• June 1, 2022

What is PSD2 and what is it good for?

Maurizio Garzelli
Chief Technology Advisor

What exactly is PSD?

First of all, we need to understand what PSD2 is and if there was a PSD version 1.

PSD stands for Payment Services Directive, and in a nutshell, the PSD provides the legal framework within which all payment service providers must operate.

The purpose of the first version of PSD was to increase customer rights, guarantee faster payments, describe refund rights, and provide more transparent information on payments.

The final adopted text of the first PSD entered into force on December 25, 2007 and was transposed into national law by all EU and EEA member states by November 1, 2009.

With the advent of digitalization and the increased adoption of web 2.0, also the financial sector needed to start a digitalization process.

In 2017 the UK introduced a practice called OpenBanking, and Poland and other EU countries put similar methods into place. Moreover, some countries started adopting standards for third parties to make payments on behalf of customers (like PayPal, Apple Pay, Google Wallet, or Amazon), and standardization of such practices was needed to ensure quality of service. This translated into the creation of the PSD2.

What is the goal of PSD2?

PSD2 is the second Payment Services Directive, maintained by the Berlin Group. Its goal is to disrupt the payments industry, affecting everything from how we pay online to what information we see when making a payment. It also included directives for allowing third parties to retrieve account information on behalf of an account owner.

It is important to note that since 2018 it has been a legal requirement for all financial institutions operating in the EEA to comply with this directive. They do so by providing APIs that allow proper access to registered parties, the so-called TPPs (Trusted Payment Parties).

One of the major impacts is the way that the payments would be handled, the need for an interim channel such as Visa, Maestro, or Amex would not be required anymore, and the merchant can directly initiate the payment on the customer’s behalf with the bank.

Another significant impact is the addition of the AISP service or Account Information Service Provider. This is particularly useful for aggregators and third parties that require access to the customer’s account details, such as tax offices or other entities, who can request to have information (partial or total) of the accounts on behalf of a given customer.

It should be noted that access control and management of such authorizations will always be on the side of the customer and bank, which can revoke such access if necessary. In addition, the registration and maintainance of the status of such Trusted Payment Parties are regulated at a national level.

In conclusion, PSD2 is a pan-European initiative that drives businesses to make their payment strategies more efficient and reduce operational costs and total cost of ownership. It also helps with security, standardization, and compliance in the financial world.

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