Understanding PSD2: An Overview of the Payment Services Directive 2
The Payment Services Directive 2 (PSD2) is a European Union regulation that was implemented in 2018. Its main goal is to improve the safety and efficiency of electronic payments within the EU. PSD2 mandates new rules for banks, payment service providers (PSPs), and third-party providers (TPPs) in order to ensure that the payments industry remains competitive and transparent.
In this article, we will take a closer look at PSD2, its objectives, and its impact on the payments industry.
Background of PSD2
The original Payment Services Directive (PSD) was implemented in 2007 to regulate the payments industry in the EU. However, with the advent of new technologies and increasing competition in the payments industry, the EU felt the need to revise the directive to ensure that it remained up-to-date.
PSD2 was therefore created to promote innovation and competition in the payments industry, while also ensuring that customers’ data and funds are protected. It aims to create a more open, integrated, and efficient market for payments in the EU.
Objectives of PSD2
There are several objectives of PSD2, including:
Increased Competition: PSD2 aims to promote competition in the payments industry by enabling new entrants to offer payment services. This is done by requiring banks to open up their payment infrastructure to third-party providers (TPPs).
Improved Security: PSD2 sets out new security requirements for electronic payments, such as strong customer authentication (SCA). This is designed to protect customers’ data and reduce the risk of fraud.
Enhanced Consumer Protection: PSD2 also aims to protect consumers’ rights by ensuring that they are fully informed about the services they are using, and that they have greater control over their financial data.
Increased Innovation: PSD2 encourages innovation in the payments industry by providing a framework for the development of new payment services and products.
Key Features of PSD2
Some of the key features of PSD2 include:
Access to Payment Infrastructure: PSD2 requires banks to open up their payment infrastructure to third-party providers (TPPs) who meet certain criteria. This allows TPPs to offer payment services to customers without having to go through the traditional banking channels.
Strong Customer Authentication (SCA): PSD2 requires that electronic payments be subject to SCA. This means that customers must provide at least two forms of authentication, such as a password and a fingerprint, to complete a transaction.
Payment Initiation Services (PIS): PSD2 allows third-party providers to offer payment initiation services. This means that customers can make payments directly from their bank account without having to use a card or other payment instrument.
Account Information Services (AIS): PSD2 also allows third-party providers to offer account information services. This means that customers can view information about their bank account from a variety of sources, including other banks and financial institutions.
Impact of PSD2
PSD2 has had a significant impact on the payments industry since its implementation. Some of the key impacts include:
Increased Competition: PSD2 has opened up the payments industry to new entrants, which has increased competition and innovation. This has led to the development of new payment services and products, such as mobile payments and digital wallets.
Improved Security: PSD2’s requirements for strong customer authentication and enhanced security measures have reduced the risk of fraud and increased the safety of electronic payments.
Changes in Customer Behavior: PSD2 has changed the way that customers interact with their bank accounts and make payments. Customers now have more options when it comes to payment services, and can choose to use third-party providers for payment initiation and account information services.