PSD2 – Lessons From India

While reading through the second payments service directive and trying to decipher the recently published RTS draft, I have been trying hard (without much success) not to draw parallels between the soon to be reality PSD2 and the recently launched UPI (Unified Payment Interface) in India.

These may be two entirely different proposition aiming to solve very different problems, but I feel there is still enough in common for ECB to consider the learnings from the UPI implementation in India.

“Cash heavy” to “less cash”

While with UPI, NPCI (National Payment Council of India) has taken another step towards making the use of electronic payments more popular and gradually changing a “cash heavy” Indian society to a “less cash” society. PSD2, on the other side, is the European Commission’s first step towards promoting Open Banking –  with the aim of making payments across Europe safer and more innovative by allowing new service providers (PISPs and AISPs) to enter the market.

The underlying commonality, however, is the emphasis on the adoption of Application Programming Interface (API) to further innovations and improve the end customer experience.

Focused on a long term roadmap

The Reserve Bank of India (Indian central bank) and NPCI realised that India is undergoing a revolution in mobile industry (1billon connections already reached) and decided to leverage this towards the promotion of electronic payments in India.

NPCI introduced IMPS (Immediate Payment Service) which allows immediate one to one payments across accounts. This is alongside a “Mobile Mapper” which allows customers to link their mobile numbers to bank accounts and use mobile numbers for inter-account instant payments.

Similarly, an Adhaar Payment Bridge System (ABPS) was also created to link the bank accounts to the customers’ unique Adhaar number (ID) to not just allow payments to be made using the unique Adhaar number, but to also link accounts to the customers’ biometric data stored in the government’s Adhaar database.

UPI efficiently leverages on all these platforms to allow the customer to push and pull payments from and to their accounts using a UPI compliant app on their smartphones. NPCI have focused on the long term  and have been progressively developing the allied infrastructure and platforms to support a service like UPI.

The differences for PSD2

The Indian banking system is still undergoing significant changes – the adoption of technology and availability of infrastructure varies significantly across the country. Leaving the implementation of UPI without a common detailed framework and standards would have led to a fragmented implementation and inconsistent customer experience.

Hence, for UPI implementation, NPCI have taken ownership and provided a set of predefined APIs along with detailed security standards, customer authentication and transaction authorisation rules. These have been used by the partner banks to connect to UPI infrastructure, allowing their customers to use UPI features from existing mobile banking apps or new standalone mobile applications.

The PSD2 offering is more complex and poses significantly greater challenges for a seamless pan European implementation – especially considering the diversity in the banking practices and disparity in banking technology across member nations.

PSD2 relies on banks defining their API specification and choosing the standards they want to use to implement the directive. This could lead to variability of customer experience and might create significant friction among TPPs, as they might have to design their offering differently for each bank or group of banks, spread across the EU.

Follow by example

The recently published draft RTS by EBA lacks the actual standards and provides almost ‘guidelines like’ standards, which might risk a disjointed implementation across the member states/ banks.

Lessons can surely be learnt from the structured, phased and controlled approach adopted by the Indian authorities in implementing a comparable if not exactly similar offering.

Hopefully the European Commission and EBA considers these risks and puts in place the controls necessary to accomplish the aims of this potentially groundbreaking directive.