Evaluating PSD2’s Impact and Potential for Improvement in 2023

The Revised Payment Service Directive (PSD2) was introduced by the Council of the European Union in 2015 to drive innovation and adapt banking services to new technologies. Ever since its launch and especially after its major update in 2019, experts have been closely monitoring the directive’s performance.

Recently, the EU Directorate-General for Financial Stability, Financial Services, and Capital Markets Union published a study examining PSD2’s impact on the market, assessing its value in terms of effectiveness, efficiency, and relevance. In this article, we explore the study’s findings, go over both its positive achievements, and highlight the areas that may require further adjustments.

Has PSD2’s Introduction Resulted in Positive Dynamics in the EU?

PSD2’s initial goals were to enhance transaction efficiency, foster a pan-European payments ecosystem, and ensure standardized rights and responsibilities for the stakeholders. According to the EU’s new study, the directive has managed to make progress in these areas and has proven to be relevant over time by making such positive contributions as:

• Increasing access to third-party providers (TPP). One of the goals of PSD2 was to enable more TPPs to access customers’ financial information and initiate transactions on their behalf. The study indicates that this objective has been achieved, and the inclusion of TPPs has added a combined annual value of €1.6 billion to the EU payments market.
• Establishing the regulatory infrastructure for Open Banking. By mandating banks to provide access to customer data to authorized TPPs, PSD2 has created the foundation for open banking in Europe. This enables customers to securely share their data with banks and financial service providers, promoting competition and innovation in the industry.
• Improving payment security. By introducing Strong Customer Authentication (SCA), PSD2 has contributed to strengthening the overall security of payment transactions, providing consumers with increased confidence and trust when making online payments.
• Enhanced consumer protection. The directive ensures that consumers have clear information about their rights, such as refund policies and liability limits in case of unauthorized transactions. By setting these standards, it has enhanced transparency and accountability in the payments ecosystem.
• Decreasing fraud losses. The report estimates that consumers have saved approximately €900 billion in fraud losses due to the advanced customer protection measures implemented by PSD2.

These factors have been fundamental in shaping the European payments landscape as we know it. However, the integration of PSD2 has also been associated with certain downsides - read on to learn more about them.

Challenges Linked to PSD2’s Implementation

Here are the key obstacles that became evident throughout PSD2’s execution, according to the study:

• Friction during customer checkout. While providing enhanced security, the SCA requirement has made the customer checkout experience more difficult and cumbersome in many cases, leading to instances of shopping cart abandonment.
• Loopholes for fraudsters. Despite increased oversight associated with PSD2, the study highlights the existence of loopholes in SCA that enable fraudsters to bypass security measures. Further improvements in supervision are necessary to address this issue.
• Technical difficulties. The integration of new APIs, security protocols, and data-sharing mechanisms turned out to be complex and time-consuming for many FIs and TPPs. Some entities faced difficulties in adapting their systems to comply with the new requirements, which led to delays and disruptions in service.
• Confusion among some consumers. Despite efforts to promote awareness of PSD2 and its benefits, the study highlights a lack of understanding among consumers. Many users did not fully grasp the changes brought about by PSD2 and were hesitant to share their financial data with third-party providers, hindering the adoption of new payment services.
• Inconsistencies across EU member states. While the directive provides a framework, individual countries have some flexibility in interpreting and introducing the regulations, which has led to variations in approaches, timelines, and requirements. The study highlights a case in Italy where certain systems favored payment service providers over consumers.

These challenges highlight the complexity and evolving nature of PSD2’s implementation, which call for ongoing monitoring, adaptation, and collaboration between regulatory bodies, financial institutions, TPPs, and consumers to address emerging issues effectively.

Can the Implementation of PSD2 Be Considered Efficient?

To analyze the efficiency of PSD2’s execution, the EU Council gathered data on the resources involved in its execution, including manpower, time, and finances. These figures were compared to the positive and negative changes that resulted from the implementation.

Banks and banking associations, in particular, disagreed with the Council’s findings. The majority of such entities consulted for the study admitted that the costs of implementing PSD2 outweighed the benefits they received.

To compound the issue, they note that the mandated fraud protections under PSD2 are rapidly becoming outdated due to fraudsters continually refining their techniques and employing advanced technologies. Even TPPs established before PSD2, although more positive overall, generally agreed with the negative assessment.

With that said, it must be noted that the study took a broad perspective, taking into account both short- and long-term impact. Yet, while the directive incurred significant upfront investment costs, the benefits are being realized gradually and have the potential to be significant over a longer term. Thus, it is currently impossible to accurately calculate the overall cost-to-benefit ratio.

How Can PSD2’s Execution Be Upgraded Moving Forward?

To address the situation, the European Council suggests such ongoing efforts as:

• Streamlining the consumer process to prevent cart abandonment
• Clarifying obligations for merchants and FIs, especially for cross-border transactions
• Implementing better oversight measures
• Continuing to foster innovation and competition among service providers
• Addressing technical and interoperability issues

Although these proposals are sensible and potentially beneficial, they will likely entail additional rules and restrictions. Due to this, they also come with a risk of creating a convoluted system by layering mandates upon mandates. Thus, the key challenge currently faced by the EU Council is the need to introduce the necessary updates while avoiding making the system too unwieldy.