The Payments Services Directive (PSD) is “an EU Directive administered by the European Commission to regulate payment services and payment service providers throughout the European Union (EU) and European Economic Area (EEA). The Directive’s purpose was to increase pan-European competition and participation in the payments industry also from non-banks, and to provide for a level playing field by harmonizing consumer protection and the rights and obligations for payment providers and users.” One aspect of PSD is Single Euro Payments Area (SEPA), that regulates credit transfer in compliance with a standardized European credit transfer system. The initiative’s goal was to promote harmonization and freedom of trade for all EU citizens and European countries. Additionally, the PSD included market guidelines that specified which organizations could provide payment services, as well as rules of conduct, to ensure that customers were receiving all relevant payment information. The rules of conduct also proposed regulations in how to manage technical payment protocols.
In 2018, PSD2 came into effect. As the fields of financial technology, general technology and payment services have continued to grow, the EU has made efforts to modernize their original proposal. PSD2 includes online payments and online account services. The initiative continues to promote fair market and requires banks to pair with other financial service providers to provide customers with a streamlined service experience while guaranteeing direct access to banks. These initiatives make it easier for users to access multiple realms of payments in one place. What exactly does all of this mean?
- Understanding Payment Service Providers
In 2008, payment service provider was the umbrella term for banks, payment institutions and e-money institutions. With the introduction of PSD2, two new lines of industry were introduced; Payment Initiation Service Provider (PISP) and Account Information Service Provider (AISP).
The role is PISP is to “initiate a payment transaction on behave of the customer, meaning they are able to withdraw money directly from your account of you have given you’re consent.” On the other hand, AISP is “a market player using a customer’s information to build new advisory and information services for customers. AISP has no agreements with your bank, but as a customer, you can give AISP full access to all your account information.”
- Retailers must ask your permission
When a consumer makes a purchase online, we are required to enter our payment details into the merchant’s website. The merchant receives your payment through a few intermediaries ultimately from your direct bank account. With the PSD2, merchant’s must ask customers for permission to access your bank details. If you give permission, a merchant will receive a direct payment from your bank account without intermediary interference. This change that connects merchants and consumers directly enables Application Programming Interface (API). API services is a service that allows these two factions to connect without a middle man. It can store multiple bank accounts into one place to simplify the user experience. In return, information service providers have all account information and user data in one place, creating worthwhile opportunities for the API providers.
- Credit Card Surcharges
While the first PSD focused on transparency with surcharges and any hidden fees, PSD2 focuses on scrapping surcharges all together. Consumers no longer need to deal with hidden fees that they’re bombarded with when making simple purchases. This advantage only deals with individual consumers. If the purchase is business-to-business, surcharges will still apply.
- Changing Definitions
With so many moving pieces within an ever-changing industry, the PSD2 has organized definitions of what is a legitimate ‘payment account.’ In the past, the definition did not include certain types of savings accounts or credit cards. PSD2 now defines a payment account as an “account held by one or more payment service users, which is used to conduct payment transactions.” This means that a payment account includes all savings and checking accounts, as well as accounts connected with mortgages, loans and payment facilities. If the account is making payments, the account is a payment account.
- Notifications and Monthly Statements
Consumers need a way to have easy access to payments and payment histories. This ensures that we do not overspend and that transactions are completed effectively. Payment Service Providers (PSP) are now required to provide a monthly account statement. This could be through a physical piece of mail or another durable medium. According to the FCA, a durable medium is “any instrument which enables the payment service user to store information addressed to them in a way accessible for future reference.” This could mean an ATM machine, PSP website, bankers, etc.
PSPs must also provide notifications in the case of unusually large purchases or any hints of security incidents. Security incidents could mean a direct breach into someone’s account or an indirect breach against the PSP. According to PSD2, consumers must always be aware of any safety concerns. PSP’s cannot just post about these issues on social media. They must be in direct contact with all of their clients so that clients are notified about the state of their money and the safety of their money.
- Not Just the EU Anymore
The original PSD only took EU countries, companies and consumers into consideration. This meant that all of the rules of the PSD applied just to these factions. In the PSD2, non-EU transactions are also included in the initiative. No matter where your business is headquartered, merchants and clients are required to abide by the established protocols. All business conducted within the European Union is expected to comply.
- Re-Authorization Process
As of 2018, it is required that already existing e-money and payment service must go through a re-authorization process in order to continue functioning under such label. Because the label of payment service provider continues to grow, companies must ensure that they still meet the guidelines, or have made the necessary changes from PSD to PSD2 in order to continue to function.