07/05/2021

PSD2 impacts on the payments industry

By Mariana Marques

By Mariana Almeida Marques 

Payment services is a heavily regulated industry, which comes as no surprise considering the increasingly higher risk levels of fraud and cybercrime and the threats this poses to both companies consumers. Not only that, but there is also a much higher volume of transactions globally, as more individuals are preferring to make purchases and payments digitally.

 

What is PSD2?

PSD2, or Payment Services Directive, is an European directive for electronic payment services. It came into effect in 2018, as an amendment to the original PSD, created in 2007, and it plays a crucial role in regulating payment services and payment providers both in the EU and EEA. This directive regulates both Payment Initiation Services (PIS) and Account Information Services (AIS).

Whilst the PIS facilitates the online payment transaction by accessing the customer account and initiating the payment process, AIS is an online service that compiles information of a customer’s bank accounts, providing customers with an overview of their finances and allowing them to share these details with other financial providers.

PSD2 mandates stronger security for online transactions reinforced through multiple tools, such as a multi-factor authentication (MFA) that often includes biometric factors like face, voice or fingerprints to ensure that the payment is indeed initiated by the account owner and not somebody else. It also requires banks to share their customers’ bank account information with third-party banking services, providing that customers give their consent.

 

What benefits does PSD2 bring to companies and customers?

The regulations imposed by PSD2 are quite clear, but its consequences aren’t as straightforward. Generally, this directive has a large impact on both Payment Service Providers (PSP) and customers, particularly when it comes to added security and collaboration between financial institutions.

PSD2 aims to strengthen customer rights, regulating the information collected and shared by banking services, as well as keeping transparency at the core of all services provided. The ultimate goal of this measure is to homogenise payment services as a whole, by enforcing the same regulations to each and every financial institution in the EU and EEA.

When it comes to sharing customers’ information with third-party banking services, it is understandable to see some initial reticence from big financial institutions, particularly those that have been around long before the technology advancements we are currently experiencing. This rule to share data is indeed a challenge imposed to traditional banks that are used to work towards a monopoly of customer data, making it more difficult for banks to become a one-stop-shop and to own all parts of the payment process.

 

The age of partnerships

PSD2’s goal, aside from building stronger online security in payment transactions, is also to boost innovation within the industry. This only reinforces an existing trend that is being adopted by more and more institutions: partnerships between big banks and smaller financial enterprises. Both are incredibly different and despite the competitive environment of the industry, there is proof that this type of collaboration is beneficial to everyone, including the customers. One of the many examples is the partnership between the automated lending platform Kabbage, and ING, an Amsterdam-based banking services corporation, which allowed ING to expand its business lending into France and Italy and more efficiently serve its existing customers.

Keeping services and databases in-house comes at a high cost for banks, because they are forced to spend millions purely in maintaining their current IT systems and ensuring these are relatively up-to-date. The prime time for the finance industry is now, when industry-wide changes are happening, innovative solutions are being launched regularly and customers are expressing their desire for easy access to seamless services that suit their needs. If financial institutions don’t adapt to industry changes now, it will become increasingly difficult to gain competitive advantage in the future.

FinTech start-ups offer big banks the possibility to adapt to industry-wide technological challenges and be ‘future-proof’, so they can be agile enough to easily readjust to the market as it changes. The finance industry is essentially controlled by customer demand and by the highly innovative solutions that are frequently being deployed.

Take Imburse and what it can do for your business. Imburse offers integration-free connection with the whole payment ecosystem, allowing companies to easily and quickly deploy the payment technologies they want, when they want. Partnering with Imburse means that you can adapt your services to your customers’ needs, expand your business worldwide and always be at the forefront of industry changes.

Whether you are paying out or collecting money, Imburse helps you perform a seamless transaction with the providers of your choice, whilst providing you with efficient management tools and resources to ensure security and build a solid database of customer behaviour. This is just one example of what collaborating with FinTechs can actually bring to the table.

 

Implementing PSD2 in the ecommerce industry

The deadline for the ecommerce industry to implement Strong Customer Authentication (SCA) rules was extended until the 14th of September this year, in light of the Covid-19 crisis. This means that by September, all payment service providers, card issuers and online retailers must be compliant with this rule and have stronger authentication methods set in place to protect their customers.

Online sales reached all-time highs last year, mainly due to lockdown measures that kept physical stores closed. This booming in online shopping magnified the whole e-commerce industry, which is expected to continue to grow globally at a compound annual growth rate (CAGR) of 14.7% from 2020 to 2027 (Grand View Research).

This is perhaps not surprising at all, considering that people are turning to digital to make purchases, and that online shopping does bring the commodity that customers now desire. However, it does intensify the need for stronger online security which will act as an extra layer in the payment process. This will benefit both the customers, protecting their money, and businesses, avoiding chargebacks and helping to build trust and reputation.

The consequences of PSD2 are actually mirroring existing trends within the payments industry: firstly, the concern with online security and, secondly, the need to partner with FinTechs that offer newer, more innovative services. Therefore, it serves as an extra push for companies to really invest in these trends and reap the benefits later.

 

About Mariana Marques

Mariana is a content writer at Imburse, specialising in Finance and Technology topics.

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