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What is PSD2?
Simply put, PSD2 is the European Commission's legislation that opens up involvement for third-party providers and establishes robust customer authentication processes.
PSD2 is the European Commission’s (EC) second instalment of its payment related directives. The first instalment was PSD1 (or simple PSD - payment services directive), which was first announced in 2007 and transposed into local legislation in 2009. PSD evolved into PSD2 in 2016.
But why the need for evolution?
The EC recognises the need for payment processes to evolve, therefore they initiated the payment services directive to speed up this evolution. The EC’s goal is to enhance innovation in the EU payments sector through increased competition. Non-banks, such as FinTechs, have the opportunity to participate, and the EC acknowledges that competition drives innovation, recognising that non-banks can innovate more rapidly.
Who is mainly involved in PSD2?
PSD2 effects many businesses, consumers, banks and non-banking providers in Europe, but generally, there are three main parties that make up the directive and changes:
- 27 European Member States: PSD2 does not affect all European countries, just the 27 European Member States.
- Account Servicing Payment Service Providers (ASPSPs): ASPSPs are banks or financial institutions that provide payment accounts.
- Third party providers (TPPs): TPPs are institutions that can initiate payments or access account information with the user’s consent.
What are the main components of PSD2?
PSD2 consists of three main components:
- Access to Account (XS2A): Access to account allows third-party providers (such as FinTechs) to securely access a user's payment accounts with the user’s consent. This allows users to see all their financial information in one place. So, rather than switching between multiple accounts and apps, a user only has to visit one app to gain a clear overview of their financial situation.
- Strong Customer Authentication (SCA): SCA ensures secure and authenticated transactions. It involves authenticating transactions through a combination of the user's password and a second method. The second method could be via a mobile device, such as confirming your password through a payment or authenticator app, or via a card reader providing you with a one-time passcode.
- Open banking: Open banking allows different financial institutions to share customer financial data with each other in a secure manner. The open banking initiative allows users to use a variety of financial services across different providers. This enables users to easily select the specific services they want from different providers. Users are no longer restricted to a single bank or payment services provider; instead, they can opt for various providers that excel in different areas.
What are the benefits of PSD2 for businesses and consumers?
PSD2 creates many benefits for both businesses and consumers. As PSD2 creates competition and innovation, users have the chance to utilise more payment services with forward-thinking processes. Users can also expect to benefit in the following ways:
- Increased competition: TPPs have the chance to offer innovative financial services, providing users with more choice.
- Enhanced security: With Strong Customer Authentication (SCA), users can rest easier, knowing their payment account and transactions are more secure. Through SCA, banks reduce the risk of fraud and unauthorised financial activity in an online world.
- Improved user experience: Rather than switching between multiple payment accounts, users have the chance to view all of their financial information from multiple accounts in one place
What is next for PSD2?
In June 2023, the European Commission announced the next payment services directive evolution - PSD3.
PSD3 will bring a new wave of opportunities, innovation and even more secure processes. The directive is still in development, and potential changes may occur based on feedback from Member States, but we can expect the directive to be transposed into local laws between 2025 and 2026.
To fully understand what PSD3 is all about, take a look at our interview with Unifiedpost Group’s payments expert Jan Van Bulck. Learn about the key aspects of PSD3, the changes it brings, and its implications for businesses and consumers