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New European payment regulations stoke competition and innovation

Kellsy Panno is a financialtechnology analyst with S&P Global Market Intelligence. Any opinionsexpressed in this piece are those of the author and do not necessarilyrepresent the views of S&P Global Market Intelligence.

Regulationwas top of mind at Money20/20 Europe in Copenhagen this week, as banks andfinancial technology firms grapple with the realities of implementing new rulesset forth in the European Parliament's revised Payment Services Directive(PSD2). The regulation, which went into effect in January 2016, must beimplemented by European Union member countries by Jan. 13, 2018.

ThePSD2 directive creates opportunities for nonbanks to offer services that weretraditionally the sole purview of banks. This is done by the introduction oftwo new categories of payment service providers that are legally authorized andsupervised to access users' bank accounts. These two new categories are"payment initiation service providers" and "account informationservice providers."

Theintroduction of payment initiation service providers means that in-store ande-commerce merchants can initiate bank transfers on behalf of their customersto settle payments. Once a merchant has permission to access a customer'saccount, a payment can be "pushed" through a direct transfer from thecustomer's bank to the merchant. This has obvious potential to lower merchantcosts, enabling them to bypass intermediaries (i.e. the acquirers and cardnetworks) and the fees they extract.

Speakingon a panel at Money20/20 Europe, Tony Craddock from the Emerging PaymentsAssociation stressed the potential for disruption posed by PSD2. "This isa profound time for us," Craddock said. "Banks are currently enjoyinghaving the larger part of the market share, but will PSD2 force banks to becomeinnovative? Or will this be an opportunity for fintech startups to take themajority of the market share? The jury is still out."

Banksnow have to play ball with service providers they were never previouslycompelled to, and do so in compliance with new security and authenticationstandards. It's a big ask, and the banks have a lot to lose, including marketshare to innovative fintech startups and even legal ramifications, if they kickthe can down the road.

Startupswere present at Money20/20 Europe, eager to capitalize on opportunities posedby PSD2. These included Auka, which offer banks a PSD2-compliant platform formobile payments. Auka has already developed successful payment platforms forbanks in Nordic countries, powering Norway's mCash system. Auka, spurred byopportunities posed by the new regulation, announced its launch into the UK andbroader European market on April 4.

AsAuka CEO Daniel Döderlein said in an interview, "traditional banks arefacing a massive change to the way they do business — and how they interactwith their own customers — in the shape of the second iteration of the PaymentServices Directive."

Thesecond new type of service provider, account information service providers, arethird-party services that can access, with permission, customer bank accounttransaction data. This creates business opportunities around transaction datafeeds that inform consumers about spending across all of their bank accounts.Financial tools and budgeting services are eager to take advantage of thiscapability and offer more robust and relevant data to customers about spendinghabits.

Thisexcites branchless banking services like Number26, a German app-only firm thatdifferentiates itself by providing more personal financial service andbudgeting tools, an area most traditional banks don't prioritize in theirmobile apps.

Speakingat Money20/20 Europe, Number26 founder and CEO Valentin Stalf stressed theimportance of turning mobile bank apps into tools for financial management, byinvesting in algorithms that can help identify savings and investmentopportunities for its users. According to Stalf, the big product it will deployover the next two months is aimed at savings and investment automation, whichit will develop through partnerships that have not yet been disclosed.

Thecompany opened to the public in January and announced a total user base of160,000 as of April 5. Like U.S.-based branchless banking services Simple andBankMobile, Number26 operates not as a bank, but a licensed bank serviceprovider. Wirecard AGunit Wirecard Bank AGis the partner that supplies Number26 with its core banking software andguarantees funds under the German Deposit Protection Fund (Germany's FDICequivalent).