While the EU’s PSD2 regulations became law in January of 2018, it was only in September 2019 that all of its effects came into full force. PSD2 stands for “Payment Services Directive 2” and it has been hailed as a great revolution for financial industry, as it encourages competition by allowing non-banks to participate in the market and allows for standardized compliance standards for payments providers.
Why it Matters Globally?
While PSD2 is intended only for the European Union, it will have impacts around the world. This is because the EU is the world’s largest single market area and trades with partners across the world. PSD2 imposes severe penalties on those who don’t comply with them, and necessitate that all service providers to the EU comply in order to serve EU citizens.
The Impacts
PSD2 builds on older legislation such as the original Payment Services Directive of 2007. The laws affect the regulation of payments services in the EU and EEA and create a framework for information sharing between banks and 3rd Parties. Readers may be familiar with the idea of “Open Banking”, which calls for banks to allow 3rd party payments services providers to interact with banks via APIs. APIs provide standardized access protocols to ensure security of data and integrity of information.
PSD2’s overall impacts will be felt in three key areas of the payment services industries:
Consumer Rights: The regulations include large enhancements for consumer rights and call for increased transparency in payments processing and fee structures and also provides a clear framework for complaint handling.
Third-Party Access: As discussed above, banks must provide access to 3rd party payments services providers.
Security: Strong customer authentication criteria is one of the most important features of these new regulations as they mandate 2 factor authentication and other security requirements when processing payments.
Global Impact Will Most Widely Be Felt Online
While PSD2 regulations many not have a major impact on day-to-day operations in other economies, for businesses connected online and or providing goods and services online, PSD2 will have numerous impacts.
On the positive side, enabling 3rd party access to account information means that big banks will no longer hold a monopoly on payments services. 3rd party service providers will be able to provide high quality of service and eventually competition will lead to innovation and overall benefits to the customer.
On the negative side, one of the more complex things for service providers, particularly in emerging markets, will be to ensure compliance in order to avoid penalties.
Overall Impacts
Ultimately PSD2 and the EU’s status as the world’s largest single market, is likely to drive change globally, particularly online. Numerous banks and other financial institutions around the world are adopting PSD2-like practices, some voluntarily and others as a matter of legislation.
Furthermore, the most significant benefit will be information sharing and an opening up of the payments services space. This will likely reduce costs in the long run and create an environment conducive to innovation and progress. More secure handling of information and transactions will also protect unwitting consumers from exploitation.
This environment will also create great opportunities for the more widespread adoption of alternative payments solutions, such as digital currencies and tokens, and also serve to create better and more efficient interfaces between traditional and alternative payment methods.
Regulatory compliance will be the main hurdle facing all participants, but this should be ironed out with time. All in all, PSD2 may well usher in a new “golden age” for the payments industry, this time for both consumers and providers alike.
