With the developing economy and growing online purchasing habits, Europe faced a significant increase in online fraud. PSD2 was released to manage and minimize fraudulent activity safeguarding consumer money while also increasing competition among financial institutions. Let’s have a look at the PSD2 timeline and figure out how it all went.
The PSD2 timeline
It all started in 2007 when the first Payment Service Directive (PSD) was introduced to the financial industry. It aimed to harmonize the European payment system streamlining transaction processes across the continent. A unified payment system was expected to promote competition and foster innovation in the financial market together with the growing quality of customer service.
After the initial PSD financial market developed and started to move online. However, PSD did not regulate mobile commerce and with the growing number of financial service providers grew the levels of fraudulent activities. This resulted in the proposal of the revised Payment Service Directive (PSD2). The European Commission recognized the need for the updated version of PSD legislation and, therefore, introduced the idea of PSD2 in July 2013.
In January 2016, European Union’s member states agreed to implement PSD2 into their national laws by January 13, 2018.
In June 2017, the Berlin Group NextGenPSD2 Task Force reported the creation of “an open, common and harmonized European API (Application Programming Interface) standard to enable Third Party Providers (TPPs) to access bank accounts under the revised Payment Services Directive (PSD2).”.
On November 27, 2017, the European Commission included regulatory technical standards for anti-fraud procedures. It was crafted for the point of purchase and the payment processing. The main idea behind it was the user’s identification to validate a transaction while safeguarding their data, this process is also known as Strong Customer Authentication (SCA).
The SCA’s purpose is to secure users’ financial information while allowing Fintech and other financial institutions to create innovative solutions for financial management and a smooth purchasing process. The standards implied by the SCA are expected to facilitate the development of the digital banking industry and streamline payments across the European Union (EU).
While PSD2 is crucial to safe online payments it might be extremely difficult for regular e-commerce merchants to implement it. It requires extensive technological solutions which transfers into huge implementation costs. To avoid going out of business or experiencing extreme losses merchants should utilize Payment Service Providers (PSPs). A PSD2 compliant PSP will offer a hosted checkout service that shifts compliance-related investment and development requirements to the PSP. This way a merchant only pays PSP for its services and eliminates any risks related to PSD2 compliance.
In January 2018, the members of the EU passed PSD2 domestic banking regulations. This encouraged the finalization of the creation of SCA compliance solutions and released it to the financial market to start developing networks for secure fund exchange between banks and Third Party Service Providers (TPSPs).
December 31, 2020, was the final deadline and the PSD2 timeline was complete. The deadline was extended several times, however, this date marked the last completion stages. From 2021 all financial institutions and e-commerce participants based in the EU must comply with the PSD2. However, there was one exception with the UK that had its deadline set to March for online banking providers and September for online shopping.
From 2021 failure to become fully compliant may lead to denied payments within the EU. However, the PSD2 timeline showcases the time frame for the transition which should have been sufficient. On the other hand, the new procedures will be new to consumers and might cause temporary disturbances for e-commerce, but in the end, it will create seamless payment processing while creating opportunities for new digital financial products and services.