PSD2 What does it mean for FinTech? The implementation of PSD2 will cause a profound change in the payment laws of Europe. This will completely transform the financial sector, having an impact on everything from how we make payments online to the data we view when we do so. The date when PSD2 was intended to go into effect is continuously shifting since the industry would need to put in a lot of effort and money to adjust to the new regulations.
The order was initially meant to go into force in January 2016. Later, on September 14, 2019, it went into full effect for all EU member states. The European Banking Authority, however, granted an extension until December 31, 2020, citing implementation problems. The Financial Conduct Authority has set a new deadline for the UK that will take effect on March 14, 2022.
What is PSD2 and what does it stand for?
And most significantly, what does it mean for consumers and Fintech businesses?
What is PSD2 and what does it mean?
PSD2 (Payment Services Directive 2) is the EU’s attempt to simultaneously promote financial industry innovation, improve customers’ online experiences, and stifle attempts at online fraud.
As part of the project, PSD2 aims to develop more cutting-edge methods of accepting payments via mobile devices and the internet, enhance payment security, and give consumers choice over how and how their personal data is used.
Equally crucial is that the regulation would level the playing field for all European payment providers, including Fintech firms and new businesses, with the purpose of developing a more integrated, secure, and effective European payment market.
As a result, customers across all of Europe will have far more retail payment options, as well as significantly greater knowledge about and control over the payment services that have access to their personal information.
What are the key points of PSD2?
Customer authentication, data security, and third-party access to client accounts are the primary areas that PSD2 will have an impact on.
First and foremost, this new law mandates multi-factor authentication for all online transactions (MFA).
In order for the other verification method to remain trustworthy in the event of a security breach, the authentication components should likewise be independent.
However, the Regulatory Technical Specification (RTS) directive identifies a number of circumstances in which PSPs (Payment Service Providers) are not required to carry out strong customer authentication, such as low-value payments, repetitive transactions, or transactions to trusted users, in order to make it easier for online banking customers.
Moreover, PSD2 introduced a set of uniform rules for banking services, including the Strong Customer Authentication (SCA) rules and Common and Secure Communication (CSC).
All financial institutions and payment service providers must abide by new regulations in order to process payments within the EU.
The legislation also aims to encourage Fintech firms and financial institutions to use new techniques for customer verification, like voice and fingerprint biometrics.
The other significant modification is that PSD2 will permit third-party businesses to access the customer’s bank information as long as they have the customer’s consent.
Consumers’ financial data and information has previously been held only by banks.
PSD2 manages giving consumers control over their data in the meantime.
Customers will be able to check the status of their bank accounts online through the “Payment account information services,” and if they have multiple bank accounts, they will be able to view them all in one location.
Customers will be able to manage their accounts more easily as a result, and online and mobile payments will be simpler.
Also, it will assist shoppers in making more accurate comparisons.
What Is Open Banking?
Moreover, Open Banking will be encouraged across Europe via PSD2.
What is it?
Open banking is a method that enables banks and other financial institutions to securely give third-party payment processors and other financial organisations access to consumer banking transactions and other data.
Application programming interfaces, or APIs, allow third parties to access the data.
People are starting to seek quicker and simpler payment methods, which has led to an increase in the popularity of open banking.
Customers now have more options, better service, and faster transactions than ever before thanks to Open Banking, which enables quicker, more secure cross-border transactions and provides them the option to manage their funds through third parties. Also check Organic Traffic Strategy
How does it function in real life?
Take eBay, for instance.
When you make a purchase there, you are transferred to a payment provider (Paypal, Visa, or your local banking service), where you must log in and confirm the payment before your order can be processed.
With open banking, you might use Amazon or Paypal to transfer money or gifts to pals with a single click or swipe.
You could just click the “Purchase now” or “Transfer money to…” button and let Amazon and Paypal take care of the rest as long as you granted those businesses access to your banking information.
