The 2nd Payment Services Directive or PSD2 regulation is a European Union measure. It was adopted to modernize and secure financial transactions. It is a significant milestone in the evolution of the online payment landscape.
Coming into force in 2019, PSD2 imposes strict standards aimed at strengthening the security of electronic payments. The directive introduces new requirements: SCA strong authentication and the opening up of banking information systems, or Open Banking. Let's find out together how PSD2 improves the customer experience, fights fraud more effectively and guarantees the transparency of financial data.
Main provisions of PSD2 regulations
PSD2 introduces several crucial provisions. These aim to modernize and secure online payments within the European Union. Here are the main aspects of this directive.
Enhanced security for online payments
PSD2 places particular emphasis on securing electronic transactions. Stricter new standards are imposed to reduce the risk of fraud and protect the consumer. These standards include the introduction of strong authentication for online payments.
What is SCA strong authentication?
Strong Customer Authentication (SCA) is one of the pillars of PSD2. It requires online payments over €30 to be validated using dual customer authentication. In concrete terms, this means that consumers must provide at least 2 forms of identification for their online purchases. There are 3 different methods of identification:
- Know: a password that the user knows
- Possess: a secret code sent to a device held by the user
- To be: the customer's fingerprint
Requirements for online transactions
In addition to a strong authentication solution, PSD2 imposes other standards to guarantee the security of digital transactions. These include the prohibition of overcharging practices and the reinforcement of consumer rights in the event of fraudulent payments.
Promoting competition through Open Banking
The PSD2 regulation aims to foster competition and stimulate European innovation in payment services. It achieves this through the introduction of Open Banking.
Open Banking: opening up banking information systems
Open-banking is one of the major innovations introduced by PSD2. This measure enables consumers to share financial information with third-party service providers. This means that account aggregators and payment initiators can have access to customer accounts. However, this requires the customer's explicit consent.
For example, a user can authorize a third-party application to access his or her banking data. This enables them to manage their personal data in a more integrated and efficient way.
Open banking brings new players to the fore
Thanks to the opening up of banking IS, new players are appearing on the payments market. These new fintechs and innovative startups are exploiting access to banking data to offer innovative, competitive services.
Companies like Lydia have been able to develop advanced mobile payment solutions. They offer an alternative to traditional payment methods, while complying with the security and confidentiality standards reinforced by DSP2.
Implications for data security
To reinforce data security and protection, PSD2 imposes strict standards, which we will now examine.
Greater protection for consumer data
Payment service providers must now implement measures to guarantee the confidentiality and integrity of personal information. These include encryption protocols and enhanced security procedures against hacker attacks.
Reinforcing standards for financial information management
The collection, storage and processing of financial information must now benefit from enhanced security. This measure, introduced by DSP2, is designed to guarantee the confidentiality and security of remote payments.
Impact of PSD2 on transactions, costs and compliance
DSPE brings significant changes to the online payment process. This new directive influences transaction costs and compliance within the European Union. Here are the main impacts of PSD2.
Complexity and cost of payment
With the introduction of two-factor authentication and enhanced payment security, related costs can increase.
Following the implementation of PSD2, payment providers need to invest in order to maintain their competitive edge. Such investments may result in higher costs for merchants and/or their customers.
Indeed, the increased costs for payment providers could be passed on to consumers in the form of fees. This, along with the SCA, could alter purchasing behavior.
Financial and legal penalties provided for in DSP2 regulations
Companies that fail to comply with the security and authentication standards required by PSD2 may face administrative penalties. These penalties can take financial form: fines; or legal form: legal action.
In addition to these legal sanctions, failure to comply with PSD2 standards can damage reputation and consumer confidence.
Customer journeys and experiences under DSP2
Compliance with PSD2 regulations requires significant changes to customer journeys and the experience offered. These changes are intended to strengthen the security of online payments, but the end-customer experience could be impacted.
Combining safety and experience
Tighter security standards often mean a poorer customer experience. PSD2 requires such measures. How can you continue to provide a smooth, pleasant experience while complying with the law? Here are some effective strategies.
Simplified authentication method
The use of identification tools makes web and mobile platforms more fluid.
Biometric authentication
Biometric authentication via fingerprint or facial recognition enhances data security while providing a pleasant user experience.
1-click identification
Developing authentication solutions that require minimal user interaction is beneficial to the overall fluidity of the platform. To this end, sending push notifications to approve a connection is a viable solution.
The role of PSPs in improving the customer experience
Payment service providers, or PSPs, also play a crucial role in developing exceptional customer experiences. They provide the tools and support needed to ensure that online payments comply with PSD2 regulations.
Supply of DSP2-compliant technology solutions
In accordance with DSP2 regulations, PSPs must secure their platforms and access to them. Financial data, bank account details and personal data must be encrypted to the highest level of security.
Development of secure payment platforms
PSP platforms use robust security protocols (SSL protocol, encryption of banking information, encryption of transferred data). They protect financial transaction data against the risks of fraud and identity theft.
Innovation in biometric payments and tokenization
By introducingbiometric authentication and tokenization technologies, PSPs are making the payment process more secure - and more enjoyable. These technologies guarantee users and customers the security of their personal information.
Helping companies comply with PSD2 regulations
Consulting and support
PSPs offer consulting services to help companies understand PSD2. They provide the support needed to identify best practices and appropriate technologies to implement all the measures required by this regulation.
Training and educational resources
In the same way, PSPs provide digital resources for understanding the elements required by the 2nd Payment Services Directive.