PSD2 or payment service directive is the second attempt by the European Commission to regulate the rights and obligations of banks to provide the customers with better and safer services. The directive has come to change the ways how customers interact with banks affecting all the parties in the payment landscape – banks, vendors, Fintech companies and most importantly customers.
PSD2 involves three crucial elements:
- Banks are encouraged to share customer data with third-party payment providers through secured APIs in order to break a bank’s monopoly and promote competition.
- It focuses more on consumer services to offer them an advanced and safer payment environment.
- It requires PSPs to implement Strong Customer Authentication or SCA to verify the identity of the user when making an online payment or any other action through a remote channel.
PSD2 has opened various attractive opportunities for banks and Fintech companies to explore the vast lending and payment market. Let us dive deep into the benefits of PSD2 to cover the transformations that the directive is poised to bring.
PSD2 could stimulate competition in the payment and lending market by breaking the monopoly of banks when it comes to keeping user data. Currently, all financial data of users is kept with the banks and used by them to provide their services. This kind of restricts non-bank players to making use of that data.
The directive, on the other hand, encourages banks to create APIs and share user data with third-party companies promoting competition, ultimately benefitting consumers. This would allow customers to reap benefits from more and better choices payment services and service providers.
Enhanced payment security and transparency
PSD2 has streamlined rules and regulations in the payment industry making it mandatory for companies to disclose their T&Cs before initiating transactions. This will offer consumers a clear image of the transaction including the processing time, extra charges, hidden fees and like.
Moreover, PSD2 has also brought strict rules regarding customer authentication stirring banks to adopt strong authentication mechanisms for more secure transactions. This would also enable customers to make transactions more confidently.
Lower transaction cost
Enabling new players like PISPs and AISPs to enter in the payment market, users would be able to make transactions bypassing card networks and therefore avoiding the high credit card charges. This would prevent vendors from adding fees to the transaction value in the name of processing charges. Today, banks charge significant amount from the consumers to cover processing charges and credit card charges.
AISP = Account Information Service Provider
PISP = Payment Initiation Service Provider
The playing field for Fintech
Fintech companies are amongst the key players who will reap the benefits of PSD2 in the coming years. PSD2 allows many third-party payment providers to build financial services on the top of banks data and infrastructure to improve innovation and offer customers with advanced payment services.
The AISP model could enable a much higher level of data aggregation, bringing a plethora of opportunities for companies that consolidate your financial data. Furthermore, the PISP model will allow third-party companies to initiate payments on behalf of consumers, which could result in a new type of instant payment method.
While PSD2 promises to bring vast opportunities for the market players, it is fair to say that there is a room for both security loops and threats. The market players must adopt a coordinated approach to secure the best outcomes from the directive and explore the vast financial market.