PSD2 and its Impact on International Payments

PSD2 and its Impact on International Payments
Prashanth13 December 2023

It all began in 2007 when the European Union launched a directive that majorly streamlined cross-border transactions within the European Economic Area (EEA). The directive called the Payment Service Providers Directive (PSD), aimed to develop a single payment market in the EU and improve the current competition and transactional efficiency. 

Before the Payment Service Providers Directive (PSD) was introduced in 2007, conducting cross-border transactions within the European Economic Area (EEA) was a complex and costly process.

You had to deal with multiple banks, various currencies, and high transaction fees, making it challenging to expand your business to international customers. The lack of a unified payment system created inefficiencies, making it difficult to compete with larger businesses.

However, with the implementation of the PSD, the process became much simpler. Now, you can use a single payment service provider to manage transactions in multiple EEA countries, reducing transaction costs and currency exchange hassles. This streamlined approach has opened up new opportunities for your small business to expand across borders, compete more effectively, and serve customers across the EEA with ease.

Although the directive was a huge success, the EU felt that there was room for more innovation.The EU amended PSD in 2009 to create the PSD1 framework, which was again amended in 2013 to its current form of PSD2. The current form, PSD2, is widely considered to have ushered in a new era of consumer-centric financial services in the EEA. 

You decide to use a budgeting app that provides valuable insights into your spending habits. Using the PSD2 framework, you can now securely link this app to your bank account. This means the app can access your account data with your consent and provide you with more accurate financial advice and budgeting tools.

Consumers now enjoy increased choice, security, transparency, and convenience in their financial transactions.

Yes, PSD2 must sound intriguing to you, but a proper understanding of what PSD2 is is vital in the current scenario when most countries are looking to create a framework similar to PSD2 for international payments.

Exploring the Impact of PSD2 on International Payments

What is PSD2, and How Does It Work?

The PSD2 (Payment Services Directive 2) is a directive released and managed by the European Union to regulate international payment services within the European Economic Area (EEA). The European Union introduced PSD2 to ensure healthy competition, innovation and secure payment process in the European payment industry. PSD2 builds upon the original Payment Services Directive (PSD) and was adopted in 2015, becoming effective on January 13, 2018.

Through the PSD2, the European Union has introduced the Strong Customer Authentication (SCA). SCA completes the transactions by including at least two of the three levels of authorisation: something they know, something they own, and something they are. The transactions require a password or a PIN, a mobile number for OTP and additional security in the form of facial recognition or fingerprint. 

What is PSD2, and how does it work

PSD2, along with increasing transactional security, has resulted in increased healthy competition by opening up payment services to fintech startups and prompted traditional banks to enhance their offerings. As a result, consumers now enjoy a more user-friendly and cost-effective financial experience.

With a broader range of payment services, consumers can choose a payment service provider with higher customer protection measures and lower transaction fees, further establishing the need for innovation to sustain.

How is PSD2 relevant to Stop Hidden Fees?

PSD2's relevance to stop hidden fees lies in its potential to address opaque pricing practices in international payments. Set to be incorporated into UK law, these regulations prohibit non-transparent pricing methods. Currently, banks and brokers often conceal costs within unfavourable exchange rates, catching customers off guard with undisclosed fees. 

PSD2 emphasises the need for consumers to know the 'real costs and charges' associated with cross-border money transfers, echoing the initial Payment Services Directive (PSD). The crucial aspect is whether the government will uphold this commitment, considering past instances of non-compliance. PSD2 presents an opportunity to combat hidden fees and enhance transparency in financial transactions.

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