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PSD2 Implementation - Major UK Bank

The new PSD2 regulation is a fundamental piece of payments legislation in Europe, which entered into force in January 2016. 

The regulation will drastically impact the financial eco-system and infrastructure for banks, fintechs and businesses using payments data for the benefits of consumers. 

Let's dig in.

What is PSD2?

The revised Payment Services Directive (PSD2) aims to better align payment regulation with the current state of the market and technology, and introduces security requirements for the initiation and processing of electronic payments, as well as for the protection of consumers' financial data. 

It also recognizes and regulates Third-Party Providers (TPPs) that are allowed to access or aggregate accounts and initiate payment services .

This will clearly shake up the payments market, particularly in the ecommerce space, by encouraging greater competition, transparency and innovation in payment services. 

In a nutshell, the essence of the PSD2 regulation is to facilitate consumer access to their banking data and drive innovation by encouraging banks to exchange securely customer data with third parties.

PSD2 directive: what is the timeline? 

After a long debate, end November 2017, the European Banking Authority (EBA) published the final release of the RTS (Regulatory Technical Specifications), which details all the payment actors' responsibilities and obligations. 

On  March, 13th 2018 , the European parliament and the European Council have approved them, opening an 18-month delay for their actual implementation that should happen before Sept, 14th 2019. 

And new dedicated Open API interfaces should be available as soon as March, 14th 2019 as part of a 6 month testing period​.

European regulators will complete new technical standards and define precisely how banks must link their technology platforms to outsiders. This will truly cement open banking into place according to Bloomberg.

When do banks need to be ready ​​for PSD2?

PSD2 regulation: im​pacts on banks and TPPs 
Security is top-of-mind
The core principles of the RTS – i.e. Strong Customer Authentication​ (SCA), Secured Communication, Risk Management and Transaction Risk Analysis (TRA) – have been maintained, confirming the directive's security objectives. To protect the consumer, PSD2 requires banks to implement multi-factor authentication for all proximity and remote transactions performed on any channel. 

This means using two of these three features: 

Knowledge: Something only the user knows, e.g. password, code, personal identification number
Possession: Something only the user possesses, e.g. token, smart card, mobile handset
Inherence: Something the user is, e.g. biometric characteristic, such as a fingerprint.
In addition, the elements selected must be mutually independent, which means that the breach of one should not compromise any of the others.

Smooth user experience

In order to ensure a smooth user experience, PSD2 requests banks to put in place security measures that are "compatible with the level of risk involved in the payment service" to find the right balance between security and user convenience. 

To simplify life for consumers, the RTS list a number of situations for which Payment Service Providers (PSPs) are not required to perform strong customer authentication. Most of these exemptions concern low-value payments, repetitive transactions and transactions to trusted beneficiaries. 

PSD2 and open banking

The move to open banking means removing barriers between competitors as it requires banks to allow their account details and transactions to be shared with third parties through APIs.

PSD2 hinges on a critical connection between retailers, fintechs and banks. This relationship will be powered by APIs that banks need to open to any Third-Party Provider that wants to aggregate account data and/or initiate payment services.

This builds a common ground of stronger collaboration and better interoperability between traditional financial institutions and new players of the banking and payment space. And to provide a coherent and seamless user experience, banks will also have to collaborate to define a common approach, at least at a country or regional level.

Why we need strong authentication standards to deliver the promises of Open Banking​  

A new world of opportunity

PSD2 is a customer-centric regulation that should lead to an improved customer environment, bringing benefits not only to end users but to all banking and payment parties.

New partnerships and open-banking APIs with the right security level brought by SCA and risk monitoring can generate value by:

Adding third-party capabilities to core offerings

Capitalizing on consumer behavior and storing consumer preference data
Making the multi-factor authentication process as easy as possible for the customer. 
New customer onboarding will be made easier, offering end users better tools to manage their finance and enticing them to buy new products and services that can be offered by banks and TPPs.

Banks will be able to better use financial data to provide competing services at competitive rates. 

Already, leading banks have started building strong partnerships and open-banking API Hubs, showing how the PSD2 regulation can be the perfect tool for more innovation in payment and banking.
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