How the PSD2 directive will boost the fintech startup scene
By September 2019, all companies within the EU will have to comply with the PSD2 Regulatory Technical Standard (RTS). PSD2 was designed to facilitate the growth of product innovations in payment and financial services provided by non-banking services. The directive will enable payments to be carried out not only by banks but also by other financial institutions and fintechs. These new regulations are set out to deepen the existing market of payment services while maintaining the interest of consumers.
PSD 2 (2nd Payment Services Directive) 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 fintech startups to carve a space for themselves on the financial services market that has been traditionally occupied by banking institutions.
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. It indicates that a strong authentication procedure should be carried out when the consumer gains access to the payment account online, initiates an electronic payment transaction, or performs 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 economy service provider such as Google or Amazon.
Handling of unauthorized transactions
Unauthorized transactions are transactions that have been made without the consent of the payer with or without the use of a payment instrument.
If the consumer determines that such a transaction has been completed, the provider is deemed fully liable. They need to return the transaction amount immediately. The consumer needs to report an unauthorized transaction of the service provider no later than within 13 months from the date of debiting the account or from the date of the transaction.
Still, the consumer won’t be charged if the loss was caused by actions or lack of action on the part of the payment service provider (its employee, agent, or branch).
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 a major disruption on the financial services market and new provider types – including fintech startups – will now have the freedom to innovate without putting consumers at risk.
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