By Jack Hammond - Aon Credit Broker
FinTech firms have transformed the financial landscape, but the challengers face their own potential disruptor. PSD2 - the European Banking authority’s revised payment services directive - looks set to revolutionise the payments industry and the insurance market with it, with significant implications for FinTech firms as well. Due to come into force in January 2018, the legislation will apply to all member states within the EU.
It is anticipated that PSD2 will create opportunities for existing third party providers (TPPs) in the payments sector, and allow for the creation of many more, but in spite of its significance few firms appear aware of the new standards or their implications.
"47% of finance corporations are planning FinTech acquisitions in the next 3-5 years" Source: PWC
What is PSD2?
The new directive will subject all third party payment providers (TPPs) to uniform regulatory supervision and guidelines, with a view to driving competition, transparency and innovation within the payments sector. Goals include greater transparency around international payments and the abolition of hidden fees.
It also intends to clarify the muddy waters of online retail transactions. Currently, online transactions often depend on third party facilitators to facilitate payment. When a customer purchases something on Amazon for example, Worldpay acts as broker, connecting with the customer’s Visa card scheme and serving as middleman between bank and merchant.
Online payments today:
PSD2 removes these middlemen through the creation of yet another pesky acronym: PISPs (Payment Initiation Service Providers). These let the merchant and the bank communicate with each other directly - a more straight-forward system with reduced costs for merchants and (ultimately) customers. We may even eventually wave goodbye to the soul-destroying booking fees we sometimes see when booking flights or concert tickets.
Online payments post PSD2:
But the changes don’t stop there. For the first time ever TPPs will be obliged by PSD2 to buy insurance cover (or a comparable guarantee), throwing up a number of questions.
First of all, what policy limits will FinTechs need? Limits are likely to vary significantly for each company, since FinTech companies range from micro-businesses to market unicorns. Second, which risks will FinTechs be required to cover? At best guess, it is likely that professional indemnity cover will be made obligatory, though sadly we have no crystal ball.
For insurers, the new ruling is an eye-opener. Insurance firms now have a golden ticket to help FinTechs comply with the new regulation, but will need to adapt their approach if they want to attract FinTech founders - a generation of digital natives, whose buying habits mostly involve a swipe or a click.
Providing suitable policies will be another challenge. The very notion of FinTech tends to throw a spanner in the works for insurers used to finance and technology being serviced by separate underwriters with very different skill sets. Nor is access to the FinTech market an open door for insurers, who may seek partnerships with venture capitalists or accelerators as a way in.
Whetting corporate appetites
When PSD2 comes into effect, we may see an interesting shift in the dynamic between FinTechs and corporates. Stiffening competition in the European market could galvanise banks and other financial firms into snatching up FinTech startups to gain an edge - 47% of finance corporations are already planning a FinTech acquisition in the next 3-5 years. FinTech founders hedging their bets on a corporate buy-out need to stay vigilant to PSD2 compliance to secure a smooth sale.
As Europe’s FinTech hotspots continue to flourish, seeds of opportunity are emerging for insurers to help them complete their PSD2 checklist. But insurers and brokers will need to be flexible to the changing needs and challenges facing FinTech firms, and scrutinise how these evolve as companies scale.