The second Payment Services Directive, more commonly known as PSD2, is one of the most crucial legislation for the countries in The European Union and the European Economic Area, known as the EEA regarding banking and financial services. This legislation, the updated version of the first Payment Service Directive, was published in December 2015, started gradually entering into force in January 2016, and applies since January 2018 to govern electronic payment services and payment service providers aros the EU and EEA. Since this legislation has been adopted across European countries, the banking industry has changed prominently.
Why was PSD2 legislation created?
As already mentioned, the second Payment Service directive is an update of the existing PSD1, which was adopted in 2007 and provided a unified market for payments, including credit transfers, direct debits, cards, in the EU. Also, the first version of the legislation is considered as the legal foundation for a Single Euro Payments Area. Since the adoption of the initial PSD, the digitalization of the banking industry has steadily progressed. Many new services have been introduced to the market by new players. Because the new financial services and their providers were outside of the scope of the first PSD, an update of the initial legislation was needed. Considering risks, challenges, and opportunities provided by digital technologies development, PSD2 was introduced to make payments safer, improve the consumers’ protection, enhance innovation and create competition in the banking sector while ensuring a level playing field for all players, including already existing and new ones.
How does PSD2 legislation change the banking industry?
First of all, PSD2 transforms the banking industry by acknowledging new service providers and changing the distribution of power while demanding account-holding institutions, usually banks, to open up previously monopolized data channels to other parties. To alter the distribution of power, this legislation provides clear descriptions of roles and statutes available for both existing and emerging players in the banking industry. PSD2 describes new players as third-party payment service providers or TTPs that are institutions that do not hold payment accounts of their consumers and have a more limited range of activities than account-holding financial institutions. PSD2 demands financial institutions, which provide and maintain payment accounts for customers, to ensure third-party providers equal access to consumers‘ financial information when consumers permit them to do so. Also, the institution holding the payment account of the customer provides to new players access to the account via open Application Programming Interfaces, so-called open APIs, that permit software at one institution to access the consumer‘s account and initiate payments from another. These new players, so-called third-party providers, can easily access the customers’ payment account to make payments on their behalf and provide them an overview of their multiple payment accounts in a single dashboard. Secondly, PSD2 aims to reduce the risk of fraud for electronic transactions and enhance the protection of the customers’ data by demanding all payment service providers to implement Strong Customer Authentication requirements. These requirements mean that payment service providers must use at least two out of three independent elements, such as password, token, facial recognition, to verify the identity of the consumer. Thirdly, PSD2 broadens geographical reach by covering transactions when only one party is located within the EU and all official currencies. Finally, PSD2 forbids charging consumers additional fees for making transactions by specific payment methods providing the surcharge ban that protects users of payment services. Also, by setting out maximal processing time for the resolution of customers’ complaints, PSD2 guarantees the execution and application of adequate and effective complaint resolution procedures. To find out more about PSD2 legislation, check the link: https://nordigen.com/en/psd2/legislation
