By September 2019, all companies within the EU will have to comply with the PSD2 Regulatory Technical Standard (RTS). The European Union designed PSD2 to facilitate the growth of product innovations in payment and financial services provided by non-banking services. This directive enables payments to be carried out not only by banks but also by other financial institutions and all companies on the fintech startup scene.
PSD 2 is the response to the previous EU PSD directive adopted more than a decade ago. But the market has undergone a real technological revolution since then. The sharp increase in electronic payments, often carried out via mobile devices, as well as new types of payment services appearing on the market made new regulations one of the most pressing needs of the European financial sector.
The new regulations also make it easier for the fintech startup scene to carve a space for themselves on the financial services market that has been traditionally occupied by banking institutions.
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The PSD2 Directive – what you need to know
The European Parliament and the Council of the European Union adopted the PSD2 Directive on November 25, 2015. The Payment Services Act came into force in various European countries to adjust the national regulations to the EU regulations.
Here are a few features of PSD2 that make fintech startup founders hopeful about the future of the financial services market in the EU.
The directive specifies in detail how payment services are to verify user identity. The consumer should carry out a strong authentication procedure when they gain access to the payment account online, initiate an electronic payment transaction, or perform the activity via a remote channel that may involve the risk of fraud.
In such cases, the provider is obliged to use at least two of the following elements for identity verification:
- knowledge (something that only the user knows),
- possession (something that only the user has),
- customer feature (something that only the user is).
Small payment institution
The directive allows small-scale suppliers to provide all payment services without any extra supervision and license. There are a few conditions they need to meet first:
- their average monthly transaction limit cannot exceed EUR 1.5 million,
- they cannot accept customer funds over EUR 2.000,
- they cannot provide services based on account access,
- they cannot provide services in foreign countries.
Regulation of a new category of service providers
Providers of third-party payment services will be able to provide two types of services:
- AIS (account information service)
- PIS (payment initiation service)
PSD2 requires that banks enable AIS and PIS access to the user’s account, regardless of whether there is an agreement between them and a specific TPP. That way, the TPP will be able to obtain data from bank accounts with the consent of the consumer directly. A TPP can be both a classic financial institution and a digital economies service provider such as Google or Amazon.
Handling of unauthorized transactions
We talk about unauthorized transactions when the payer did not consent to the unauthorized transactions, which were made with or without the use of a payment instrument.
The provider is deemed fully liable if the consumer determines that such a transaction has been completed. They need to return the transaction amount immediately. The consumer needs to report an unauthorized transaction of the service provider no later than 13 months from the date of debiting the account or from the date of the transaction.
These four aspects of the PSD2 Directive make it one of the most effective regulatory acts in the recent history of the financial market. Technological innovation has caused major disruption in the financial services market and new provider types – including the fintech startup scene – will now have the freedom to innovate without putting consumers at risk.
We support fintech companies on the quest to change the finance sector. If you’re looking for a company that helps the fintech startup scene, reach out to us – we have plenty of experience in delivering digital products for this exciting industry.