If you’re from the EU or are interested in the global finance and economic sphere, you likely have heard of PSD2. Even though the abbreviation is known by many, far from everyone is aware of what exactly that is and how it works. Well, we’re here to make PSD2 explained in the clearest and simplest possible way. Without any further delay, let’s begin!
How PSD2 Came to Life?
The story of PSD2 begins in the mid-2000s. European Union legislators were raising concerns about the growing influence of the banking market. With increased reliance on digital banking and online transactions, the EU set a standard and created the SEPA (Single Euro Payment Market). It was a groundbreaking achievement and brought tons of benefits to both private and corporate consumers in the EU. The SEPA was introduced as a part of a broader regulatory package, involving competition monitoring, transaction management and other items. That package was the first Payment Services Directive.
PSD2 is the second and much revised directive. It is more focused on the protection of personal information and creating a model for secure and effortless transactions with regards to money or information exchange. The second Payment Services Directive is as much an expansion to the first one, as it is a standalone document.
How PSD2 Works?
For the most part, PSD2 dictates how TPP (Third Party Providers) can access your data and how they can use it. Rapid advancements in the digital space made the previous directive almost obsolete after only a decade which meant a revision was needed. Before, the technological capabilities greatly outpaced legislature forcing innovation to slow down almost to a dead stop.
After the introduction of this new directive, innovation once again flourished with the development of an entirely new sector – the open banking sector.
PSD2 works by ensuring that each financial transaction, regarding one’s personal or sensitive financial information must be initiated by the person (no one else can initiate it) and the intent is authentication. Very versatile SCA authentication requirements were introduced, making fraud very difficult whilst untying the hands of developers and financial service providers. With consent, they could get relevant information and generate insights, make predictions and offer financial products that are better optimized.
In general, PSD2 is very fluent and adaptable. Developers, consumers, banks and entire economies can benefit from it. Whilst the goal is to increase the general sense of competitiveness in the banking sector, there are also numerous parallel benefits outside of banking.
For example, before the introduction of open banking (e.g. PSD2), tasks like tenant referencing were needlessly complex. After the introduction and the implementation of sufficient technology, people can hand over necessary financial information to their potential landlords with only a few clicks. What once took hours, days or even weeks to complete, now takes a few minutes.
It looks like the functionality will be expanded in the future, making PSD2 the most important document in European finance, for the time being.