In example, you could just ask Alexa to pay your usual phone bills or transfer money to a buddy to have your virtual assistants like Siri or Alexa handle the transactions for you.
Access to your bank account details may also make it possible for you to benefit from innovative, focused financial services that enhance your data control.
Many of us, for instance, maintain accounts with different banks or brokerage houses.
You may consolidate all of your account data into a single dashboard using Open Banking, which displays all of your money in one location.
By doing this, you might better understand your financial situation before making any important financial decisions and manage your money more skillfully.
What are the vital PSD2 benefits for consumers and businesses?
It could sound quite hard to talk about rules, security measures, and standards all at once.
Particularly given that it wasn’t all that simple for financial institutions to put the legislation into place.
Many of them have to modify their entire infrastructure in order to include the required security measures.
Also, most brands were concerned that including verification processes in their present SCA would irritate their customers because it would increase their workload and be more expensive and time-consuming for them.
Banks now bear responsibility for reducing the risk of fraud, thus they also had to make investments in sophisticated fraud protection techniques, such as sophisticated analytics (to verify the source of incoming API calls), client authentication technologies, and fraud attack detection tools.
Also, businesses had to deal with a plethora of technological challenges as they got ready for API integrations.
Yet, PSD2 can also offer a number of advantages to clients, financial organisations, and Fintech businesses in exchange.
Customers will find it much simpler to use banking services, even those in other countries.
Let’s imagine you came to France from the UK and want to open an account and get a loan from one of their banks.
But, the bank has no knowledge of your credit history or financial standing, thus you are (presumably) refused.
How might PSD2 alter the situation?
The bank where you want to create an account would only need to ask for your permission to access your financial data, and it would then be able to review your whole financial history from the previous several years.
They would then have sufficient information to determine if they could grant you a loan and how much they could lend you based on your credit score.
The advantages of PSD2 for customers, however, don’t end there:
It can aid in reducing the number of occurrences of fraud or security breaches by introducing stringent security criteria for electronic payments and the protection of financial data.
All third-party payment service providers will be able to start payments for their clients or give them a summary of their accounts and balances under the new regulation.
The new guideline strengthens customers’ rights in a number of ways, including by letting them decide who has access to their financial information and by lowering their culpability for illicit purchases.
Surcharges (extra fees for payments and money transfers) are now prohibited. Also check Digital Marketing Techniques for Small Businesses
Every European Union member states are required to appoint competent authorities to handle complaints from interested parties and users of payment services who believe their rights are being violated.
Also, after 15 business days of receiving a complaint, payment service providers must respond in writing.
The new European directive, however, may also present a huge opportunity for the banking sector and Fintech businesses.
Although many traditional institutions view it as a threat to their status (as it enables new companies or FinTech organisations to compete with them), the enormous volumes of data they already have and can access may actually work in their favour.
To increase the trust that customers have in them, they might, for instance, use their data to customise their service and offers to each individual customer.
The banks may benefit financially from collaborating with outside businesses.
For instance, they could request that Fintech businesses develop cutting-edge solutions for them so that they can continue to serve as trusted advisors while also improving the consumer experience.
In the meanwhile, that would be a terrific chance for Fintech businesses to broaden their product offerings into other areas and work with banks to develop new products.
Financial organisations might potentially gain a significant edge by utilising emerging technologies like voice biometrics or payments because they would not only make banking services more convenient for normal consumers but also significantly safer.
Partnering with other businesses to improve customer experience may be just what financial institutions need to stay competitive in a time when a hassle-free customer experience is more important than a low price.
Conclusion
Does PSD2 pose a threat to the banking sector? Not at all. Companies who profit from Open Banking & PSD2 not only benefit customers greatly but also benefit greatly themselves.
They may gain more from the new directive than they anticipated by consolidating their financial goods in one location, personalising their offers, providing their clients with information, or giving them additional means to authenticate their identity or make payments.