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Payment Services Directive (PSD2) regulations were introduced to stimulate growth and competitiveness in the EU financial sector by simplifying the sharing of the infrastructure and customer data between incumbent banks and other players, including new financial institutions and fintech startups. Alas, the new rules received a lukewarm or hostile response from the industry incumbents, who perceived them as additional costs and a possible threat to their competitive advantage. As such, PSD2 became an exemplar of the gaining attention in literature phenomenon of “imposed innovation,” a change that does not make microeconomic sense to incumbent firms but is instead mandated by influential non-market stakeholders. So far, most of the imposed innovations cases were studied in corporate social responsibility, environmental or safety domains, with limited understanding of this phenomenon in other areas. Based on a detailed case study of PSD2 implementation failure in the German banking industry, we demonstrate that without certain identifiable contextual factors, the societally-important innovations within an established industry might not materialize. By studying the implication of PSD2 and its effect on the EU banking industry, for the first time, we provide practical suggestions for how to improve the effectiveness of imposed innovation, from the public policy and firm perspectives.

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