In 2015, the Council of the European Union enacted regulatory reforms culminating in what we today identify as the Revised Payment Service Directive, or PSD2.
The primary objective of this regulation was to drive innovation in payment methodologies. This would be accomplished by facilitating the banking industry’s transition to emerging technologies.
The most recent significant amendments to the PSD2 were made in 2019. Since then, the directive has been under rigorous scrutiny by experts. With discussion around a future PSD3 now underway, this raises a pivotal question: has the legislation been effective thus far?
Shifting Consumer Payment Preferences
One major and unforeseen influence has been the covid-19 pandemic. This escalated non-cash payment instances to extraordinary heights.
The term “non-cash” has evolved a great deal beyond what was meant in 2015. It’s not only payment cards; consumers are now presented with a great variety of payment alternatives. Specifically, within the realm of eCommerce, fresh substitutes to online card payments have emerged. For instance, simplified online bank transfers, buy now pay later (BNPL) services, and digital wallets like Apple Pay.
In Europe, digital wallets have already surpassed traditional credit cards in usage. However, merchant acceptance of these alternative payment methods is not universal. Merchant acceptance of alternative payment methods has actually seen a decline over the past year.
The unforeseen expansion of these novel payment methods has created significant disruption within the payments value chain. Pay by Bank (PBB) and Account-to-Account (A2A) payments are also escalating competition within the payments market.
It is one thing to affirm that PSD2 protocols retain their relevance. Whether they are as optimal as they could be is an entirely separate question.
New Data on Effect of PSD2
The European Union’s Directorate-General for Financial Stability, Financial Services, and Capital Markets Union recently conducted a comprehensive study on PSD2. The report, titled A Study on the Application & Impact of Directive (EU) 2015/2366 on Payment Services (PSD2), delves into PSD2’s influence on the financial market.
The intent behind the Commission’s study was to gather and scrutinize data related to the current status of the payments market. The Directorate-General also sought to evaluate PSD2’s contribution in terms of its effectiveness, efficiency, and relevance.
Interestingly, there were no evident adverse effects or ramifications stemming from the directive overall. The exception was found in Italy, where court findings indicated some novel systems were more beneficial to payment service providers than to consumers.
Overall, the study found the regulations to be both pertinent and fitting. The general consensus was that PSD2 had predominantly yielded positive results.
But, while the overall outcome was favorable, the report also highlighted several areas necessitating enhancement. Some of these may be attributed to oversights in the initial design. However, many were indicative of continuous technological advancements and evolving customer behaviors that were not incorporated into the directive.
Evaluating PSD2’s Effectiveness
PSD2 was projected to bring long-term benefits. For some of these, it may still be premature to fully assess their efficacy. Two goals, however, yielded more immediate results.
First, the report suggests that the leveling of the playing field and expanding of access to third-party providers (TPPs) was successful. It indicates an added value of €1.6 billion annually to the EU payments market through TPP inclusion. Secondly, PSD2 laid the legislative and regulatory groundwork for open banking. In doing so, it fostered increased competition, compelling legacy banks to deliver innovative consumer products and services to remain competitive.
On the security front, PSD2’s implementation of strong customer authentication (SCA) has fortified transaction payment security, facilitating a decrease in fraud levels. The directive has also empowered or bolstered certain consumer rights, including diminishing liability for unauthorized payments. All in all, the report states that PSD2’s enhanced customer protection measures saved consumers around €900 billion in fraud losses.
However, the study also highlights areas needing attention. While SCA improved security, it introduced friction at the customer checkout stage, often culminating in abandoned shopping carts. In addition, loopholes in SCA have allowed fraudsters to bypass security measures.
The report acknowledges that PSD2 has enhanced oversight. Ultimately, though, the authors recognize the need for further improvements in supervision.
Moving Forward
Categorizing PSD2 as a “success” or “failure” is overly simplistic. The Council’s report correctly asserts that not all data is available yet, with some positive effects only now beginning to materialize and potential opportunities to close loopholes yet to be identified.
The consensus among stakeholders is that PSD2 was launched with good intentions, but the burdensome requirements it imposes are viewed as disproportionate by many. The study’s authors see these challenges as part of the “growing pains” of progress.
The directive’s primary aim is to enhance processes, and observable strides have been made in this respect. However, the main beneficiaries have yet to feel the impact of the most significant advantages. To rectify this, the Council advises ongoing endeavors to refine and solidify the directive. Their recommendations include simplifying consumer processes to minimize abandonment and improving oversight. They also advocate clarifying obligations for merchants and financial institutions, especially regarding cross-border transactions.
However, these reasonable suggestions may lead to further restrictions and regulations. Striking a careful balance between necessary revisions and avoiding system overcomplication will require the Council’s thoughtful deliberation. It will be interesting to see how these concerns are addressed in the now-ongoing process of creating the third Payment Services Directive.
