PSD2

Open banking: the advantages of PSD2 for small and medium-sized enterprises

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Open banking

Open banking: a new way of “banking”

The European directive PSD2 concretizes the concept of Open banking and introduces new players in the financial market, increasing competition and innovation in the banking sector.

PSD2 and Open Banking: What is Open Data Banking?

The Payment Service Directive 2 (PSD2), the European directive on payment services that entered into force on January 13, 2018, has in fact changed the Digital Payments market and, consequently, the relationship between financial institutions and customers.

PSD2 is the European directive on payment services that has simplified digital transaction processes, introduced new security measures, including Strong Customer Authentication (SCA), and revolutionized the relationship between financial institutions and customers through Open Banking.

What is Open Banking?  Open Banking, literally “banking system with open data”, is a new way of “banking” that encourages innovation and competition in the supply of financial services in order to create a more democratic banking environment, strengthen the protection of consumers and improve the security of digital payments.

Open Banking is a collaborative model that involves multiple market players (banks and Fintech companies) who share customer banking data (for example available balance, expense details, income, and expenses) through open technological platforms with the aim to improve the customer experience and offer users increasingly customized solutions.

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With the introduction of PSD2, therefore, the financial ecosystem becomes more open and collaborative because banking institutions share the financial information of their customers, with their prior consent, with third parties (Third Party Provider-TPP) via open API (Application Programming Interface) that allow the exchange of data and information between banks and other service providers.

How are the APIs shared?  Completely safely and exclusively under conditions approved by the customer himself. In fact, only the data authorized by the customer in accordance with the GDPR regulations are shared with third-party companies.

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TPP and Open Banking: who are the Third-Party Providers?

Open Banking redesigns the financial market, outlining a competitive scenario that opens the doors to new players: the introduction of PSD2, in fact, requires banks’ APIs to be made available to third-party companies, in English Third-Party Provider (TPP), in order to offer users new and increasingly innovative services and products.

Let’s see what are the three new types of players at the base of Open Banking:

  • Account Information Service Provider (AISP)
    The acronym AISP indicates service providers who have access to customer banking information and are able to analyze user spending behavior, group information relating to periodic expenses, and aggregate banking data from several financial institutions in one platform.
  • Payment Initiation Service Provider (PISP)
    ​​PISPs are service providers who have access to customers’ banking information and are able to withdraw money from the account and send a payment, subject to the user’s consent. In other words, these are services that can act as an intermediary between a customer who has to make a payment and his bank account.
  • Card Issuer Service Provider (CISP)
    CISPs are debit card-based payment service providers associated with a current account accessible online and linked to a credit institution other than the one that issued the card. These services are able to check if the availability of money on the customer’s card is sufficient to complete the transaction successfully. It is important to remember that the CISP is not able to verify the actual availability of the customer’s card, but only the remaining availability sufficient to complete the transaction in question.

What are the benefits of PSD2 for SMEs?

As we have already said, the application of the European PSD2 directive is transforming the traditional financial world which, with Open Banking, becomes more democratic and competitive, favoring innovation in the banking sector and increasing the level of security of digital transactions.

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All this translates into advantages and opportunities even for small and medium-sized enterprises that can choose between products and services that meet their needs.

Let’s see what are the main benefits of PSD2 for SMEs:

  1. Wide choice of dedicated services
    The access of third-party companies (TPP) to customer information allows us to offer solutions aimed at improving payment management and guarantees greater speed and efficiency of services.
  2. Increased level of security
    Thanks to Strong Customer Authentication (SCA) and procedures for verifying user identity and authenticity of payment transactions, security is significantly enhanced.
  3. Improve the Customer Experience
    The PSD2, in addition to increasing the transparency and security of online banking systems, simplifies the management of finances, improving the user experience of customers. In fact, by implementing an optimized payment system and checkout phase in your e-store, it is possible to offer the consumer a simpler shopping experience and increase sales.

PSD2: guide to the new European legislation on digital payments

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digital payments

In the space of a few years, the payments sector has undergone a rapid and significant evolution: according to a survey, digital transactions have grown by around 50%. It is precisely within this innovative landscape that Europe has taken the decision to regulate the world of new digital payments with new legislation, PSD2.

PSD2 is not the first legislation regarding the world of online payments enacted in Europe, in fact, in 2009 the PSD directive was introduced to regulate payments within the EU. Due to the development of new digital payment systems, the European Commission has recently decided to revise the existing legislation. Thus was born the new PSD2, a law that entered into force on 13 January 2018 which should become mandatory from 14 September 2019 starting from the new SCA and 3DS 2.0 authentication systems. The objectives of PSD2 are clear: to comply with innovative transactions, to increase the protection and safety of users, and to favor the new financial model ” Open Banking” based on a higher level of competitiveness.

Latest updates: PSD2 extension

Latest updates, PSD2 extension: the latest official press release made public on 1 August 2019, reviews the timing of the legislation by taking advantage of an opportunity granted by the European Banking Association (EBA).“In consideration of the complexity of the adjustments, particularly relevant in the field of online card payments, and the need for active involvement of users, on 21 June the European Banking Authority (EBA) recognized the possibility of granting additional time to national authorities, compared to September 14, to allow the completion of the interventions and the adoption of the new authentication tools by all customers, with exclusive reference to the aforementioned category of payments “, this is how Bankitalia communicates its decision at an official level. In fact, the application of the strong authentication rules for online payments (Strong Customer Authentication) – which had to be implemented from 14 September – is postponed to a date to be defined. What are the reasons? Updates in the financial system are considered to be particularly complex. A gradual change is expected to significantly reduce the risk of payment services malfunctioning.

