What is PSD2?
Let’s start with some background for those who might not be familiar with payments. PSD2 stands for Revised Payment Services Directive (or some call it Second). Some also refer PSD2 as Open Banking, because of the inclusion of non-banks participation (3rd parties).
The original version was PSD (Payment Services Directives) launched in 2007. It is a single framework for payments in the European Union (EU). The purpose is to facilitate simple and fast payment within the EU like one borderless country and to include participation of non-bank corporates in payment industry. The vision is to increase Europe’s competitiveness in the payment industry.
Now 10 years have passed and the financial world has advanced (or disrupted) largely, especially in the payment space where Fintechs are extremely active and there are more technology enablers. PSD2 is the revised version of PSD that was proposed by the European Commission in 2013. Here are the 5 main objectives of PSD2:
- Contribute to a more integrated and efficient European payments market
- Improve the level playing field for payment service providers (including new players)
- Make payments safer and more secure
- Protect consumers
- Encourage lower prices for payments
What experiences are PSD2 trying to achieve?
Here are a few scenarios
1. Allow customers to manage finance via 3rd party
Today: Customers manage finance via the channels that its bank is operating (e.g. branch, online banking, mobile banking).
PSD2: Individuals and corporates may pay bills and make transactions through 3rd parties (e.g. Google, Faceboook or others) which they prefer. Customers can authorize 3rd parties and banks have to provide the data based on its customer’s authorization. The connection between 3rd parties and banks is enabled by Application Programing Interface (APIs).
2. Seamless online payment
Today: When you go online shopping, you would select the items on merchant site or marketplace, go to cart and check out, enter your payment details and the merchant/ marketplace obtain payment through a few intermediaries.
PSD2: Once you give permission to merchant/ marketplace, they would receive direct payment from your bank. No multiple intermediary, no multiple fee.
3. Multi-bank account management
Today: You maintain 5 bank accounts, 5 sets of online banking login details, go to 5 online set to check balance and manage transactions.
PSD2: With introduction of Account Information Service Provider (AISP), you can integrate account information with single provider. It’s all about customer view of information, instead of bank view of information.
How is PSD2 going to change the EU?
- Disintermediation – reduce no. of intermediaries required for payments
- Allow more innovation of financial services, even by non-bank corporates
- Better customer experience for payment, esp. for eCommerce
- Consumer right protection strengthened during unconditional refund and when there is uncertain payment amount
- Banning of surcharging for card payments
PSD2 is going to go live in Jan 2018 and it is expected to bring big change in payment industry in EU. We will try to talk about the impact of PSD2 on Banks in a separate post.