PSD2 codes or (Payment Services Directive Codes) are a game-changer for online banking systems.
It has the potential to break down the bank’s control over its users’ data, allowing e-commerce platforms such as Amazon to retrieve your user data.
The implication is that users will no longer have to rely on intermediary platforms such as PayPal when making online payments, as direct access to your account data will be given to said platforms.
In short, PSD2 is a new type of regulation for making online payments that bring forth numerous benefits.
The regulation can be summed up in two statements:
- Open access to account information
- Permission for APIs to access payments (more on this point later)
What’s an API?
An API, or Application Programming Interface, is a type of program that is used as a way for different platforms to ‘communicate.’
In the context of PSD2, an API would be used to access the user’s payment or account data, requesting it from the platform that stores the data automatically.
Generally, APIs make processes much more efficient, eliminating the need for manual data extraction.
The problem with APIs however is the integration aspect.
Because around 4,000 financial institutions will be affected by the new regulation, the same number of systems will need to be supported.
Designing such a system will be a tedious and resource-consuming task - though a necessary one due to the need to implement the PSD2 regulation.
Is PSD2 Safe?
You may now be wondering if the regulation will affect safety - after all, giving program access to your bank account details doesn’t sound very safe.
The reality may actually surprise you.
PSD2 is considered to be much more secure than alternative means of payment.
The reason behind this is because strong authentication will be required each time a payment is made - generally, the rules for authentication are amorphous and thus inconsistent between platforms currently.
PSD2 ensures the consistency and thus security of each transaction.
Further effects of this are reduction or elimination of fraud or illegal transactions.
Will payments be harder to make?
Considering the stronger security requirements, you may now be thinking that online payments will take much more time to make.
The answer to this question is complicated, but consider the following:
Current platforms such as PayPal generally only require a sign-in or password when making payments.
The ways in which payments can be verified when PSD2 is put into place are listed below:
- Knowledge: something only the user knows, e.g. a password or a PIN code
- Possession: something only the user possesses, e.g. a mobile phone, and
- Inherence: something the user is, e.g. the use of a fingerprint or voice recognition.
The three factors listed above are part of PSD2’s Strong Customer Authentication or SCA process.
Most of the factors are already in use, however, because there were previously no strict rules surrounding the authentication of payments, inconsistencies existed between payment platforms.
Some were more secure, verifying the user’s identity to a great extent before each payment.
Other platforms may not have had the same strict requirements, making illegal or fraudulent transactions more likely to occur.
Why should I use PSD2?
You may be a concurrent PayPal user, currently enjoying the ease at which you can make payments, and thus wondering why you even have to switch to PSD2.
Another factor that PSD2 brings is the transparency of user charges and fees.
This is one of the key reasons for the regulation.
Banks, brokers, and other financial services generally hide their fees and costs when making transactions.
Furthermore, they tend to provide bad (in terms of the user) exchange rates, which increases costs for the user - this likely happens without them even knowing!
If you have been using an online financial service, chances are you’ve been overpaying without even knowing it.
PSD2 eliminates this issue by putting in place regulations to prohibit the charging of non-transparent fees.
According to government bodies (in charge of putting in place the regulation), users must know the ‘real cost and charges of transactions.’
Additionally, multi-bank account users will also benefit from PSD2, as all of their bank accounts will be in one place, making them easy and convenient to view.
When will the regulation be put in place?
As of now, PSD2 already went into effect in September of 2019.
Many people however are still unaware of the change and how it can affect them.
How will it affect banks?
Considering the fact that banks will no longer control all their users’ information, their data monopoly will no longer exist.
Account information will be given to Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs).
Banks will have to begin to update their outdated processes.
This could lead to various partnerships with fintech or tech-related businesses and banking institutions.
If you are one of the said types of businesses, PSD2 may bring forth many business opportunities and could be very useful to keep in mind.
What will AISPs and PISPs do with my data?
In terms of the activities of Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs), they will analyze the account data of their users, looking at spending activity and cash flow for example.
What they will then do is the process or organize the data - then profit off of this data.
Bank documents will be completely digitized - a much-needed change from the traditionally used paper documents.
This is a major advantage, as the time taken to request, send, and save traditional paper documents can be greatly reduced, making activities such as monthly audits very convenient.
The process of getting a loan can also be sped up as a result of digitized documents.
What’s the takeaway?
PSD2 has many benefits, and will likely change a lot about the current online payment systems that are in place.
Said systems had many flaws and were run (mostly) by banks, who have not updated their online payment channels for a very long time.
PSD2 will make things more efficient, safe, and transparent.
From a user standpoint, you will likely not be able to see much of a change - payment processes may become seamless and require additional layers of authentication, however, the internal changes will be the greatest.
PSD2 will change the online banking landscape, and modernize the outdated payment systems that we rely on today.
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