PSD2 Definition

PSD2 is the second iteration of the Payment Services Directive, introduced by the European Union in 2015 and later implemented in 2018. PSD2 was built upon the foundation of PSD1 but brought significant overhauls, particularly when it came to security requirements and innovation in the payment industry.

One of the key differences between PSD2 and PSD1 is the emphasis on Strong Customer Authentication (SCA). PSD2 mandates that payment transactions must undergo SCA, which involves using at least two out of three authentication factors: something the customer knows (like a password), something the customer has (like a smartphone), and something the customer is (like a fingerprint). This adds a strong layer of security to online payments, drastically reducing the risk of unauthorized access and fraud.

Another important aspect of PSD2 is the promotion of open banking. PSD2 encourages collaboration between traditional financial institutions and third-party providers. With the customer’s consent, third-party providers can access account information and initiate payments on behalf of the customer. This has proven to foster innovation, competition, and the development of new financial services.