The introduction of PSD2 (second Payment Service Directive) has brought both opportunities and challenges to the financial services landscape. The implementation of the revised directive will greatly affect how banks and financial institutions store and process data. Furthermore, it will also create a chance for non-bank Fintech companies to bring a host of new services and modes of revenue generation.
PSD2 will also bring the key to innovation for lending platforms that leverage peer to peer lending, crowdfunding and other forms of alternative finance. The most crucial and significant advantage the platforms might gain is the availability and access to the vast user data. Earlier, the data was stored with big banks only.
With the vast availability of data, PSD2 will bring numerous opportunities to the table for the lending sector. The
PSD2 under the microscope
At the core, PSD2 is a data and technology-driven directive designed by European Union that aims to drive healthy competition, innovation and transparency across the European financial market, while also improving the security of online payments and account data. PSD2 also promises to offer customers greater control over their payments and finances in general.
PSD2 introduces two types of third parties in the financial market to create new business models:
- AISP or Account Information Service Provider – Third party which can access financial data from various sources to provide an aggregated view of customer data to Fintech companies for better and detailed analysis.
- PISP or Payment Initiation Service Provider – Third party which will be able to initiate payments on behalf of the customers, e.g., paying credit card bills, etc.
More about PSD2, here.
Implications of PSD2 for Alternative Finance
Data could be a key tool for alternative finance platforms to provide better and more efficient services to customers. With the introduction of PSD2, more and more data would be made available to Fintech companies in order to build services that are more personalized and customer-centric.
Lending platforms can use all data sources including bank transactions, payment history, credit usage, etc. to effectively analyze customers’ creditworthiness. This analysis would result in a more stable loan book with higher quality and a lower default rate.
Most banks and lending businesses depend upon third-party credit scores calculated by external credit scoring services. They might not reflect the accurate creditworthiness of the customers as the loan applications are becoming more complexed. The availability of data could help businesses to calculate credit scores of individuals with enhanced practicality. The credit score would be completely data-driven showing the creditworthiness based on your business needs.
The rise in large volumes of data will initiate a more predictive risk management environment, which could drive significant demand for a cultural shift within the traditional underwriting approach.
Challenges that might come
With more data at disposal, the chances of data getting hacked and misused could increase. GDPR is another regulation that intensifies the requirements to safeguard this new access to data. With PSD2, alternative finance sector might face certain challenges in terms of data security.
Alternative finance sector majorly includes non-banking small and medium enterprises (SMEs) which might raise a question mark on their credibility. Users may face a tough time in relying on these firms with their financial data.
Businesses must comply with GDPR to ensure trust amongst the customer base. They must be transparent about how the data is used, also, why the data is being processed to build deeper trust and retain more loyal customers.
Apart from the regulatory implications, PSD2 will open ways to new business opportunities for alternative finance providers to enhance their service offering. A deeper understanding of this new regulation will also bring insights into how the market can reap the most out of it.