PSD2: What it is and how it has changed the EU Payment Services Directive

For many, PSD2 may sound like an abstract acronym, of exclusive interest to those who work in finance. In reality, the revised EU Payment Services Directive (hence, the term PSD2) is the legislation that favoured the birth of Open Banking, a new way of interpreting banking services that brings numerous advantages both for end customers (businesses and individuals) and for market operators. Officially entered into force at the European level in January 2018 and operational since September 2019, PSD2 has brought some fresh air into the world of payments and money management, making banks more open, raising security standards, and making the offering towards customers more personalised and convenient.

Therefore, although Open Banking is now an established reality in Europe and is moving towards Open Finance, it is useful to learn more about this specific Directive, explore the effects it has had on citizens and businesses lives so far, and understand in which direction it is heading.

What is PSD2?

As the acronym recalls, PSD2 is the 2nd Payment Services Directive. In 2013, the European Commission decided to strengthen the objectives of the 1st Directive (aka PSD1), a piece of legislation that came into force in 2009 with the aim of defining the legal basis for a single European payments market and to establish safer and more innovative payment services across the Union.

Thanks to the revised Directive, the European Commission mandates all banks to share data in their possession with regulated third-party providers (usually fintech companies). This implies that end customers (individuals and businesses) have more choice and can decide to entrust the management of their money and the payments made to authorised non-banking entities. At the beginning of 2023, there were 559 TPPs active in Europe (European Economic Area and United Kingdom), and the market was still increasing its AIS and PIS offering.

Important note: at any time, end users can either authorise these TPPs to access their data or revoke the authorisation granted through their Internet Banking.

AISP, PISP and CISP: the third parties established by PSD2

With the entry into force of PSD2, three new types of players, which differ in terms of purpose and freedom of action, were established:

• AISPs (Account Information Service Providers) provide services that access customers’ bank account information, thus making it possible to analyse users’ spending behaviour and/or aggregate data from multiple banking institutions into a single platform.
• PISPs (Payment Initiation Service Providers) provide services which initiate payments directly from users’ current accounts, subject to users’ consent.
• CISPs (Card Issuing Service Providers) provide card-based payment services which make it possible to verify whether the required amount is available within a given account for the payment transaction to be successful. If the balance available on an account is sufficient to carry out the relative transaction, this information is not revealed.

What are the main objectives of PSD2?

The introduction of PSD2 has three main objectives, which are strongly intertwined:

1. Increasing competition within the payment services market, encouraging the entry of new players and fostering innovation in the sector.
2. Creating a more efficient and integrated market through the sharing of banking data, which takes place via Open API (Application Programming Interface) that banks make available to third parties allowing these latter to access information and/or initiate payments transactions from current accounts.
3. Guaranteeing the security of information and data with the introduction of a new way of authenticating users who make a payment, called SCA - Strong Customer Authentication.

It is only thanks to the entry into force of PSD2 that nowadays we can speak of Open Banking as we have done in recent years. This is mainly because PSD2 defines the rules that allow banking institutions to open up to third party providers, which are therefore put in the position to build innovative products and services, increasingly aimed at satisfying customers’ needs.

How does PSD2 improve the overall customer experience?

It is important to remember that, in addition to increasing competition, the introduction of PSD2 and the rise of Open Banking enable end customers to enjoy better experiences or access new services. For example:

• Accounts held at different banking institutions can be collected in a single dashboard, for example within an app through which users can monitor their financial situation and move money from one account to another in a simple and safe way.
• By integrating PISP services via API, merchants can save on fees by offering customers an alternative payment method (Account-to-Account payments - A2A payments), which is also valid for large amounts and for those who do not have credit cards. One of the main advantages of the PISP solution is to enable recurring payments by requiring the customer to carry out the SCA process only for the first payment of the series.
• The assessment of creditworthiness and financial solvency to obtain access to credit is now more precise and secure thanks to Credit Scoring services which, through the analysis of relevant transactional data, allow for a more accurate investigation of users’ risk profile.
  The AISP license can also help streamline customer onboarding processes and the overall user experience with specific products and services. In fact, it allows to use account information to verify the identity of the holder and the ownership of the account quickly and promptly.

Towards PSD3

If, on the one hand, PSD2 has generated great opportunities for all stakeholders; on the other hand, to fully realise what has been promised when it comes to Open APIs and Open Banking and to bring the entire European financial sector closer to an Open Finance vision, EU institutions aim to fill the main gaps that have arisen due to a rapid market evolution with a new Directive (aka PSD3) which could further revolutionise the world of payments.

Considering the critical issues that were highlighted in the latest European Commission report on the application and impact of PSD2 published at the beginning of 2023, it is highly likely that PSD3 could lead to further significant changes regarding:

• The regulation of new services, such as Digital Wallet, BNPL solutions, and crypto.
• The standardisation of Open APIs at European level.
• The simplification of existing rules (i.e., PSD2, GDPR, E-money Directive etc.).
• The coordination to reduce legal uncertainty due to the tension between supervisory law and data protection law.

The process to revise PSD2 has already begun with the European Commission promoting a ‘Call for Consultation’ in May 2022. By the end of 2023, the European Commission is planned to publish an initial legislative proposal to move beyond PSD2 which is then expected to be amended by the European Parliament and approved by the Council of the European Union between 2024-2025.