11/26/2020 9:24 AM

How Has PSD2 Affected Fintech?

Innovation and efficiency in the European Union are goals we all share. Since the full implementation of PSD2 in 2019, there is evidence that the regulation has a positive effect on fintech companies in the European Union.

Just a year later, Europe is now the leading region for open banking institutions, according to the website FintechFutures.com.

For consumers, PSD2 is adding up to better service through increased competition among fintech companies.

What is PSD2?

In 2007, the Payment Service Providers Directive was launched to contribute to the development of an EU single payment market. The European Commission later proposed an amendment to the payment directive to improve consumer protection, increase competition and innovation, and strengthen security in the payments market. The enforcement of this amendment, PSD2, is leading to new opportunities in electronic payments and e-commerce.

Saldo was among the first financial companies in the EU to introduce PSD2 protections to regulate new and developing areas in payment services.

PSD2 has been fully implemented since September 14, 2019.

How Does PSD2 Work?

PSD2 requires Payment Initiation Service Providers, or PISPs, to act as payment intermediaries. With the account holder’s consent, a PISP can initiate payments directly from that account as an intermediary.

As part of Payment Service Directive 2, all financial institutions must open their customer networks to PISPs and third-party payment providers, or TPPs, which is expected to increase competition.

PSD2 also requires Account Information Service Providers, or AISPs, to provide real-time consumer bank account information such as transactions, balances, and expenditures, either to account holders or to third-party financial companies such as Saldo.

Saldo was among those leading the way in the EU in the enforcement of PSD2 to facilitate lending and led the way in PSD2 implementation in Finland as well as Lithuania and Sweden.

PSD2 has led to improved services and a faster response to customers’ transactions and applications.

For example, at Saldo, decisions on loan applications can be made more safely and in a more prompt manner. To obtain the account information, Saldo has partnered with the Swedish service provider Kreditz.

Kreditz can access the bank account information of loan applicants with their permission and provide that information to Saldo, allowing Saldo to quickly and safely decide on loan approval.

Are Our Finances Safer Now?

Since the implementation of PSD2, EU consumers can feel safer when shopping online. PSD2 instituted stronger security requirements to protect consumers and their data during these transactions.

According to the European Commission, these requirements include the use of Strong Customer Authentication, or SCA, when initiating payment for goods or services or making a transfer of funds.

Two of these SCAs, the use of a password, the use of a particular device, such as a smartphone, or the use of facial or fingerprint identification, are required to authenticate transactions greater than 30 Euros unless one of nine exemptions apply. These can include trusted beneficiaries and decreased risk due to low-value transactions.

Payment service providers applying to be exempted from PSD2 must monitor transactions for risk of data breaches and submit certain information on fraudulent transactions to authorities, including the European Banking Authority.

These protections make banking fraud and data breaches less likely to happen and offer the regulatory framework needed for open banking to succeed. This, we feel, is an advantage to consumers and banking customers in Lithuania as well as the rest of the EU.

Fintech Growth Opportunities

Because the European Union and the United Kingdom are both requiring financial companies to adapt to open banking, fintech companies in these counties have an advantage. According to American Banker, since the United States has left such decisions to the private sector, PSD2 standards could become the de facto practice there, especially for international fintech companies.

The clear requirements of PSD2 and regulatory framework of the EU market may attract innovation from third-party fintech companies, American Banker predicts, setting European countries as pacesetters in fintech and open banking.

Has PSD2 Made Electronic Transactions More Complicated?

Payment Services Directive 2 has added layers of security to financial data and account networking across institutions and third-party fintech service providers. Proponents of PSD2 say the additional security provided and the increased competition and growth in fintech far outweigh any complications that multi-factor authentication might bring.

PSD2 also calls for seamless communication among institutions to authenticate and authorize transactions.

As the American author Stephen Covey once wrote, "Nothing is as fast as the speed of trust." Setting up the framework and data exchanges to make these real-time communications possible may bring certain complications at first. Still, we at Saldo see the regulations of PSD2 as authentication that will increase trust through added security as well as the speed of banking transactions.

How Has PSD2 Affected Consumers and Institutions in Lithuania?

Progressive action has set Lithuanian institutions and fintech companies apart as leaders in the implementation of PSD2.

To assess what application payment interfaces would work best for Lithuanian institutions and fintech companies, Lithuanian payment service providers set up the API Standard Working Group, Lietuvos Bankas Bank of Lithuania Eurosystem reports.

Lithuania enacted payment initiation and account information standards in 2018, ahead of PSD2 implementation in the EU, according to Lietuvos Bankas.

This early implementation has resulted in a higher degree of security for Lithuanian consumers and better open banking services for customers of Lithuanian financial institutions and fintech companies.

Security and high quality service

Our financial customers' trust is based on the security and the high quality of service offered by Saldo and others. It powers progress in Lithuania and throughout the European Union. At the same time, we are opening doors to innovation and a regulatory framework promoting safety amid open banking.

Because fintech companies, including Saldo, need accurate information to serve customers in a secure and timely manner, the implementation and operation of PSD2 are proving to be a positive development for customers and the institutions and fintech companies that serve them in Lithuania and the European Union.