functions. Aggregators will be able to display all your financial information in one place, regardless of how many banks you work with.
Just think how attractive all that data is for service providers.
(There’s some other stuff in there as well, such as tighter control on credit card charges, greater protection for non-EU payments, unconditional refunds on direct debits… all good news for the consumer, not so much for the banks.)
What does that mean for blockchain development?
Basically, PSD2 is about the sharing of sensitive data with a network. Right now, the law envisions the transfers being handled through Application Programming Interface (APIs), code that gives third parties access.
On a blockchain, the distribution could be handled in an open, seamless and secure manner. Banks, clients, retailers and fintech services could all use the same system to share information. Access would be limited to network participants (who would have to jump through some hoops to join), transparency would ensure good behavior, and decentralized storage would enhance security.
This has to be preferable to a system in which banks (reluctantly) cede the information to any approved entity. Or a system littered with targeted APIs with limited interoperability. Or one in which the information is stored in centralized (hackable) silos.
Furthermore, a blockchain-based system would have lower operating costs than a distributed database, since less verification will be needed each time the data crosses over to another platform.
Lower operating costs will be crucial, given the tightening squeeze on banks’ profit margins.
While banks are currently preparing for this seismic change on their current systems, the appeal of a blockchain alternative is likely to encourage even more research and pilots than are already going on. Incorporation of a decentralized, transparent solution may shift from being a nice-to-have, when-we’re-absolutely-sure option to an increasingly pressing imperative. While blockchain technology is still new and has many hurdles to overcome (not least, regulatory), and while the cost of implementation is likely to be substantial, the need to adapt to a new financial paradigm could well be the catalyst that the sector has been waiting for.
We could be on the verge of a shift in blockchain interest. Already high among banks, it could jump up a notch to imperative.