Understanding PSD2 and What It Means for Your Business

Understanding PSD2 and What It Means for Your Business

A set of rules known as PSD2 was formed in the EU to safeguard consumers and enhance the online payment system. PSD2 laws, which were put into effect between January 2018 and September 2019, have a wide-ranging impact on businesses operating in the European Union. 


PSD2 is transforming how people conduct business and handle payments within and outside of the EU, thanks to its overarching objectives of enhancing consumer safety and optimizing the online payment process.  What is PSD2 SCA compliance, and what effects could it have on your business? Let’s go over this in more depth. 


The PSD2’s adoption in 2019 has caused some seismic changes in the payments sector as a result of the following two important points:


SCA: According to the PSD2, online retailers must use “Strong Customer Authentication,” or SCA, for any transaction in which the banks on either end are in the EEA. The credit card holder making the payment must validate additional information via 3D Secure in addition to the usual credit card specifications (such as the card number, CVV code, etc.). The way SCA is put into practice is somewhat flexible.


Each institution can select, for example, how to arrange the authentication of these additional facts based on its current tech resources and infrastructure. Options include, among others, requiring the user to enter a code provided through SMS to a mobile phone or log into an existing account. 


Providers of Third-Party Payment Services: 


The PSD2 currently permits banks to open their payment processing to third-party entities, or TPPs, which has significantly impacted the payments industry. This was caused, in large part, by the rising acceptance of Account Information Services, which compile customer information in one location to give the consumer a comprehensive picture of their finances, as well as Payment Initiation Services. These third-party organizations enable using bank accounts to make online payments. 


Significant obstacles that had previously hindered TPPs from providing solutions in these well-liked domains across the EU are now eliminated by the PSD2. With the introduction of PSD2, it is currently anticipated that TPPs will intervene and build innovative, extensive financial solutions within the EEA. 

The PSD2 has broken the monopoly held by banks and central banks by granting TPP access to account information, enabling internet firms to grow their payment services. 


PSD2 compliance: PSD2 compliance is the act of complying with SCA requirements. A business must show a CDS authentication flow during the online purchasing transaction to verify a customer’s identification and that they are the authorized account holder on a credit card.


Card issuers will reject payments on any transactions that comply with PSD2 regulations if these authentications are not integrated into an online merchant’s checkout process. 


Cash transactions and Merchant-Initiated Transactions, or MITs, are excluded from PSD2 regulations. A recurring subscription fee for a client membership is an example of an MIT. 


How much does PSD2 compliance cost?


Some EU merchants have been unable to make the required adjustments in time for PSD2 deployment due to the cost of PSD2 compliance. Costs to comply could exceed 30 million euros for a single large EU bank. Some of these merchants have chosen to use third-party payment processors as an alternative to handle transactions. 


PSD2 Effect: What effects would PSD2 have on financial institutions and businesses? If an entity is an issuer or an acquirer in an industry will greatly influence how the directive is applied to that entity.


Merchants and eCommerce Retailers: 


The new rule is a win-win for large-scale online retailers like Amazon because it allows them to use their own payment solutions when processing online sales.  However, smaller merchants will need to adopt a different, risk-based strategy to make the transition to PSD2 compliance simpler by utilizing the two-factor verification procedure exclusions.  


One-off contactless payments performed in person under 50 euros, single internet transactions under 30 euros, or corporate costs started by a firm and made through B2B are a few examples. 


How can I comply with PSD2? 


As a business owner, there are several methods by which you can become PSD2 compliant. Your transition to compliance will be streamlined by using the following two main strategies:


Selecting a payment service provider that complies with PSD2: 


Working with a PSD2-compliant PSP is quick and affordable to ensure compliance with PSD2. To ensure that your online payment processing checks off every compliance box, the PSP takes care of all compliance-related issues and can provide a hosted checkout. 



Integrate authentication into your website’s payment system: 


In some situations, a company could prefer to maintain control over the checkout process or might decide against working with a PSP that provides a hosted checkout option. In those circumstances, a business must independently add 3DS into the payment process. Although complicated, it will guarantee compliance.


The conclusion: 


Any business with an online presence or holdings in the EU must comply with PSD2 regulations. Fortunately, getting in compliance is simple if you work with the proper PSP or consultant.


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