Most fintech companies are ready for the Revised Payment Services Directive (PSD2), which takes effect in the UK on 13th January 2018, but they may not be planning far enough ahead. For example, are they making sure the new requirements are embedded as part of their day-to-day activity?
The incoming regulations are designed to make online payment services more transparent. As an example, consumers will be able to instruct their banks to share information about their bank transactions with third parties. To act on these instructions, banks and any other financial institutions that are responsible for making online payments will need to be authorised by the Financial Conduct Authority (FCA).
What does PSD2 mean for the fintech sector?
For the fintech sector, the changes have created a market opportunity to develop innovative alternative payment methods that offer added value to consumers and/or business customers, at the same time as allowing them to make payments efficiently and securely. Since the regulatory changes were first introduced at European level in 2015, software developers and other entrepreneurial businesses have moved into the space to trial new apps and services that they hope will attract consumer attention in 2018 and beyond.
For businesses that have yet to make an application to the FCA to operate under PSD2, it is important to be well prepared. The process can take several months, and incomplete applications can be subjected to delays. To fulfil the requirements set by the regulator, businesses may need to provide detailed accounting information in the form of cash-flow forecasts and balance sheet profit and loss accounts.
From ‘early stage’ to ‘quick growth’ businesses
Early-stage businesses should ensure they have a well-funded business plan in place that sets out strategic goals over a defined timeframe. The regulator will be looking for assurances that the business has robust systems in place to mitigate operational and security risks to payment services and that there are sufficient resources in place to manage all eventualities. Advisers can perform a critical role in helping businesses to secure finance at an early stage. They can help businesses to compile accurate and reliable business forecasts by challenging assumptions about how individual factors could impact on trading performance. For example, it may be necessary to consider whether software updates will be needed and the impact these might have on income levels. It may also be necessary to set aside funds for risk management audits, cyber-related insurance cover and business recovery planning. It is also important to be able to demonstrate a well-researched and realistic understanding of the target market and the likely speed of take up.
When businesses are growing quickly, managing cash becomes more challenging of course. For example, it is not unusual for companies focused on gaining ground in an emerging marketplace to start ‘over trading’. In this scenario, the business could experience cash-flow difficulties if the drive to increase sales means cash is being spent before payments have been received. To guard against this, senior managers should make sure they have access to up-to-date management information delivered by effective accounting systems; allowing them to make better business decisions about how and where to deploy resources. Faster-than-expected growth can also force businesses to bring forward capital expenditure plans – for example if it runs out of storage, or if there are new features or services that it wishes to add – and such information should be used to inform financial forecasts.
Are there any further obligations under PSD2?
Once the business has submitted a registration to the FCA to operate under PSD2, its obligations don’t stop there. Licensed businesses will be required to meet specific reporting requirements, according to their revenue, profits and other ongoing capital requirements. In particular, it is important that capital resources don’t fall below a specified level and regular management accounts and forecasting can help to prevent this from happening as well as assisting with the provision of information to the FCA.
Summary information about these requirements can be found at the FCA’s website and further brief guidance is given below:
- Incident Reporting – Payment service providers will be required to report any major operational and security incidents to the FCA. This is intended to allow time for the regulator time to act to protect the financial system. Firms will be able to do this via the FCA’s Connect System.
- Capital funding – Payment service providers are currently required to hold a certain amount of capital and this will not change under PSD2. However, recent changes have introduced more deductions, so some firms might find they need to hold more capital than previously in order to comply.
- Keeping records of services – Payment service providers are required to keep records of the account information services and payment initiation services they provide. This will ensure the FCA is kept abreast of how much activity is taking place.
PSD2 best practice
Many fintech companies will have obtained a PSD2 licence and be ready to launch a new alternative payment method early next year. However, it is important that they make risk management and ongoing compliance an integral part of their day-to-day operations and having support on hand to keep track of any new guidance or changes to regulatory requirements is essential. If the groundwork has been done well at business planning stage, there is every reason to be optimistic about what the future holds for their venture in 2018.
Mike Ayres is a member of Menzies Business Services team specialising in the Financial Services sector. If you have any further questions on the above, please contact Mike by phone on 01252 894911 or by email at MAyres@menzies.co.uk.