PSD2 and its Global Impact
Posted January 12, 2018
While the upcoming PSD2 regulations are focused on banking and financial institutions throughout the European Union, that doesn’t mean the impact won’t be felt elsewhere.
After all, the digital economy has turned every business into a global business.
Get to Know PSD2
In October 2015, the European Parliament adopted the Revised Payment Services Directive 2 (PSD2) to create safer and more innovative European payments. The new rules, set to be adopted into law this Saturday, January 13, were meant to promote the development and use of innovative online and mobile payments through open banking, and make cross-border European payment services safer.
In short, PSD2 is a game changer for digital payments and eCommerce in Europe. It will enable banks and other financial institutions to offer a range of products and services within a highly regulated market that is undergoing rapid digital transformation. And it will pave the way for emerging players to cause major disruption among long-standing financial institutions – all with the common goal to protect consumers and facilitate growth.
Among others, Kabbage and SoFi, as well mobile banking apps, such as Revolut, Monzo and Starling Bank, have already seen significant levels of success in reinventing the banking experience using many of the concepts and technologies behind this directive.
The Directive Heard ‘Round the World
During the past year, the European Commission has reviewed the extensive feedback it received on the draft of the document, including hundreds of feedback submissions from executives and organizations in the U.S. alone, and has amended the directive to better meet the true mandate of PSD2 and provide clarity and certainty.
Despite its European-centric nature, the effects of PSD2 will be felt across the globe as organizations looking to do business with companies in the EU will have to abide by these regulations.
Businesses outside of the EU that use payment services in Europe can take advantage of some compelling provisions allowed through PSD2 by partnering with a wide range of service providers, from banks and fintechs to social media companies and retailers, to deliver the solutions they need.
For example, if a business sells its products to European customers on Amazon, it can now retrieve its customer’s bank account information and automatically initiate a payment from the customer’s bank without having to redirect them to a third-party service, such as PayPal or Visa.
Many U.S. banks see the rollout of PSD2 as an indication of where the industry is headed, and are getting ahead of the game by developing an open banking strategy now instead of later.
Some financial organizations have announced API hubs that will let third-party developers access consumer data to develop a range of services built around everything from P2P payments to a wide swath of functions tied to account management, including paying bills and money transfers – all in an effort to drive speed and cost efficiency.
Also in the U.S., the Consumer Financial Protection Bureau has already set forth data sharing guidelines for banks and fintech firms. While not in direct response to PSD2, these guidelines will put U.S. businesses one step closer to their EU counterparts.
Transactions Go Global
Today, the global nature of business means businesses can no longer afford to ignore industry changes abroad.
Cross-border transactions continue to grow, as more than one in four transactions seen in our Digital Identity Network are now cross-border. And, as banking and finance continues to take on a more global footprint, meeting PSD2 standards will be critical.
However, the standards around such items as Strong Customer Authentication, risk-based authentication and the use of one-time passwords, are tech-agnostic, giving organizations outside of the EU some flexibility in their implementation, if not already mandated by government regulations.
But fair warning. While all of this is designed to make transactions safer, this flexibility could open the door to potential problems if the systems are not able to operate seamlessly for both domestic transactions and throughout the EU and beyond.
Welcome to a New Era
The implementation of PSD2 is ushering in a new era of open banking throughout Europe that is likely to be the catalyst for a revolution in global banking, opening up doors to new customers and whole new revenue streams.
Failure to capitalize on this could be disastrous, especially if it is only due to the failure to embrace new regulations that have already shown to be of great business benefit to upcoming fintech organizations and leading legacy players aiming to take their businesses to a whole new level.
To learn more about the new phase of PSD2, download our exclusive white paper – PSD2: Revolutionizing the Payments Landscape.