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Juggling security and frictionless experiences with PSD2 and PSD3

The revised payments services directive (PSD2) has been the European Union’s open banking buzzword since it came into force on 01 January 2018 (albeit with some implementation delays). Already we have seen some positive effects with reduced eCommerce fraud rates across the European Union (EU). This was always one of its main goals through the introduction of strong customer authentication (SCA) in online payments. Mission accomplished? Not quite.

In the midst of public consultations and review of PSD2 (that could pave the way for PSD3) coordinated by the European Commission (EC), it is clear the same concerns that were stumbling blocks in PSD2’s rollout continue to cause problems. Juggling anti-fraud measures with frictionless customer experiences is still prevalent among eCommerce merchants. What’s certain, however, is that FinTech solutions to these concerns have been available for years and can help to ensure PSD3 smoothens the payment processes across Europe.

The major PSD2 open banking concerns

Despite PSD2 having been in place for a relatively short legislative timescale, the review process seeks to make amendments to its initial shortcomings. Although feedback and the conclusions gleaned from consultations are by no means confirmation of imminent PSD2 amendments, the European Commission has already indicated that amendments are more than likely! The biggest potential changes will cover the lack of regulation in PSD2 for emerging technologies and alternative payment methods such as cryptocurrencies and Buy Now, Pay Later (BNPL) schemes, which grew rapidly around the time of PSD2’s delayed implementation. 

Other finer details that could be amended are:

  • whether exemptions afforded under PSD2 should be updated, removed entirely or even new ones added. 

  • potential changes to SCA requirements, which could include extending the SCA period from 90 to 180 days to reduce the current issues with checkout friction for customers.

  • resolving legislative fragmentation across Europe by including more precise specifications of API standards, directory services and payment infrastructure.

Open banking has heralded innovation

Fighting fraud and improving payment security were always key aims of PSD2, but so too was the intention for open banking to increase competition and innovation, providing customers with better services and control of their data. FinTech companies in particular have been at the forefront of the evolution of open banking, with, for example, fraud-fighting startups creating advanced tech powered by machine learning (ML) models. Their success is only possible with access to user data, with which behavioral biometrics and digital fingerprinting (device and network setups) analysis of thousands of pieces of data takes place - automatically and in real-time - to weed out fraudsters while ensuring genuine customers have a smooth UX.

Crucially, the whole process is passive, performed in the background of every user interaction without impacting their service interaction. There may still be apprehension among individual account holders when they learn that ‘third party services’ wish to gain access to their data. The negative connotations surrounding the phrase still harm potential innovation, conjuring up thoughts of scams, which in actual fact, are being prevented through advanced fraud detection and prevention measures by some TPPs. Education remains a key stumbling block with open banking principles as many consumers do not fully understand what it is, nor what value it can offer them.

Frictionless experiences effortlessly paired with enhanced security

Discussion over checkout friction and merchant fears of losing out on conversions should be weighed up against the positives. The majority of online shoppers actually feel safer making payments, regardless of any additional checks they are required to perform with potentially invasive SCA. In the UK, for example, 42% of respondents to a Nationwide Building Society report declared they felt safer with their online shopping experiences and a further 27% declared they are now more likely to shop online. This is just one part of the challenge - to encourage further engagement with eCommerce services. What cannot be overlooked is the 21% of respondents who encountered checkout friction when making online purchases and see it as intrusive.

Juggling, at the best of times, can be quite challenging, but to approach security and fraud issues with customer satisfaction in such a way is, quite frankly, an unnecessary pain. Smooth online payments and transactions without the need to risk a drop in security is already a reality. A happy equilibrium can be achieved - eCommerce merchants just need to be aware that advanced solutions to their perceived problems are already available.

Tech success in open banking can aid future open finance initiatives

As previously mentioned, the EC has already indicated that amendments to PSD2 are very likely to go ahead. On top of this, the European Banking Authority (EBA) has likewise put forward over 200 recommended amendments that will, for the most part, likely end up in some revised payments services directive. Whatever we call it, be it PSD2 2.0, or PSD3, changes are coming. 

The hope is that the initial successes of PSD2 and the potential of new FinTech will lead to further innovation not only in open banking but will spread to open finance. This could lead to TPPs providing additional consumer options with mortgages, savings, pension and insurance services. A true open data initiative could be just on the horizon.

It’s a lot to take in, especially as we are still closer to the beginning of PSD2’s lifecycle. Although not likely to occur immediately, thanks to the completion of PSD2 implementation, it is expected that PSD3 could be introduced much quicker than its predecessor. This still gives everyone dealing with online payments and transactions time to adapt to any future changes without being caught by surprise. The FinTech to ensure advanced security and anti-fraud measures without causing checkout friction is already available. It’s down to industry leaders to help consumers and businesses and decision-makers understand the potential of it all.


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Hubert Rachwalski

Hubert Rachwalski



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14 Apr 2022



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This post is from a series of posts in the group:

Open Banking

Open Banking regulation, innovation and technology and it's potential to revolutionise the Financial Services Industry.

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