Two birds, one stone? Is PSD2 also beneficial for the Blockchain industry?

By Justine Scerri Herrera

Justine Scerri Herrera is a Managing Partner at MK Fintech Partners

For those of you who do not have a background in financial services or banking, PSD2 which is the second Payment Services Directive, is a new regulation which will revolutionise the payments industry and undoubtedly affect all players in the Banking Scene.

The Directive’s purpose was to increase competition and participation in the payments industry from non-banks (TPPs such as PISPs and AISPs) and provide a level playing field for these new players while harmonising certain safeguards for customer protection through secure customer authentication.

Some of the new provisions that PSD2 obliges EU member state banking service providers to comply with, is a new concept called ‘Open Banking’.

Open Banking will allow merchants such as Amazon to retrieve account data from their customer’s bank (with their customer’s permission) and could also allow them to initiate payments on their customers behalf (with their customer’s permission) instead of customers being redirected to other services such as Paypal.

How does this fintech evolution work in practice? Open banking allows the use of open APIs that enable third party developers to build applications and services around the financial institution.

Therefore, what this means is that banks are now required to open their customers data by exposing their own APIs. The reality is that most banks are not ready for this new API-driven access world.

Due to Banks archaic core infrastructure and complex back office environment, most of these interfaces are not ready to be declared ‘open’ for use meaning ready to for APIs to plug in to their systems.

However, they are slowly coming to terms with this new change in the market’s ecosystem and coming to the realisation that the market is moving towards adopting more digital operating models due to the many obvious advantages they offer.

Why is this new Fintech Evolutionary state also relevant to Blockchain and Crypto infrastructures?

As many of you may have heard, we are currently also in the era of Tokenisation.

Many persons are becoming more and more interested in tokenisation: issuing and recording certain securities in a tokenised form through the use of Distributed Ledger Technology (DLT) or Blockchain technology.

DLT affords issuers certain benefits including; better governance, potential automation of trading and settling (if done via on-chain tokens), more transparency and if need allow permissioned access to third parties to manually take care of certain aspects of the platform or liaise with off-chain third parties.

Have you made the connection (pun unintended) yet?

When it comes to let’s say issuing shares or bonds on a token form using DLT or Blockchain technology, one major part of the plug in and play set-up is: payments.

How can one issue dividends or bond interests on chain? One potential solution is, to issue payments via a crypto token just like Bitbond did in Germany with Stellar.

One better solution would be to issue payments via a Stablecoin backed and redeemable by a central bank issued currency like the Euro. But the best solution to date in my opinion would be to plug in a Bank or E-Money Institution partner which has an open API.

An issuer could partner up with an EMI and when shareholders or lenders (bond) create a wallet on the issuance platform, part of the process would be creating an e-money account to receive dividends, interest, share transfer payments etc. Usually these token issuance platforms will also have KYC-in built in their platform – so this integration could kill two birds with one stone: use recorded due diligence for the bank and company share registry.

Usually these issuance platforms can be highly customisable, and many things can be automated.

Furthermore, when it comes to linking off-chain third parties or data (such as the Company Registry or a corporate assistant to liaise with the Company Registry), such third parties can be plugged in via a node which will give them permissioned access to the platform, to manually do and upload any work or information needed.

Therefore, in conclusion although gearing up for PSD2 compliance was/is a cloudy headache for some players (banks) this regulatory market change may be a silver lining for players in the upcoming Blockchain Industry.

This fintech evolution came at a time where there is a pressing need for payment integration services via open APIs in the Blockchain space! It’s true what they say: timing is everything!