Importance of PSD 2

With the beginning of next year, a new European legislation on payment will enter into force. The new Payment Service Directive — part 2 — to enhance security on payments while also supporting more innovative banking methods. “European consumers want to know that their payments are safe when they shop or make a payment online. The new Payment Service Directive will ensure that electronic payments in Europe become more secure and more convenient for European shoppers. This legislation is a step towards a digital single market; it will benefit consumers and businesses, and help the economy grow.” said Jonathan Hill, European Commissioner for Financial Stability, Financial Services and Capital Markets Union.

But what does this new legislative change for the market?

First of all the reason for this update of the PSD, is the rapid development of the payment market in the past years and the innovations, new payment methods and business models call urgently for an adaptation of the law. Making electronic transactions more secure all over the European Union is a significant step into a digital single European market. The PSD2 might be the entrance to the development of an “open banking”, for many this would be the biggest change since the introduction of SEPA, just that this time nothing will stay the same, but now new non-finance related players will enter the payment market as well. This fundamental change might be a chance or a risk, depending on the point of view. Nevertheless experts believe that especially banks have not realised the risks nor the changes that lie in PSD2. Banks are still limping when it comes to e-commerce and its aspects of digital payments. The new payment directive is their opportunity to benefit from customer-oriented services.

Not only banks should use their chance with the new directive but also online merchants can increase their competitive advantage by implementing the required changes as soon as possible. The directive might bring stricter regulations and stipulations but in the same time it also brings a new freedom to online merchants: individualising their payment processes. As third parties can receive access to bank account information, an online merchant could act as a Payment Initiation Service Provider (PISP) and directly communicate with the customer´s bank in order to confirm his validity and credit status. This would make complicated and long authentication processes like 3D-Secure unnecessary and enhances customer friendliness leading to a decreasing number of purchasing breaks.

Without any doubt this shift in the payment process requires a big investment, due especially to the high complexity and effort of implementation. Nevertheless it is a big chance and especially big companies could be able to charge off the costs with saving in transaction costs and less payment breaks. Smaller companies could profit on focusing on core competences and develop a follower strategy. This will help them to react on developments in the market without investing too much themselves.

The PSD2 is having its perks and downsides and most probably the complexity of payments will increase after the implementation. However those who manage to adapt and implement the necessary changes early enough will have competitive advantages over those who don´t. The first priority for online merchants should be to ensure security and comfort for their customers and have a complete and easy to understand customer communication. Obviously customers would require time to get used to the new options and opportunities but a focus on user friendliness and comfort of the payment process will lead to an increasing customer base.

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