What is PSD2?
PSD2 (the Second Payment Services Directive) is a European Union regulation that improves the security, efficiency, and competitiveness of electronic payments across the EU. It introduces new rules to protect consumers, encourage innovation, and strengthen the overall payment infrastructure in Europe.
PSD2 builds on the original Payment Services Directive (PSD1), which laid the foundation for a single EU-wide payment market. The updated directive was introduced to reflect changes in technology and consumer behavior, and to support the growing role of fintech and digital banking.
What PSD2 aims to achieve
The directive has three core goals:
Enhance consumer protection: Through better security and more transparency in online transactions.
Promote innovation: By opening the payments market to new players like fintechs and third-party providers (TPPs).
Increase payment security: Especially for online and mobile transactions.
Key components of PSD2
1. Open Banking
PSD2 requires banks to give licensed third-party providers secure access to customer account information (with the customer’s consent). This is known as Open Banking.
There are two types of third-party providers:
AISP (Account Information Service Provider): Can access account data to provide services like personal finance dashboards.
PISP (Payment Initiation Service Provider): Can initiate payments directly from a customer’s bank account, often offering cheaper and faster alternatives to traditional card payments.
Open Banking enables more choice, better tools for managing finances, and competition in the financial sector.
2. Strong Customer Authentication (SCA)
PSD2 introduces Strong Customer Authentication (SCA) to reduce fraud in electronic payments. SCA requires multi-factor authentication for most online and contactless transactions.
To meet SCA, authentication must include at least two of the following:
Something the customer knows (like a password or PIN)
Something the customer has (like a phone or hardware token)
Something the customer is (like a fingerprint or facial recognition)
Note: Some transactions may be exempt from SCA—for example, low-value payments, recurring subscriptions, or trusted beneficiaries.
3. Improved transparency and consumer rights
PSD2 strengthens consumer rights by:
Reducing liability for unauthorized payments
Introducing clearer dispute resolution procedures
Ensuring better information on fees and exchange rates
Why PSD2 matters
PSD2 is more than just a regulation—it’s a major shift in how banking and payments operate in the EU. By opening access to financial data and enforcing better security, it lays the groundwork for innovative payment experiences and gives consumers more control over how they pay and manage their money.