The new PSD2 directive is a fundamental piece of payment legislation in Europe.
It was to go into effect on 14 September 2019. However, the European Banking Authority (EBA) granted further potential exemptions and set the new PSD2 deadline to 31 December 2020.
The PSD2 regulation drastically impacts the financial eco-system and infrastructure for banks, fintechs, and businesses using payment data for the benefits of consumers.
The Payment Services Directive 1(aka PSD1 or Directive 2007/64/EC) opened up the European banking and financial services market and went into effect almost ten years ago.
Let's dig in.
What is PSD2?
The revised Payment Services Directive 2 (PSD2) aims to better align payment regulation with the current state of the market and technology.
It introduces security requirements for the initiation and processing of electronic payments, as well as for the protection of consumers' financial data.
It also recognises and regulates Third-Party Providers (TPPs) that are allowed to access or aggregate accounts and initiate payment services.
This move will shake up the payments market, particularly in the eCommerce space, by encouraging greater competition, transparency, and innovation in payment services.
In short, PSD2 aims at facilitating consumer access to their banking data and driving innovation by encouraging banks to exchange customer data securely with third parties.
PSD2 directive: What is the new timeline?
After a long debate, end of November 2017, the European Banking Authority (EBA) published the final release of the RTS (Regulatory Technical Specifications), which details all the payment actors' responsibilities and obligations.
On 13 March 2018, the European Parliament and the European Council have approved them, opening an 18-month delay for their actual implementation that should have happened before 14 September 2019.
This date was the "final deadline" for all companies within the EU to comply with PSD2’s Regulatory Technical Standard (RTS) related to the directive (EU) 2015/2366.
New dedicated Open API interfaces were available (as of March, 14th 2019) for a six month testing period. European regulators have completed new technical standards and defined precisely how banks must link their technology platforms to outsiders.
The bad news?
Many banks and merchants were not ready for both the March and September deadlines. The EBA has to reset a deadline for the end of 2020.
The good news?
This move will genuinely cement open banking into place, according to Bloomberg.
PSD2 compliance: Who's ready?
As stated by Finextra, 41% of the 442 European banks part of a survey failed to meet the March 2019 deadline. They could not provide a testing environment to third-party service providers.
This six month testing period before the September deadline was seen as critical for them to test the APIs that will connect them to banks and also key to pilot new services.
During MONEY 2020 early June 2019, several speakers also pointed out that some banks and financial providers were clearly dragging their feet in handing over data to customers, arguing about their compliance and risk scenarios.
We shared our feedback on this in our blog post about the latest industry thinking on Open Banking.
And it happened.
The European Banking Authority (EBA) announcement (so-called Opinion), made last October, clearly showed that it has acknowledged that massive numbers of online merchants were not ready for this change.
The new deadline to implement Strong Customer Authentication (SCA) has been pushed back by fifteen months. It's enough time, according to the EBA, to make the expected developments.
And yes, the coronavirus is adding another layer of complexity.
PSD2 regulation: Impacts on banks and TPPs
Security is top-of-mind
The core principles of the PSD2 RTS – i.e. Strong Customer Authentication (SCA), Secured Communication, Risk Management, and Transaction Risk Analysis (TRA) – have been maintained, confirming the directive's security objectives.
To protect the consumer, PSD2 requires banks to implement multi-factor authentication for all proximity and remote transactions performed on any channel.
This obligation means using two of these three features:
- Knowledge: Something only the user knows, e.g. password, code, personal identification number
- Possession: Something, only the user, possesses, e.g. token, smart card, mobile handset
- Inherence: Something, the user, is, e.g. biometric characteristics, such as a fingerprint.
Besides, the elements selected must be mutually independent, which means that the breach of one should not compromise any of the others.
Smooth user experience
To ensure a smooth user experience, PSD2 requests banks to put in place security measures that are "compatible with the level of risk involved in the payment service" to find the right balance between security and user convenience.
To simplify life for consumers for digital banking, in particular, the RTS list several situations for which Payment Service Providers (PSPs) are not required to perform strong customer authentication.
Most of these exemptions are related to low-value payments, repetitive transactions, and transactions to trusted beneficiaries.
PSD2 and open banking
The move to open banking means removing barriers between competitors as it requires banks to allow their account details and transactions to be shared with third parties through APIs.
PSD2 hinges on a critical connection between retailers, fintechs, and banks.
This relationship will be powered by APIs that banks need to open to any Third-Party Provider that wants to aggregate account data and/or initiate payment services.
This change builds a common ground of more robust collaboration and better interoperability between traditional financial institutions and new players of the banking and payment space.
And to provide consistent and seamless user experience, banks will also have to collaborate to define a common approach, at least at a country or regional level.
Read more on our blog post:
Why we need strong authentication standards to deliver the promises of Open Banking
A new world of opportunity
PSD2 is a customer-centric regulation that should lead to an improved customer environment, bringing benefits not only to end-users but to all banking and payment parties.
New partnerships and open-banking APIs with the right security level brought by SCA and risk monitoring can generate value by:
- Adding third-party capabilities to core offerings
- Capitalising on consumer behaviour and storing consumer preference data
- Making the multi-factor authentication process as easy as possible for the customer.
New customer onboarding will be made easier, offering end-users better tools to manage their finance and enticing them to buy new products and services that can be provided by banks and TPPs.
Banks will be able to use financial data better to provide competing services at competitive rates.
Already, leading banks have started building strong partnerships and open-banking API Hubs, showing how PSD2 regulation can be the perfect tool for more innovation in payment and banking.
PSD2 compliance: Where do we fit in?
As a leading provider of digital security solutions, Thales enables banks and financial institutions to meet the challenges raised by PSD2.
Thales helps financial organisations understand and address PSD2 requirements relating to strong customer authentication, risk management, and Open Banking API.
We have released a first white paper introducing PSD2 in general, and how it opens the market of payments, and additional white papers allowing us to analyse PSD2 compliance of various solutions.
An additional white paper describes how Thales' solutions may help our customers comply with PSD2 security requirements.
Strong Customer Authentication
Strong Customer Authentication, as defined in PSD2, means that transactions are authenticated using 2‑factor authentication or more.
How to improve user experience?
By evaluating risk and adapting accordingly, banks can offer a targeted approach that strikes the right balance between security and user convenience.
Innovate with Open Banking API
By working more closely with third-party actors, financial institutions can better prepare themselves for the market changes and proactively identify areas of research and development.