What is PSD2?
This fall, the EU will pass a banking directive that will affect every business and consumer in Europe when it comes to online purchases. On September 14, the EU will issue a new regulation to help protect online consumers when they make online purchases. This new directive, Revised Payment Service Directive (PSD2) will do two things: allow bank customers to give data permission to third party payment providers and create a more secure online purchasing protection for consumers. Banks will now have to compete with other third-party companies such as Facebook or Google which are now beginning to offer payment services.
What is the EU’s objective with PSD2?
Imagine, you are a business based in Spain and you want to do business for a client in Germany. You agree to the project, terms, and price. You finish the project, send the invoice to the client and now you wait, wait and wait for that payment. If you are a freelance or small business, sometimes you can’t wait for that payment, and sending payments across countries is a logistical nightmare. This is the norm for many freelancers and small businesses who are trying to expand their services across EU countries and are often reluctant to do business in other countries because of payment delays and issues.
The PSD2 objective will help to create a single integrated market for payment services by standardizing regulations for the new third party payment service providers. Banks will now have to make changes to adapt to the new way of doing business by allowing bank transfers within EU countries easier and more importantly third-party services will now be able to compete with banks and become a more viable option for everyone. Banks are also experimenting with their APIs (application performing interface) to help make the online process easier as well as working with third-party payments services to have better usability features.
Strong Customer Authentication
Another aspect of this new directive is to help reduce fraud and to help make online payments more secure. A Strong Customer Authentication (SCA) is using a two-factor authentication to complete your purchase. The new SCA will require a biometric or password to complete the online purchase and make the process smoother. If you have a website where customers can make purchases, you need to make sure your payment process follows these new guidelines, if not you will either have your transactions declined by banks or delayed payments. Now, when you make an online purchase, most banks use 3D Secure where it adds an extra step where the cardholder is prompted to give additional information. If anyone has done online purchases, you know that information being asked is often not uniform making the purchasing experience clunky and sometimes drags. 3D Secure 2 is the new version of the authentication protocol which will be the main method used. This updated version has a better online purchasing experience and helps speed up the purchase process as well. Third-party payment services such as Stripe or Apple Pay have already implemented this authentication helping their online customers with a smoother overall purchasing experience.
Are you prepared for the change?
Firm 451 surveyed 500 payment decision-makers at European businesses where more than 50% of the annual revenue comes from online and European consumers to get a pulse of these businesses to see how they were preparing for the change in September. Some of the results of the research are tagged below:
€57bn expected loss in economic activity
24% of businesses will implement 3DS2 after the deadline
40% of online vendors knew about new regulations but don’t know how to prepare
45% of online vendors anticipate being ready to implement in the next 3-6 months
72% of heavy online shoppers have abandoned an online purchase in the past 6 months due to bad checkout experience
If you have a website that has online transactions, you will need to do an audit and make sure your online banking service is PSD2 compliant. If you are using services such as Stripe or PayPal you should not see any delay with payment transfers as they have been planning for this change. If you are using a bank for online transactions on your website from your country, you may have to contact them and make sure they are compliant and so that payments will not be delayed. When I advise clients who sell online, I usually advise them to set up with a good third party payment service because they are proactive when it comes to regulations and customer purchasing experience.
The exemptions to the SCA
There are some exemptions to the SCA, these may change after the PSD2 is active, this may not apply to every business and you can read about them more in detail in the following article by Stripe.
- Low-Risk Transactions
- Online Payments Below 30€
- Phone Sales
- Fixed Amount Subscriptions
- Trusted Beneficiaries
Going forward
Since living in Spain, I have seen how businesses move here, it is almost always reactionary and never proactive. Business in the EU is becoming a bigger marketplace for freelancers and small businesses and if you are PSD2 ready, you will have a leg up on the competition. Using third-party service providers for purchases is usually going to be the best option to instill confidence in your customers and have a smoother purchasing process for them. Curious to see how businesses, especially in Spain, deal with this huge change in the marketplace and see if proactive freelancers and businesses can take advantage of this opportunity.