PSD2 what it is and what it entails

Payment Services Directive 2, better known by the acronym PSD2, is the second legislation issued by the European Commission relating to payment services. Entered into force on 13 January 2018, the new directive has the primary objective of making payment management in Europe more secure and convenient.

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On the online payment security front, PSD2 will bring important news: starting from 14 September 2019 (with the August extension from a later date to be defined) all e-commerce platforms will have to implement new innovative authentication systems in their payment procedures, such as 3DS 2.0 and SCA. All transactions that do not comply with the new security requirements may, in fact, be rejected by the buyer’s bank. Strong Customer Authentication (SCA) and 3DS 2.0 are innovative security procedures able to guarantee the customer total security. In fact, with the PSD2, every consumer will be able to make payments or access their banking information without having to fear fraud or violations of privacy.

The real innovative feature of PSD2 is the increased competition in the financial sector. Banks and Poste Italiane must necessarily share information relating to their customers with authorized third parties (Third Party Provider – TTP). PSD2 will undoubtedly open the financial market to new entrants. The e-commerce sector, for example, will benefit enormously from the new legislation. In fact, by implementing a complete payment phase in your store, you can offer the consumer an optimal experience.

PSD2 meaning: why did the EU introduce it? The objectives are multiple: to offer more protection and security to customers in the field of digital payments through new authentication methods, to create an Open Banking model by sharing data with authorized third parties, and to optimize the customer experience by simplifying digital transactions processes.

PSD2 Banking: who are the new financial players?

As already mentioned, one of the most revolutionary innovations introduced by the PSD2 regulation concerns the possibility for authorized Third Parties to have access to users’ banking data. In other words, online account holders have the ability to make payments or access their private information through authorized non-banking services.

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In order to use the services provided by new players, the so-called Third Party Providers, it is the user himself who must authorize access. The authorization signal is transmitted to the customer’s bank by means of reinforced security mechanisms. In fact, the European Banking Authority (EBA) has made it mandatory to draw up a public electronic register in which all the TTPs authorized to operate payment services in the EU within the PSD2 context will be listed. In this way, each consumer will be able to check if the Financial Player to be authorized is present in the register. By doing so, you will have the security of providing access to your bank details and payment transactions exclusively to certified and effectively approved entities at a regulatory level.

But who are the TTPs? Let’s find out what are the new players in the financial market:

  1. PISP – Payment Initiation Service Provider

Services that act as an intermediary between the user who has to initiate a payment and his own online account. PISPs take action when initiating a transaction on behalf of the user in favor of a third-party beneficiary. In other words, through the use of intermediary software, PISPs allow you to make an online payment from your account to a seller. The operation is simple: the customer, during the payment procedure, just enter the information required for the online money transfer. The user must then inform the merchant that the payment procedure has been initiated. Through this simple procedure, it is possible to transfer sums of money without using credit cards and bank intermediaries.

  1. AISP – Account Information Service Provider

Services made available to online account holders: through specific dashboards, the customer will be able to obtain complete information about their accounts. AISPs are more simply services capable of retrieving banking information by connecting to customer accounts. Through AISPs, customers will be able to monitor their investments, analyze their spending behavior and plan each financial investment using a single dashboard.

  1. CISP – Card Initiation Service Payment

CISPs are issuers of card-based payment methods other than the customer’s bank. The CISP is a tool capable of asking for checks on the availability of money within the card before starting a transaction. The answer that the CISP receives from the bank can be affirmative or negative: it will be affirmative only when the availability of money on the card is sufficient to carry out the requested transaction.

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What will change with PSD2?

PSD2 brings with it 5 major improvements in the financial sector:

  • Open Banking

As already explained above, the most important and innovative change brought about by the PSD2 regulation undoubtedly concerns the creation of an open banking system. Banks, by sharing their customers’ data with TTPs, will make the financial market more competitive and modern. Customers will benefit greatly from this reform: managing their finances and initiating payments will require less time.

  • New safety systems

PSD2 tackles the issue of online payment security in a totally innovative way. To cope with the incessant increase in risks and scams for consumers, the new legislation introduces two new simple and secure authentication systems: 3DS 2.0 and SCA. The 3DS 2.0 system, an evolution of the current 3D Secure, and Strong Customer Authentication (SCA) will significantly improve the security of online transactions. Both security measures must be adopted starting from September 14th, 2019.

  • Improvement of the online customer experience

One of the most evident changes brought about by the new European legislation undoubtedly concerns online shopping. By sharing information with authorized third parties, merchants and online stores will be able to implement complete payment procedures on their web pages. European legislation opens the doors to new players in the financial sector: FinTech companies and e-commerce giants such as Amazon or Apple will be able to fully manage the payment processes of their users. The PSD2 will therefore allow the e-commerce sector to optimize the consumer experience by offering a complete service without intermediaries.

  • Simplified management of your accounts

Thanks to PSD2, Open Banking, and AISPs, it will be possible to view your accounts within a single dashboard. In fact, it is currently not possible to view the data relating to your account if you have two accounts in separate institutions. With the arrival of Open Banking and AISP services, it will be possible to analyze information from a single channel by implementing your data with new tools capable of analyzing spending behavior or commercial trends. In fact, AISPs make new features available to customers with the aim of optimizing their loans and improving the management of online accounts.

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  • Significant cost savings for consumers

The PSD2 will make it possible to significantly reduce the costs of payments. With the arrival of PSD2, in fact, interchange fees cannot exceed 0.2% of the value of the debit card payment transaction. As for payments by credit card, the commissions will be limited to 0.3%. Furthermore, the consumer’s deductible will be reduced (from 150 Euros to 50 Euros) to regulate the expenses activated before a possible report of credit card theft. European consumers will therefore be able to derive clear economic benefits from the new PSD2 legislation and reduce their liability in the event of unauthorized payments.