In a previous blog, we wrote about open banking and the possibilities it opens up for both banks and FinTech to finally work together as a team to improve the process of onboarding and enable other plug-and-play services. The new European regulation PSD2 is speeding up this process by compelling banks to cooperate.
What is PSD2?
PSD2 is short for Payment Service Directive 2, an update to PSD1, which was instated over ten years ago. PSD2 wants to enable a simpler, safer, and more efficient payment system within Europe. There are three major changes, all to protect clients’ privacy while forcing banks to share what the client wants to share.
1. Open up account information
The most radical change is that banks are obliged to open up the payment accounts to authorized third parties if and when the clients want them to do so. Companies (not just banks) can arrange payments, check the balance on the client’s account, and retrieve account information. Banks will have to find a way to build a trusted relationship between them and the FinTech their client wants to use.
2. Abolish extra costs
PSD2 prohibits the beneficiary of a payment (a merchant, online store, etc.) from charging additional costs for payments with certain payment methods. For example, an online store may no longer request a small surcharge if a client wants to pay with a credit card. Banks will have to find a way to make all payments free of extra costs.
3. Create a safer payment environment
PSD2 introduces new strict rules to guarantee the client’s safety, so everyone can pay the way they want, with strict security compliance. Apps will have to use a proven and 100% safe payment method with secure authentication to prevent abuse and theft. Banks and FinTech will be obliged to use Strong Customer Authentication (SCA) based on knowledge, possession, and inherence.
Why is PSD2 an improvement?
PSD2 could revolutionize the payment industry by changing profitable business models. Banks will be forced to create equally attractive solutions for their customers in order not to be overtaken by third parties. PSD2 will open the door for a lot of new services that require banks to work together with FinTech instead of shielding their data.
As we said before: by partially opening up their systems to FinTech, banks can embrace agility. The only thing they need to do is pick the tools and software that improve the customer experience. Open banking consequently leads to being more responsive, improved user experience, and potentially lower innovation costs. We hope PSD2 will accelerate this process. We will keep you posted!
If you need any help with the challenges PSD2 brings, we can help you with our smooth onboarding solution – powered by our ID capture software – which enables your customers to easily register when buying new products or services. Contact us for more information and advice.