A banking market can be defined as the environment (it does not have to be a physical location, it can be virtual) formed by authorities, financial institutions, savings banks and credit institutions and whose main function is to channel savings based on surplus units, which are those that do not spend all that they earn (savers). This surplus (excess saving) is redirected through the banking market to the deficit units, which are those that spend more than they earn (borrowers). This allows the saver to receive a return on their savings, since they will not have them for a while.
The degree of efficiency will increase as the transfer process is greater and will be achieved the greater the savings stream that is generated. This inflow has to be directed towards a productive investment adapted to the individual decisions of the agents.
Among the functions of the financial market, we can find:
- The main function is to put the agents involved in it in contact, whether they are individuals or companies or specialized agents or financial intermediaries.
- The second function that we can point out is to serve as a mechanism for setting the price of financial instruments in the banking market.
- The third function of the banking market is to provide liquidity to the agents involved in it.
- The fourth function would be to reduce intermediation time and costs.
The better this set of functions is fulfilled, the more efficient a market will be. However, this usefulness is directly related to its proximity to what is understood by perfect competition. The characteristics that it must meet are:
- Amplitude. A market is broader the greater the volume of instruments that are exchanged in it.
- Transparency. A market is more transparent the easier it is to access the information for the agents that interact in it.
- Liberty. A market is free when there are no limitations or barriers for the saver or debtor.
- Depth. A market is deeper the greater the number of transactions that are carried out in it.
- Flexibility. A market is more flexible the greater the ease for the agents to react.
PSD 2
The Payment Service Directive (PSD) is a European Directive that aims to increase security and consolidate protection against fraud in banking transactions carried out by telematics means.
The aim of the Directive is to expand competition within the electronic payments market so that the consumer is protected. The first of these directives was approved in 2007 and its aim was to create a single payment market in the European Union. Later, in 2013, the European Commission proposed a review to unify the system of payment services, specifically those made online, between countries and providers. The new PSD was passed in 2015.
One of the main novelties is the so-called open banking in which financial institutions must open their systems to third parties. In perspective, it is essential that this transition is made with certainty and confidence, so the importance of the combination of cybersecurity and management comes into play.
Likewise, it regulates the access to personal banking data by third parties, which means eliminating payment intermediation between the client and them, meaning that if the client wishes to buy a product, it is not necessary to do the transaction through their bank. The Directive allows financial management to be done through a third party. This will allow greater ease and speed when making purchases online, since authorization will be immediate and without using a means of payment such as a card, as if it was a transfer of funds.
Formerly: E-commerce → payment service provider → card → bank
PSD2: E-commerce → bank
The new regulations came into force in September 2019, being approved in 2015, so it is already underway and includes improvements in rights for users; we can mention the following:
- The cost will be zero for the user if they wish to access the information.
- They may cancel contracts without prior notice.
- Changes in transactions that the user does not authorize. The service company will be in charge of proving that the user has authorized the transaction.
- Strengthened authentication mandatory.
Previously, mention was made of the third parties that came into play, but who are they? Two new institutions emerge, the PISPs (Payment Initiation Service Providers) and the AISPs (Account Information Service Providers).
PISPs
Payment Initiation Service Providers (PISPs) are providers whose function is to connect the bank with the customer when the latter needs to carry out a transaction.
The money is not transferred through the PISP; it is kept at all times away from the information and from the access to the finances of the consumer or user. When the user is going to carry out a transaction, they are redirected to a payment gateway to accept the transaction making use of a means of payment such as a credit or debit card, but not only a card, a transfer is also possible.
AISPs
The Account Information Service Providers (AISPs) are providers that put together and associate the consumer’s financial information, either from one or more banking institutions, so that the consumer from a single platform can carry out the transactions they want. For example, buy with card A from financial institution A or buy with card B from financial institution B.
For this to happen, as mentioned above, the user authorization is necessary and the purpose is to link the financial information of the user in a single platform, which may carry a series of disadvantages in terms of security, hence the importance of the cybersecurity and the recommendations of the institutions.
Payment institutions
These are those institutions that are authorized to carry out payment services, such as transfers, direct debits and payments made by card. Among the services they can offer, we can highlight the following:
- To open accounts, called payment accounts, in which the customer can deposit or withdraw funds.
- To carry out payment transactions, either through one or more associated cards or through transfers.
- Sending of funds.
- With a duration of less than 12 months, credit lines that are related to a payment transaction may be extended.
- To make payment orders.
It is important to remember that these are not deposit accounts and that deposits can only be made in financial institutions, such as a bank or a savings bank, and consequently these are not interest-bearing accounts.
Electronic money institutions (EMIs)
They are devoted to the issuance of electronic money admitted as a means of payment by companies other than the issuing institution, which must be issued at its face value. “Electronic money” is understood as the monetary value in which the following three characteristics occur:
- Be stored by electronic or magnetic means and be representative of a claim against the issuer.
- Be issued upon receipt of funds for making payment transactions.
- Be accepted by a natural or legal person other than the issuer of the electronic money.
- Exceptions from this definition are those monetary values stored in specific instruments designed to meet specific needs and with limited use, e.g. membership cards, public transport cards.
EMIs transform current money into electronic or virtual money, replacing it with coupons, numerical series, etc. This virtual money is what can be used to carry out online transactions in authorized stores (e.g. purchases through eBay, which work through the Electronic Money Institution “PayPal”). This form of electronic payment is characterized by its security in transactions (it increases to the extent that no data is provided, for example, about the credit card of the person who wants to make a purchase over the Internet), its convenience (electronic money can be managed and exchanged for cash when it is decided not to use it anymore) and its ease of use (it does not even require the holder to have a checking account or card in its name).
