Payment Service Directive AKA PSD2

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The new European payments law introduced back in January 2018 and which will come into affect in September 2019, is known as the second Payment Services Directive or PSD2, which has introduced some major changes since PSD1 was introduced that significantly impact multi-sided platforms, or online marketplace businesses, in Europe.

In a normal marketplace setup, where a platform acts as an intermediary for their buyers as well as the sellers without itself actually selling the product or service, the system will no longer be allowed to receive payments that are owed by buyers to sellers. If it does, it will have to obtain a special payments license from a regulator and become a regulated business. Stripe Connect for example offers such platforms another option. Platforms that use Stripe Connect do not receive payments owed by buyers to sellers directly and, instead of having to become a licensed provider of regulated payment services, so they can concentrate on growing their online businesses instead. For more on the regulatory changes under PSD2, read further below.

Since its roll out 9 years ago, PSD1 opened up the European banking and financial services market.

Also known as the Payment Services Directive 1, it was a European Union directive designed to regulate payment services and payment service providers in all EU and EEA Member States. This proposal was signed in November 2009 and came into effect in the following few month. Its objectives are multiple, most of which is to stimulate competition in Europe, improve the quality of these services and protect the consumer.

PSD2 is now going to pave the way for new account information and payment initiation services right across the ball.

PSD2 is the updated version of PSD1 which was launched in January 2018. This second directive goes further and paves the way for very important changes in the banking and payments sector. PSD2 will allow innovation by creating two new types of payment services.

The status of “Account Information Service Provider” (AISP) allows new players to access account information directly via API, including balances and transactions, for multiple accounts and multiple banks if requiring more than one.

The status of “Payment Initiation Service Provider” (PISP) gives new players the possibility to initiate payments on behalf of the payer. Instead of triggering a payment from their bank, the user can initiate payment via the PISP, which in turn transmits the instruction to the bank directly, avoiding any third party service gateway.

PSD2 has the potential to radically change and improve the banking and financial services that we experience. New actors will be able to allow all their customers and users to check their accounts and initiate any online payments directly. This is already the case in some B2C for individuals, with account aggregation services, Which there are a lot of across Europe currently.

Summery of the new PSD2 initiative

So the bottom line is that this new PSD2 requirement which will improve the way users payment credentials are verified, will tighten up the process to avoid the growing amount of online credit card fraud. By taking more than one unique payment credential as is the case currently, it will tighten up and make it a requirement to have another form of identity verification, be it coming from the bank itself through their open API or be it another way to identify a user online, it will make things a lot more safe to pay online going forward.

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