The revised Payment Services Directive (PSD2) is a regulation that aims to bring payment regulations into alignment with technology and the current financial services landscape. It has replaced the original Payment Services Directive (PSD1), which commenced in 2007.
First proposed by the European Commission in 2013, PSD2 was adopted by the European Parliament in 2015 and entered into force throughout the European Union in September 2019. Since its adoption, the PSD2 regulation has become a hot topic of discussion in the financial services industry. If your business currently operates in the EU or may be operating there soon, you need to know what PSD2 is and how to achieve compliance.
PSD2 in a Nutshell
PSD2 is a directive with the goal of addressing pressing challenges in the payments industry. It is primarily concerned with securing consumer financial data, broadening access to banking information, stopping the use of hidden fees, and fostering innovation in the industry.
Many of the changes included in PSD2 have to do with improving the user experience and creating infrastructure compatible with open banking, which gives consumers more visibility and control over their finances.
Who Does PSD2 Apply To?
Since PSD2 went into full effect in September 2019, all banks and financial service providers operating in the European Union must comply with the directive’s requirements. This includes banks and financial service providers based in the UK, although it is important to note that the UK government did not write into law the portion of PSD2 that requires pricing transparency for foreign currency transactions.
One of the main features of the directive is that PSD2 applies beyond traditional banking. The regulation also acknowledges and regulates third-party providers (TPPs) like fintech app developers and merchants. These providers are now allowed to access user bank account data, aggregate accounts, and initiate payments (with the consumer’s permission, of course). In fact, as part of PSD2, banks are required to grant this access to TPPs.
How Will the Revised PSD2 Regulation Impact Banks and TPPs?
PSD2 banking will have a significant impact on any financial services business operating in Europe. It is also expected to increase industry competition and innovation, since banks will no longer have a monopoly on customer data.
Although PSD2 has some things in common with PSD1, companies hoping to enter the EU market will still need to adjust to the new requirements. Some of the changes included in PSD2 relate to:
- Security: Under PSD2, banks must implement multi-factor authentication for remote transactions. The methods of authentication used must be mutually independent, which means one compromised element cannot compromise the other. This rule is designed to protect the customer.
- Dispute resolution: PSD2 regulation requires banks and other financial institutions to take action to resolve customer complaints within a specific amount of time.
- Open banking: By requiring banks to share account information with third parties, PSD2 encourages collaboration between banks, fintech companies, and retailers. This interoperability will be powered by application programming interfaces (APIs).
See How Hydrogen Can Help You Achieve Compliance
Hydrogen offers a range of solutions to help institutions build financial applications compliant with PSD2, including the Hydrogen Atom platform. Developers building on Atom can use supported TPPs on the Hydrogen platform (Plaid, MX, Yodlee, Saltedge, etc) to get account aggregation data. This data can be used when building PFM, banking, and investing apps. With Hydrogen Molecule, developers can add blockchain components to these applications, using powerful REST APIs. If you are looking for a way to respond to PSD2, and the worldwide push toward open banking, please contact us for more information today.