A payments services directive, or PSD, is a regulatory framework that aims to ensure security, efficiency, and competition within the European payment market.
Over the years, updates have been made to PSD, adjusting to the technological advancement of payment services and the simultaneous fintech boom taking place in Europe.
As a framework, PSD aims to cover the following areas:
- Licensing and authorization
- Consumer protection
- Protection against security and fraud
- Innovation and competition
- Regulatory oversight
Differences between Payment Services Directives 1, 2, and 3
Since the first version in 2007, PSD has been updated to accurately adjust to the shifting payments ecosystem.
The first version, PSD1, implemented payment service categories, licensing regimes, and rules that aimed to protect consumers. It also focused on harmonizing payment-related regulations in EU countries.
In January 2018, PSD2 was released, introducing stricter provisions for account and payment service providers on accessing consumer data. It also instituted stronger customer authentication for payment transactions.
The biggest change in PSD2, however, concerns open banking. It requires banks to allow third party providers access to customer account data through APIs.
Finally, while it hasn’t been released yet as of this writing, a proposal has been put in place this year for PSD3, tackling the following:
- Mitigating fraud risks for consumers
- Improving open banking competitiveness
- Creating fairer competition between banks and non-banks
Concepts similar to PSD around the world
Regulatory frameworks like PSD exist all over the world. Some examples include the UK’s open banking initiative, Singapore’s guidelines for customer authentication in online payments, and the United States’ Consumer Financial Protection Bureau, which addresses similar areas to the PSD.
These regulatory frameworks are essential to understand when you’re executing payments in multiple countries.