Payment Services Directive 2

Definition

Payment Services Directive 2 (PSD2) is a European regulation that aims to enhance consumer protection, promote innovation, and improve the security of payment services across the European Union. It updates the original Payment Services Directive, introducing new requirements for payment service providers and facilitating access to customer accounts for third-party providers, thus fostering competition in the payment services market.

5 Must Know Facts For Your Next Test

1. PSD2 came into effect in January 2018, significantly changing the landscape of payment services in Europe.
2. The directive requires banks to provide third-party providers with access to customer accounts with the customer's consent, leading to increased competition and innovation.
3. Strong Customer Authentication (SCA) is a critical element of PSD2, which requires that all electronic payments must be authenticated using at least two independent elements.
4. PSD2 also aims to enhance consumer protection by mandating better transparency regarding fees and terms associated with payment services.
5. Non-compliance with PSD2 can result in significant penalties for payment service providers, emphasizing the importance of adherence to regulatory requirements.

Review Questions

• How does PSD2 facilitate competition among payment service providers?
  • PSD2 fosters competition by allowing third-party providers to access customer bank accounts with the customer's consent. This access enables these providers to offer innovative services such as account aggregation and payment initiation, which enhances consumer choice and encourages traditional banks to improve their offerings. By breaking down barriers that previously restricted access to banking information, PSD2 levels the playing field and promotes a more dynamic payment services market.
• Discuss the implications of Strong Customer Authentication (SCA) introduced by PSD2 for online transactions.
  • Strong Customer Authentication (SCA) under PSD2 has significant implications for online transactions as it requires two-factor authentication for most electronic payments. This added layer of security helps reduce the risk of fraud and enhances consumer confidence in digital payments. However, it also presents challenges for merchants and payment processors who need to adapt their systems to comply with SCA requirements while ensuring a seamless user experience.
• Evaluate how PSD2 impacts consumer rights and protections in the digital payments space.
  • PSD2 significantly enhances consumer rights by promoting transparency in payment services and mandating clearer information regarding fees and transaction terms. Consumers are better protected through stronger security measures like Strong Customer Authentication, which reduces fraud risks. Additionally, the directive empowers consumers by allowing them more control over their financial data and choices in selecting payment service providers, ultimately leading to a safer and more competitive environment for digital payments.

Related terms

Open Banking:

A system that allows third-party developers to build applications and services around financial institutions, enabling consumers to access their financial data securely.

Strong Customer Authentication (SCA): A requirement under PSD2 that mandates two-factor authentication for online payments to enhance security and reduce fraud.

Payment Service Provider (PSP): A company that facilitates online payment processing for businesses, enabling them to accept payments from customers through various methods.