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Home |About Us | Blog | PSD2: What it Means for Merchants and Innovation

In January this year, revisions to the EU’s Payment Services Directive (know as PSD2) took effect in the UK and across the region. Broadly speaking, the new provisions are designed to increase competition and innovation in the payments sector and improve consumer protections.

Things won’t change overnight, but there are some potentially fantastic opportunities here for retailers to modernise, reduce costs and fraud losses, and drive profits by improving the customer experience.

What’s new in PSD2?

The new revisions to the directive have already had one major impact: banning the use of surcharging across payment cards. Although this may cause pain for some retailers in the short term — especially those who used card charges to pass on the cost of processing — it should help to build trust in the long-term with their customers.

But there are two even bigger implications: 

1) Access to accounts (XS2A)/ Open Banking

The PSD2 will allow any regulated third-party to access a consumer bank account with their consent. This will create two new types of business: the Account Information Service Provider (AISP) and Payment Initiation Service Provider (PISP).

AISPs could provide retailers with services allowing them to access and analyse customers’ bank data, providing fantastic insight to help personalise and improve their offerings. PISPs services, on the other hand, offer merchants a new opportunity to cut out the middle-man and allow customers to pay directly by bank transfer: no cards required. This could reduce the costs associated with card processing as well as chargeback risks. It’s a model extremely popular in the Netherlands, where around 60% of consumers use the iDEAL service to pay for their online purchases, in preference to credit and debit cards.

2) Strong Customer Authentication (SCA)

The second major new provision of PSD2 involves improving the security of electronic payments. Also known as two-factor authentication, this mandates that payments be authenticated by at least two of the following: something the customer knows (like a PIN); something they possess (like a phone or card); and something they are (eg. a biometric like a fingerprint).

This may sound like an extra step in the payment process that would put consumers off. But if done correctly it could improve consumer trust and reduce fraud losses. Plus, there are exceptions for:

• Transactions under €30
• Transactions that have undergone a real-time assessment
• Regular payments (after the first one)
• Trusted merchants (which customers can whitelist)

What now?

There are some great opportunities here for retailers to modernise and get closer to their customers, although initially there could be some privacy concerns on the part of consumers. But over time it’s likely that increasing numbers of tech-savvy shoppers will look to take advantage of the new
services.

Change is already happening. Deutsche Bank has unveiled a new service for airlines which will enable customers to pay directly from within their
accounts. And UK start-up Emma is set to offer an innovative financial management service off the back of the new directive.

At Optomany, we’re always looking at what’s coming down the track and whether it could help our clients drive growth and future success. That’s why you can be assured that we’re keeping a close eye on PSD2 developments and the opportunities it could offer merchants and their customers.

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