PSD2 is set to revolutionize the way consumers interact with banks, retailers, telecom, hospitality, and other service providers.
It’s midnight. You need some cash urgently, but you don’t have your ATM card to hand. So you take out your mobile phone, touch the app for the bank account you want the money taken from, and select the sum you need. You enter the one-time PIN number you’ve received by SMS into the bank’s ATM, and collect the money. The mobile app even directs you to the nearest ATM. Simple, convenient, and secure.
This is just one of the scenarios where the Payment Services Directive 2, commonly referred to as ‘PSD2’, will help to make your life easier. In fact, PSD2 is set to revolutionize the way consumers interact with banks, retailers, telecom, hospitality, and other service providers.
So what is it? The original PSD was initiated by the European Union (EU) in 2007. The data and technology-driven directive provided a legal framework for all payments made in Europe, with the aim of increasing the speed, efficiency, and simplicity of European payment services. PSD2 leads on from this in response to changes in the payments landscape, and aims to drive increased innovation and transparency across the European payments market—while enhancing the security of Internet payments and account access.
PSD2 also provides a level playing field for competition, both between traditional and new-age payment services providers (PSPs), such as fintechs, and from entities such as online retailers and telcos.
In the application economy, more and more consumers are managing their financial affairs through dedicated personal financial assistant mobile apps. So let’s take a look at five ways PSD2 will accelerate payments innovation and transform the customer experience through mobile apps.
PSD2 puts the consumer, not the transaction, at the centre of the payment process. It aims to give them a simple view and complete control over their financial assets, regardless of which institution maintains the account. When we currently buy online, for example, we share our card details with the merchant and other entities such as PayPal or MasterCard. They in turn get payment from our account via intermediaries.
With PSD2, we will shop online without sharing card details over the Internet, securely and in confidence. Our transactions will be assured and protected by advanced authentication and driven centrally in line with risk-based evaluation of the funds transfer. The result? Faster, cheaper transactions, greater competition, and improved security as well as increased innovation.
Don’t want to use a mobile app or suffering from app clutter? With the adoption of an application program interface (API) driven model for financial accounts, new modes of interacting with this information are emerging. For example, as voice-driven services such as those available from Amazon, Google, and Apple mature, it is only a short step to provide a secure interface that enables consumers to talk to their various financial institutions and perform transactions. There’s no need to wait in a telephone queue or navigate the ‘maze’ of selecting multiple options via your mobile.
Strong (two factor) consumer authentication is a key component of PSD2, being used to validate the user of a payment service or the transaction itself in real-time. Ultimately, it will create a trusted environment for payment services across the EU and reduce fraud without burdening legitimate users. Strong authentication will enable consumers, for example, to make electronic payments quickly and conveniently between enrolled accounts.
They simply touch the account in the mobile app where the money is coming from, then touch ‘transfer funds’, select the recipient, and the process is complete. In certain circumstances however, the bank may designate that transactions over a certain value require additional security to be applied—what is termed ‘risk-based authentication’. In this instance, a further form of user authentication is required, such as a one-time password or perhaps facial recognition. Once the consumer is validated by their bank, the actual transfer can be completed.
Moreover, consumers can also be dynamically restricted through account geo-fencing—this is the use of mobile device geo-location data to assist with transaction verification and fraud prevention. Let’s assume, for example, that the consumer has both Eurozone and US accounts. If the consumer is traveling in the US, then their member bank may wish to permit read-only access to the registered Euro accounts. The bank blocks the inter-bank transfer of funds, as the consumer is not located in the authorized geo-location.
Peer-to-peer payments also become a reality through the PSD2 API-driven framework. In this instance a consumer will be able to select a contact on their mobile device and issue a payment to them without knowledge of their specific bank account details.
With PSD2, consumers will benefit from a single, complete view of all their account affairs directly from their mobile device. Single sign on to their member banks gives them a unified view of their available financial services, as well as a comprehensive picture of their historical financial situation. Additional accounts can be easily added: the consumer simply scrolls through to the chosen member financial institution, authenticates directly with them, and grants the PSD2 mobile assistant access to their account details, including complete transaction history. The new account then appears in the app as a newly available account and the consumer can begin transacting.
With PSD2, consumers can receive relevant financial offers, such as loans, investment advice, and cashback offers. The directive also calls on the banks to give Trusted Payment Providers (TPP) secure access to customer accounts, assuming they have customer consent. TPPs can then bring together key bank data, including income, purchasing history, and debt repayments to obtain an up-to-date, 360 degree view of the consumer. This includes the credit risk of each individual, as well as their likes and dislikes from the product and service marketing perspective. Like banks, TPPs can use their intelligence to provide consumers with compelling customized financial offers.
For consumers, the implementation of PSD2 has the potential to by-pass card schemes and the supporting network of intermediaries in the PCI ecosystem. This in turn eliminates card payment processing costs for the merchants—savings which can be passed directly back to the consumer.
The current ‘pull’ model means merchants ‘call’ for payment via a card scheme, with an API communicating directly with the payer’s bank or via a third-party payment initiator. Through the PSD2 directive, online payments will move to a ‘push’ model, with money taken from a customer account via APIs and transferred directly to the merchant’s account. The account owner can easily decide how long they want online retailers to have access to their account information, and what is the maximum transaction value before additional user validation is necessary.
With PSD2, IT moves from being a supporting function for the business to being an enabler for new business models. Banks will require scalable API management solutions to provide secure access to accounts and connect third-party payment aggregators with their own systems. Moreover, they will need security solutions to deliver the strong authentication and security demanded by PSD2 to validate users and the transaction—all without sacrificing the consumer experience.
Such technologies need to scale on demand, as it is widely anticipated that there will be significant growth in the transaction volumes financial institutions will be required to manage in tomorrow’s emerging e-commerce landscape.
In short, PSD2 will be transformative, making payments safer, increasing consumer protection and convenience, and encouraging lower prices for payments. However, the directive is a business challenge as much as an IT challenge: and this technical dimension needs to be factored into the strategic thinking currently underway across the Fintech industry in response to this important directive.
CA Technologies has developed a demo app which visualizes the way consumers will benefit from PSD2. This short video demonstrates the vision for PSD2 and some of the key advantages of PSD2 for consumers.