PSD2 is a European directive that uniformly regulates payment services and payment service providers across the European Union (EU). The directive aims to increase competition across Europe and also allows non-banks, such as FinTechs, to participate in the payment industry.
PSD2 – A Definition
PSD2 stands for “Payment Services Directive 2” and is a European directive regulating payment services and electronic money. It was developed to promote competition in the payment services sector, improve the security of online payments, and give consumers more control over their financial data.
Since When Has PSD2 Been in Effect?
The implementation of PSD2 took place in two stages. The first stage came into effect on January 13, 2018, replacing the original PSD (Payment Services Directive) from 2007. The second version included, among other things, a reduction in the liability limit for unauthorized card transactions, the so-called surcharging ban, and an extension of the scope to include non-EU/EEA currencies. The obligation for strong customer authentication and the opening of payment accounts to “third parties” were initially specified in the European Commission’s Regulatory Technical Standards (RTS). These came into effect with the second stage on September 14, 2019.
Key Features of PSD2
Two-Factor Authentication (2FA):
PSD2 requires that online payments be secured by at least two independent authentication factors. This can be something the user knows (such as a password), something the user has (such as a mobile device), or something the user is (such as a fingerprint or facial recognition).
Access to Account Information:
PSD2 allows third-party providers to access consumer account data, provided the consumers give explicit consent. This was the starting point for Open Banking, where third-party providers like FinTech companies can develop innovative financial services based on this data.
Access to Payment Services (Payment Initiation Service):
PSD2 also enables third-party providers to initiate payments on behalf of consumers. This can help increase the efficiency of payments and offer alternative payment methods.
Stronger Security Standards:
The directive introduces stricter security standards for payment service providers to prevent fraud and increase the security of online payments.
Transparency and Consumer Protection:
PSD2 requires banks and payment service providers to provide consumers with clear information about fees and transactions and strengthen consumer protection.
Conclusion and Outlook
PSD2 has significantly changed the financial industry in Europe by promoting competition and enabling innovations in payments. It also aimed to improve the security of online payments and give consumers more control over their financial data.
In 2022, the European Commission reviewed the Payment Services Directive. Based on feedback and insights gained, the EU Commission will revise the current regulation. One of the outcomes of this review was the realization that there are still inconsistencies and exceptions in regulated payment services across member states, which hinder cross-border business. PSD3 aims to reduce these discrepancies and achieve better harmonization.
