What is PSD2?

The Revised Payment Services Directive (PSD2) is a European Union (EU) directive that aims to regulate payment services and payment service providers throughout the EU and European Economic Area (EEA). PSD2 was adopted in 2015 and became applicable on January 13, 2018. It builds on the original Payment Services Directive (PSD1) and introduces significant changes to enhance competition, innovation, and security in the European payments market.

One of the main objectives of PSD2 is to promote the development of innovative and secure online and mobile payments. It aims to open up the EU payment market to new entrants, fostering greater competition and providing consumers with more choices and better services. PSD2 requires banks to open their payment services and customer account information to third-party providers through Application Programming Interfaces (APIs). This provision is known as Open Banking.

Open Banking under PSD2 allows two types of third-party providers (TPPs) to access customer data with their explicit consent: Payment Initiation Service Providers (PISPs) and Account Information Service Providers (AISPs). PISPs can initiate payments on behalf of the customer, while AISPs can access account information to provide services such as financial planning and account aggregation.

To ensure the security of these transactions and protect consumers, PSD2 mandates strong customer authentication (SCA) for electronic payments. SCA requires at least two out of three authentication elements: something the customer knows (e.g., a password), something the customer possesses (e.g., a smartphone), and something the customer is (e.g., a fingerprint). This requirement significantly reduces the risk of fraud and enhances the security of online payments.

PSD2 also introduces new rules to improve transparency and consumer protection. It requires payment service providers to provide clear information about fees, exchange rates, and the time it takes to execute transactions. This transparency helps consumers make informed decisions and compare different payment services effectively.

Furthermore, PSD2 addresses the liability of payment service providers and users in case of unauthorized transactions. It sets clear guidelines on the responsibilities of each party, ensuring that consumers are protected and have recourse in the event of fraud or errors. For instance, if an unauthorized transaction occurs, the payment service provider must refund the customer promptly unless it can prove that the transaction was authenticated and authorized by the customer.

The directive also enhances the regulatory framework for payment services by strengthening the supervisory powers of national authorities and introducing stricter licensing requirements for payment institutions. This ensures a higher level of oversight and consistency across the EU, contributing to a more secure and reliable payment ecosystem.

In summary, PSD2 is a comprehensive EU directive designed to enhance competition, innovation, and security in the European payments market. By promoting Open Banking, mandating strong customer authentication, improving transparency, and strengthening consumer protection, PSD2 aims to create a more competitive and secure payment environment that benefits both consumers and businesses.

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