The European Union embraces technology to improve performance and output. One of the domains where technology has made a decisive difference is banking. The EU unveiled the first Payment Service Providers Directive (PSD) in 2007. Its objective was to contribute to the development of a single payments market in the EU, to promote innovation, competition, and efficiency. Here is a quick look at PSD2, which succeeds the original PSD.
PSD2 and APIs
In 2013 the EU leadership proposed an amendment to the PSD. PSD2 aims to better protect consumers from fraud by reinforcing security in payments. It strives to improve competition and encourage innovation in the retail payments market. The directive came into effect in September 2019. One of the biggest changes it brought was to embrace open banking. The system uses open Application Program Interfaces (APIs) that enable third-party developers to build apps and services around financial institutions. Open banking enhances customer experience. With the use of APIs customers’ needs and demands are met easily and more completely. APIs also serve to enhance and centralize banks’ services.
Third Party Providers
TPPs are authorised online service providers who exist outside conventional banking, but are involved in online transactions. Some examples of such providers are insurance companies, remittance companies, fintech firms, and merchants. Based on what they do, TPPs are categorized into 2 types. These are Payment Initiation Service Providers (PISPs), and Account Information Service Providers (AISPs).
PISPs use online banking to make online payments without the need for debit or credit cards. One example of PISPs is PayPal. An interface links consumers’ and merchants’ accounts, making direct payments possible. Consumer can also make payments directly to merchants using their banks’ apps. A merchant need not use the same bank as the consumer. PISPs make the transactions possible.
Without the need for debit and credit cards the costs of transactions are reduced significantly. Because the payments are made directly from customers to businesses, they are processed much faster. PISPs credit the merchants instantly. This creates better liquidity for merchants. The process also results in significantly more transparency. This is important in many types of transactions such as the pricing of international payments, remittances, and foreign exchange deals.
Account Information Service Providers are online participants that can view specific information such as the customers’ balances and transaction lists. For this to happen, customers must permit an AISP to access their data. AISPs compile all the information from a customer’s various bank accounts in one place. This gives customers a consolidated view of their finances. It allows customers to analyze their expenses and financial needs easily. AISPs improve customer experience by making it less tedious and requiring less repetitive documentation. This is just one aspect of the possibilities of digitalized banking.
Fintech firms, banks, and insurance companies that are interested in becoming TPPs must comply with the same rules as traditional payment service providers. These correspond to registration, authorisation, and supervision by competent regulators, which in this case is the European Bank Authority (EBA).
Strong Customer Authentication (SCA)
The PSD2 introduces new security requirements for payment service providers within the European Economic Area (EAA). SCA requires that online payments and online access to accounts are performed with strict authentication factors. The three authentication factors are knowledge, possession, and inherence. The knowledge factor uses information that only the customer has, such as a password. The possession factor makes use of something personal that is only owned by the customer, such as a mobile device, a token, or smart card. The inherence factor is based on the customers’ biometric characteristics such as fingerprints. Some exemptions on transaction authentication are allowed. These include payments less than EUR 30, and recurring transactions to the same payee (such as subscriptions).
PSD2 and remittances
Millions of migrants living in the EU send billons of Euros annually in remittances to their home countries through channels such as the Ria Money Transfer App. PSD2 encompasses remittances transfers outside the EU. These transactions refer to payments where one of the Payment Services Providers (PSPs) is outside the EEA. The directive takes account of consumer rights and the use of non-EU currencies.
PSPs are required to provide information on the costs and conditions of the payments. They become liable for their part of the transaction. These rules also apply to payments in non-EU currencies. PSD2 aims to increase information transparency and lower the cost of remittances. PSD2 is designed to streamline online payment systems in the EEA. With banks opening up their payment services to TPPS new players will enter the market. This would improve competition and reduce costs for customers. More transparency would lessen the risks and regulatory costs, not only within the EEA, but globally.
About the author:
Hemant G is a contributing writer at Sparkwebs LLC, a Digital and Content Marketing Agency. When he’s not writing, he loves to travel, scuba dive, and watch documentaries.