On 14th September 2019 the requirements outlined under the new payment directive, PSD2, come into force. The European Union will roll-out their second payment system directive or PSD2 across all member states and those countries in the European Economic Area.
Designed to provide greater cooperation between payment providers and their customers, this directive may not be revolutionary to the industry yet, it does require significant attention. We've taken a look at what PSD2 is and how it will impact various financial institutions as the deadline for the implantation of this directive approaches.
What is it?
PSD2 is the second directive on payment services that the European Union has agreed on. The directive has two distinct focuses. Primarily it looks to open up banking and services to third parties by sharing information and to increase the security surrounding online payments and helping to protect customers.
PSD2 will affect both merchants and payment providers as the new regulations look to change the landscape of payments and who can conduct them in the near future. Those most likely to benefit from it are consumers, as the changes will make it easier and faster for payments to be processed. Banks, on the other hand, could feel the negative impacts.
Opening up banking
The greatest change that PSD2 will bring is in opening up banks and the information that they store to third parties. Under PSD2, banks will be required to share customer information with third party payment providers as they will be able to process transactions such as paying bills and having the ability to check bank balances for customers of big banks. It is hoped that there will be greater competition, and therefore greater choice out in the market. Instead of having to wait or rely on bank services, which can often be cumbersome, customers can look to new third-party tech to help them in their financial matters. This means ultimately that the information that a bank holds on their customers must now be shared and accessible to new companies.
The implementation of this regulation may be bad for banks, but it offers customers the choice of staying with the established bank services or switching towards faster and often cheaper solutions offered by fintech companies.
There have been some concerns over allowing third party companies to have access to customer data yet, PSD2 states that only registered third party companies are able to access this data, reducing the risk of it being misused. PSD2 focuses on security by making banks adhere to Strong Customer Authentication (SCA). This authentication regulation requires payment providers to supply a combination of password or PIN with a physical identification system or a fingerprint or face recognition method. Banks will also be required to do more in tackling and reporting fraud. Effective fraud security requires banks to collect and report data on fraudulent transactions using a consistent methodology and data breakdowns.
Whilst PSD2 allows greater access to customer data, it also puts in place measures to protect customers from fraud and the misuse of data which allows for innovation in the sector whilst keeping strict security measures. The deadline for implementing changes needed for PSD2 are fast approaching with the directive looking as if it will be positive change in the fields of choice and transparency. PSD2 will offer more choice in the way payments are made in a way that moves the process away from relying on banks and opening it up to innovative fintech companies. It also enforces elements of transparency in the industry by revealing how banks store customer data and process it. Opening up the banking sector is good for customers as the choices for conducting their payments online will increase and offer easier, safer and cheaper ways in which use their money.