How Europe’s New Banking Rules Could Affect Your Business

Many SME owners might switch off when they hear word of complex new European legislation. But the Second Payment Services Directive (PSD2) most definitely requires a second look. Why? Because it will have an impact on any business that handles money. Don’t worry. Although it might take a little while to get up to speed, there’s a lot in here that could potentially benefit small businesses: like the opportunity to enhance payment security, gain new customer insight and reduce payment overheads.

The rules are already in place, so let’s take a look at what it might mean for your business.

Levelling the playing field

PSD2 is an updated version of the European Union’s first Payment Services Directive (PSD), designed back in 2007 to improve competition in the banking sector by creating a “level playing field” for traditional lenders and non-banks to access the industry. The latest version of the directive came into force on 13 January 2018 and will have a major impact on payments across Europe.

The guiding principles of the PSD2 are to encourage greater innovation in the traditional banking sector, by allowing fintech and other start-ups to enter the industry. The hope is that this could improve choice for consumers, although merchants could also benefit, as we’ll see. Another major driver is to improve payment security and consumer protections. With fraud levels on the rise in the UK and across Europe, it’s an additional move which could benefit merchants in the long-run.

Making an impact

You may have already seen an impact on your business with the change to surcharging for all consumer card payments. This bold PSD2 step aims to increase merchants’ transparency and build consumer trust.

If you operate a marketplace acting on behalf of buyer and seller, and have previously been exempt from registering as a payment institution, this may also change with the PSD2. You might find you have to change your model accordingly, or choose a licensed third-party to help manage the funds and some of the regulatory aspects for you.

Opening up payments and data

Perhaps the biggest opportunities for merchants lie in new PSD2 Access to Accounts (XS2A) rules. These herald the creation of two new types of service provider, offering Account Information Services (AIS) and Payment Initiation Services (PIS). Whereas previously, access to consumer and business bank accounts was strictly limited to the lenders themselves, now thanks to the UK’s Open Banking initiative and PSD2, a whole sweep of new regulated firms could theoretically enter the sway.

With the consent of the account holder, they could offer new services which consolidate all of a user’s financial accounts in one place; or offer direct bank transfer payments without the need to use a credit/debit card. This could benefit merchants by having access to customer bank data could enable the development of data insight tools which allow merchants to offer more personalised offers.

The latter scenario especially could be welcomed by merchants across the UK. Direct and immediate bank transfers could help improve cashflow, minimise checkout complexity, lower the risk of chargebacks and eliminate card transaction charges.

Stepping up security

As part of the new regulations, merchants will also be required to improve payment security. Strong Customer Authentication (SCA) is the same as two-factor authentication (2FA) or multi-factor authentication (MFA) in requiring a customer to produce two of the following: something they know (like a password); something they possess (like a token or smartphone); and something biometric (like a fingerprint).

Advanced, context-and behaviour-based fraud prevention solutions featuring detailed reporting functionality could help you to prove transactions are low risk and hence avoid the need for SCA. However, if SCA is necessary, biometrics can help to reduce customer friction while meeting the new rules. Over 60% of new smartphones now feature biometric tools like fingerprint sensors or facial recognition, and common authentication method 3D Secure (3DS) also supports biometrics. The latest version of the standard features a more streamlined integration with checkout pages to further improve the customer experience.

These are still very early days for PSD2, but there are opportunities for merchants willing to take the plunge.

It’s time to make PSD2 pay.

To find out more read our report on PSD2 here. [i]