Why embracing PSD2 is a must

The revised Directive on Payment Services (PSD2) is not a minor update of the original EU Payment Services Directive established in 2007. The impact of PSD2 on the payment community will be considerable. However, the global payment community needs not resent the effects of PSD2. Instead, PSD2 should be recognised as a major step forward along the road to a more open, client-focused, digital payments market in Europe.

PSD2 brings three major changes to the first EU Payment Services Directive (PSD1). Firstly, it widens the geographical and currency scope of its predecessor regulation. Under PSD2, the bulk of PSD1’s provisions about payment transparency, and payment rights and obligations have been extended to apply to payments where only one party is located in an EU/EEA country (“One Leg Principle”), and to payments made in all currencies.

Secondly, PSD2 tightens payment security and authentication. While strong customer authentication is currently mandated only for browser-based payments, PSD2 stipulates that a payment service provider must apply strong or 2-factor customer authentication (2FA) to each remote, online or electronic payment, no matter what the surrounding circumstances.

Finally, and perhaps most disruptively, PSD2 licenses new Third Party Providers (TPPs) – such as Payment Initiation Service Providers (PISPs) and Account Information Service Providers (AISPs) – and obliges financial institutions to offer these new market players access to their customer data and payment infrastructure, provided they consent for related transactions.

A Directive to fear?

The changes to the first directive are both logical and incremental. However, they are not universally popular. According to a PWC report released in the first quarter of 2016, 68% of bankers fear the effects of PSD2, particularly the impact of new third party provisions.

Payment service providers will have their work cut out implementing the new Directive. The extended scope of PSD2 requires financial service providers to make a series of process and system modifications. These modifications include not only currency conversion, value dating and availability of funds in international payments, but also introduce 2-factor authentication systems and mandate a secure and easily accessible online account interface that Third Party Payment Providers (TPPs) can use to extract the information they need to operate effectively.

Yet, existing service providers should not fear the impact of PSD2. While the entry of organisations with business models and channels of customer communication vastly differ from the traditional banking modus operandi and may disrupt the payment market, this disruption should be welcomed. PSD2 should be viewed as a catalytic force for heightened innovation, security and data transparency in the payment space.

A force for innovation

The opportunities that PSD2 can foster far outweigh any temporary pains if narrowing it down to payment innovation alone.

TPPs are already fostering innovation and helping to enhance the customer experience in the payment space. For example, Payment Initiation Services, now used widely in the area of internet payments, have helped catalyse the ecommerce process – they provide comfort to a payee that a payment has been initiated, and in turn incentivise the payee to release goods or deliver a service without delay. Also, new Account Information Services providers can now equip payment service users with consolidated and convenient online information on one or more of their payment accounts.

In licensing TTPs, PSD2 not only ensures better consumer protection. By providing TPPs with access to incumbent providers’ account interfaces, and mandating increased interplay between the two, PSD2 will inject a new dose of competition into the payments market, and help drive further improvements in product and service offerings. Whether these services are offered by banks – leveraging their deep-rooted customer trust and regulatory experience, technologically nimble fintechs, or collaboration between the two, they are likely to be delivered through new convenient channels of customer communication.

Moreover, if open application programming interfaces (APIs) are used to build the new interface between banks and third party providers – PSD2 might even ease in a new era of open banking. The European Banking Authority encourages this development as an open banking ecosystem that offers tremendous potential for banks and financial institutions to innovate at pace, create new revenue streams and ‘disrupt the disruptors’.

Raising the bar for security and customer authentication

Naturally, where there is more frequent and easier access to customer account information by more parties, this gives rise to concerns about the security of customer data – particularly given the staggering rise in online card payment fraud. Card Not Present fraud in the EU rose by 21% from 2011-2012, in-line with rises in e-commerce. 

With PSD2 in place, practitioners have nothing to fear. By mandating 2-step customer authentication in all kinds of electronic, remote and online payments, PSD2 shows the EU’s determination to enhance consumer protection. Despite some concerns that an extra authentication step might deter customers from completing online purchases, enhancing consumer protection is an aim, which payment service providers, retailers and regulators should naturally share.

Deutsche Bank sees PSD2 as a clear indication of the EU’s desire to be at the heart of a digital payments revolution already well underway. PSD2 will help foster innovation, payment security and harmonisation across the European payments market – in turn delivering significant benefits to the customer.

About Shahrokh Moinian:

Shahrokh Moinian is Managing Director and Global Head of Cash Management Corporates within Deutsche Bank’s Global Transaction Banking division. Shahrokh joined Deutsche Bank in 2001 and handles product strategy, investments, innovation, resource allocation and global profitability.

About Deutsche Bank:

 Deutsche Bank provides commercial and investment banking, retail banking, transaction banking and asset and wealth management products and services to corporations, governments, institutional investors, businesses, and private individuals. Deutsche Bank is Germany’s leading bank, with a strong position in Europe and a significant presence in the Americas and Asia Pacific.