For many PSD2 is the inconvenient directive that means you are spending more time remembering passwords, PIN numbers and finding yourself shouting at a device to authenticate your voice activated bank account.
The frustration consumers are experiencing is one element of the PSD2 ruling as authentication requires tightening up to defeat fraudsters. However, PSD2 has far reaching consequences. Consequently, banks and online merchants are facing the biggest overhaul to banking since online banking was introduced.
Under PSD2 EU directive banks and online merchants are facing the biggest overhaul since eCommerce was introduced. However, the scale of the PSD2 overhaul is proving to be too much too soon.
The businesses online are not ready. Consequently, the FCA (Financial Conduct
Authority) has bowed under pressure from the banking and ecommerce sectors and
agreed to an 18 month delay instead of the mid-September deadline.
So what exactly is PSD2 and how does
it affect you?
What is PSD2?
PSD2 is more than a change
to a 2 step authentication process. PSD2 is an evolution of the 2007 Payments
Services Directive (PSD) and is coming into force in September – focussing on
creating innovative payment services. The directive will ensure cross border
payments are easy, efficient and, of course, secure.
What
are the aims of PSD2?
- Improve innovation
- Strengthen consumer protection
- Improve security of internet payments
- Strengthen account access
What impact will PSD2 have?
- Increased security to stop fraud
Tightening up of
security is in response to the surge in cybercrime and online fraud. The enhanced security measures will
significantly impact how banks and online merchants will take payments. Increased security of internet payments using Stronger Customer
Authentication (SCA). Every transaction will require 2 forms of ID based on 3
pillars of authentication:
- Knowledge:
something only the user knows e.g. PIN number, password - Possession:
something only the user has e.g. bank card - Inherence:
something that is unique to the user e.g. voice, fingerprint
Under PSD2 a second layer of security must be added
for all remote access transactions made via internet or mobile. What will happen now is a unique code is sent for
each specific transaction. This is significant because until PSD2 banks
resisted introducing 2 stage authentication. Reason being, customers’ feedback
indicated 2 steps had a negative effect on customers’ experience. As a
compromise banks only introduced a 2 step process when a new payee was set up on
the account.
You may already be experiencing the changes. Recently, banks were writing to customers and
implementing changes in advance of the deadline date. Two reasons, firstly to
smooth out technical hitches and avoid penalties after 14th of
September. Secondly, ensure customers are comfortably using the system.
2) Open
Banking
PSD2 is
revolutionising the financial world. The EU directive shatters the banks
monopoly by removing barriers for ‘non banks’. The Directive is enabling 3rd
parties to easily enter the financial market and creating an open banking
environment. Banks will no longer have a monopoly over their customers’
accounts and data.
Banks will
be obliged to give third parties access to account information enabling those
parties to access valuable data and make payments on behalf of someone. The
‘non bank’ model is not new as PayPal, Apple Pay etc are well-established 3rd
parties trusted by consumers and merchants. The difference is how easy it is becoming
to enter the market by piggy backing financial services on top of the existing
banks’ infrastructure.
3) Improved Consumer Rights
Last, but by no means least, PSD2 is
enhancing consumer rights and complaints processes.
Consumers will demand
competitive rates and the balance of power to be in their hands. As transacting becomes quicker, easier and
more convenient the physical high street combined with an online presence will
no longer matter. Instead customer experience and innovative services will
shape consumer trust. An outdated, clunky banking experience will result in a
customer switching accounts in a matter of minutes.
What does PSD2 mean for business?
Banks will no longer be
competing against only banks, instead everyone offering financial services is potentially
a direct competitor. Rapid change is evident with personal bank Monzo and
business bank Tide – disrupting the banking sector by promising (and
delivering) to make life easier not harder.
For SMEs managing cash flow, receiving and sending
payments should become cheaper and more convenient than ever before. Consumers
should experience the benefits of increased competition combined with
transparency over all financial data related to you and your business. PSD2
promises to put control into the hands of the consumer.
The question is will consumers finally gain the
balance of power or not?