In 2018, the European Union changed the way its citizens proceed with payments. The PSD2 (Second Payment Serviced Directive) ends the monopoly of banks on their customer’s data and allows third-party payment services to access your bank account information, with your consent. But what would this mean for your business? What exactly is PSD2? What is open banking? And how do these two terms differ from one another?
PSD2 vs Open Banking
In summary, the EU PSD2 revised the rules of electronic payment services in the Union. It provides a legal foundation for a better integrated internal market for electronic payments within the EU. The directive takes into account the emerging trends and innovation in payment services.
In simple terms, the PSD2 establishes the rules that create a more competitive environment in the EU among established and new players in the payment services. This becomes possible as PSD2 allows payment services providers to gain access to the account information of their consumers. This means that third-party payment services providers and merchants can initiate payment processing for you, without having to redirect to traditional channels such as PayPal.
Open Banking, on the other hand, is the United Kingdom’s way of implementing the EU’s PSD2. It forces the UK’s biggest banks – Allied Irish Bank, Barclays, Santander, Bank of Ireland, Danske, HSBC, Lloyds, and Nationwide – to standardize their data, release the information in a secure manner. This makes it easier for data to be shared among financial institutions, third-party electronic payment systems, and merchants. The main difference between the PSD2 and Open Banking is that Open Banking requires the data to be shared in a standard format.
What does this mean for you and your business?
Open Banking and the EU PSD2 will enable customers to process their transactions faster, with the reduced inconvenience of transferring from one system to another, just to finish the payment. Open Banking will also help you manage separate bank accounts faster since it will let you see your account details at the same time.
What about security threats?
As Wired UK explains, Open Banking is just as safe as online banking. The technology used to share the data is universally trusted. The law also requires account providers to use strong authentication means which allows the payment service providers to verify the identity of the user and the service. Lastly, the UK’s Financial Services Authority will be accrediting startups who can use the system.
However, with the convenience that Open Banking offers, the system is also an attractive target for scammers who will trick people into sending over sensitive information. Therefore, it is important for people to remember that information about their banking login and/or password should only be kept between them and the bank.
How will Brexit affect payment services in the UK?
The outcome of the Brexit remains unclear years after the referendum was passed. This year alone, the Brexit deal has been turned down by the British Government twice. As Prime Minister Theresa May still work her way to forge a deal agreeable to both the UK Parliament and the EU, industries including payment services regulators are still on the edge of uncertainty with matters concerning transactions between the EU and the UK. However, since Open Banking has already been in place in the UK, transactions within the country will remain untouched by the outcome of the Brexit.
Technological innovations do not only present challenges and adjustments, they are first and foremost here to make things easier for everyone. What the EU PSD2 and Open Banking creates is a way for customers to process transactions, manage their accounts, and make overall better decisions. Businesses should adapt to these improvements and take advantage of the benefits that Open Banking can provide.
If you need help in navigating with the increasing technological demands of the business landscape in the UK, you can download D&V Philippines’ Finance and Accounting Solutions for UK CFOs and learn how our finance and accounting experts can take your business to the digital world.