The PSD2 directive is a regulatory framework within the European Union, revising the original Payment Services Directive. PSD2 requires companies such as online businesses, banks and fintech firms to ensure their online payment processes meet robust requirements within the legislation.

The original PSD came into force in 2007. However, by the mid-2010s, there was a rise in companies other than banks processing payments. This, the widespread adoption of smartphones and the growing e-commerce market meant that it was necessary to update the legislation.

PSD2 was transposed into national law in member states in January 2018, with companies having to comply with the legislation by September 2019.

Key objectives of PSD2

There are three key objectives of the PSD2 directive:

• Enhanced consumer protection whilst making online transactions

• Improved competition in the payments sector, opening it up to organizations other than banks

• To regulate new forms of online payments that did not exist at the time of the first PSD

Components of PSD2

Strong customer authentication

The directive’s technical standards create a standardized process for acquiring strong consumer authentication (SCA) when processing electronic payments. These should be dynamically linked to the amount and payee.

Transaction and device monitoring

Payment providers should put in place procedures to identify any unusual activity on accounts. This requires payment providers to install a transaction risk analysis system.

Open banking

Banks must provide third-party providers (TPPs) with access to their customers' accounts (with the customer’s consent), enabling services like account aggregation and payment initiation.

Regulation of Third-Party Providers

The directive distinguishes between two types of services:

• Payment Initiation Services (PIS): Services that initiate a payment order at the request of the payment service user concerning a payment account held at another payment service provider.

• Account Information Services (AIS): Services providing consolidated information on one or more payment accounts held by the user with either another payment service provider or with more than one payment service provider.

How PSD2 benefits consumers

• More secure payments, facilitated by multifactor identification

• Increased transparency over the payments they make

• There are now strict deadlines for organizations to report back on customer complaints and issues such as acts of fraud

• Convenience of being able to aggregate all financial information via open banking.

• Additional regulatory coverage of protection for European citizens, even if the payment provider is not located within the EU.

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