Speculation over the much anticipated PSD2 – revised Payment Services Directive – has been gathering for quite a while now. Last week the European Parliament adopted the revised Directive on Payment Services (or PSD2), and with it the PSD2 reality got a little bit closer. PSD2 has been attracting quite a lot of attention, and in and amongst all of the talk about Directives and European Parliament votes its not always immediately clear what PSD2 actually is. The intention of this post to outline simply what PSD2 is, and why there is so much hype and excitement surrounding it.
1. It all started with the Directive on Payments Services (PSD)
The objective of PSD, adopted in 2007, was to create a single market for payments within the European Union. The legislation:
- Created the rules and guidelines for modern payment services in the European Union
- Simplifies payments and payment processing across the European Union
- Aims to promote competition by opening payments up to new entrants
- Advocates payment efficiency, innovation and reduced costs
- Provided the legal platform for the Single Euro Payments Area – SEPA
2. Then came PSD2 – the revised Payment Services Directive
The revised Payment Services Directive (PSD2 – EU Directive 2015/2366) was proposed by the European Commission in 2013, and the objective was to create a level playing field by:
- Standardising, integrating and improving payment efficiency in the European Union
- Offering better consumer protection
- Promoting innovation in the payments space and reducing costs
- Incorporating and providing clarity on the use of emerging payment methods such as mobile payments and online payments
- Create a equal playing field for payment service providers – enabling new companies to get into the payments space
- Harmonise pricing and improve security of payment processing across the European Union
- Incorporate new and emerging payment services into the regulation
3. Enough of the fluffy stuff – What is the big deal with PSD2?
The banks are all talking about PSD2 because it will require a lot of investment, reduce their existing revenue streams and introduce a whole wave of competitors. Check out the Starling Bank Explaining PSD2 for the juicy details. But in a nutshell…
- When we buy something online we typically enter our payment details into the merchants website, and the merchant then gets the money from your bank account by way of a few intermediaries
- With PSD2, the Directive will allow retailers to ‘ask’ consumers for permission to use your bank details. Once you give permission, the retailer will receive the payment directly from your bank – no intermediaries
- The direct connection between retailers and banks will be enabled using Application Programming Interface or APIs for short
- The use of API’s is exciting because it enables companies (innovative companies) to connect to financial institutions directly
- For those of you that maybe multi-banked – i.e. bank accounts with multiple banks – we currently have to access each bank website separately
- With PSD2 they’re introducing Account Information Service Provider or AISP’s, which will allow you to view all of your multi-bank details in 1 portal.
- This is interesting stuff because now it means that new providers, not necessarily banks, can consolidate your account information in 1 place and acquire insightful data about you. This offers lucrative cross selling opportunities for these new providers
4. Interesting.. What else will PSD2 bring?
- The introduction and regulation of third party payment service providers (TPPs) – as described above there are 2 types, those that offer:
- Payment Initiation Services Providers – PISP
- Account Information Service Providers – AISP
- The unconditional right of refund for direct debits under the SEPA CORE scheme
- A strong customer authentication system – check out the post: Two Factor Authentication
- Ban on surcharging (additional costs) for card payments
- Better consumer protection against fraud, capping any potential payments if a unauthorised payment is made to €50
- Improved consumer protection for payments made outside of the EU or in non-EU currencies
5. PSD2 – What happens next?
The proposals within the PSD2 have now been finalised by the European Parliament, and in the near future there will be a vote by the European Union member states to officially endorse the Directive. After this vote has taken place member states will have 2 years to introduce the changes into their own national laws
PSD2 – Disrupting Payments in Europe
Third party access to accounts (XS2A), the use of API’s to connect merchant and the bank directly and the ability to consolidate account information in 1 portal will undoubtedly disrupt payment services in Europe. Innovative companies will be eager to occupy this space and respond to consumer frustrations with existing incumbent providers. The challenge though, will be how consumers respond to new technology based providers and how these newcomers are able to meet the expectations of both the consumers and the European regulatory bodies. At the same time the newcomers must ensure the highest levels of security are implemented – after all they will potentially be handling YOUR payments and have access to YOUR account.
- Payments Compliance: Payments Services Directive 2
- European Commission – Directive on Payment Services (PSD)
- Council of European Union – 2013/0264 (COD)
- PSD2: Almost final – a state of play
- PSD2 – By Ruth Wandhofer