What is the The second Payment Services Directive (PSD2)?

PSD2, or the Second Payment Services Directive, is a fundamental piece of European legislation concerning electronic payment services. The goal of PSD2 is to make the EU’s single market fit for the digital age by promoting efficiency, competition, innovation and security. One direct consequence of this legislation was the removal of the monopoly traditional banks had on the use of customer data by giving third-party providers (TPPs) access to that data, with the customer’s permission. In other words, open banking.

More formally, PSD2 states that ASPSPs that offer online payments accounts shall allow payment service users to access accounts via regulated TPPs to:

1. initiate payments
2. access account information

It also states that communication of information between the ASPSPs and the TPPs will be secure and in compliance with the regulatory technical standards of the EBA for strong customer authentication and common and secure open standards of communication. This means ASPSPs must block access to unauthorised entities and ensure proper verification of customer consents. Failure to do so could lead to the risk of unauthorised transactions or data sharing, and subsequent claims under PSD2 and General Data Protection Regulation.

PSD2 enables customers to share information residing on payment accounts. It also covers any other accounts that allow you to make transactions from that account to another account not owned by you. Non-payment accounts that are not available under PSD2.

While PSD2 and Open Banking are closely related (and sometimes used interchangeably), they are not the same. Open Banking was a result of PSD2, and effectively refers to the UK’s implementation or interpretation of PSD2. There is one significant difference to note: while PSD2 requires banks to open up their data to third parties, Open Banking dictates that they do so in a standard format. The latter offers a clear advantage in ease of use, which led to the Berlin Group attempting the same in Europe.