What Is PSD2?


The banking industry has seen incredible disruption in the last decade. From the housing collapse that reverberated worldwide to the increasing need for securitization against more and more sophisticated data breaches, banking regulations are becoming stronger. This is where PSD2 comes into play. Many merchants in the U.S. might be unfamiliar. Still, understanding PSD2 and the resulting considerations that must be made are essential to doing business globally and growing your overall footprint to compete in the larger marketplace.

Banking Security

Banking requires extensive securitization to ensure that the tens of millions of transactions that occur each day are made without fault or jeopardy of being hacked. Card and cash transactions both require stringent checks to ensure both the customer and merchant’s safety and security. Payment services agree on this point, and innovation in directives aimed at improving the banking industry as a whole–like open banking–focuses intensely on the rock-solid security of online payments and brick and mortar transactions to protect all parties involved in every one of those purchases.

What Is PSD2? 1

Open Banking

Open banking is a novel innovation that fits within the PSD2 framework. In fact, open banking concepts lie at the extreme forward edge of these regulatory standards and are on the horizon for all global banking interactions. Currently, open banking has been rolled out in the European Economic Area (the EEA) and is creating new and streamlined experiences for customers in all aspects of their financial lives. The advancements are heading across the Atlantic to the United States, but we haven’t quite arrived at this pinnacle just yet.

Open banking is the concept of interconnectivity between financial products. To link accounts or cards to other services, Americans–and formerly European purchasers–have to provide third party systems with log-in details for accounts at banking institutions and other financial service firms. This is not entirely unsafe in its current form, and trusted developers exist in these ‘after market’ financial service roles. Credit history reporters, payment services for electricity and other utility bills, and even new-era loan providers all rely on these arrangements to provide their clients with financial solutions that make their lives easier. But information doesn’t exist in a vacuum. The only way to ensure with complete confidence that your data cannot be compromised is to never use services and infrastructure like this in the first place. A password saved in your head can’t be hacked. The more your information spreads, the more likely a data breach is likely to affect you.

Instead of sharing passwords and log-in credentials, open banking, in line with the PSD2 regulations, creates natural links between third party service providers and card issuers, traditional financial institutions, and other financial services providers. PSD2 regulates how these interactions can provide customers with 3D Secure transactions and rock solid algorithms that protect their personal information, no matter how they choose to utilize these cross-platform services.

PSD2 regulations act as a framework for banking institutions and third-party solutions to work together across multiple spaces in a user’s life’s financial infrastructure. Financial services come in various forms in the modern world, and the European model under the PSD2 guidelines helps streamline security and ease of use for payment account holders looking to take advantage of additional data and platforms. To remain competitive in the global marketplace, all startups and established business entities should begin to transition into these new data rules now to continue doing business overseas and become compliant with the future of the financial services industry before new rules begin to roll into enforcement.