Explaining PSD2: the EU directive ushering in open banking

The EU directive which allows quicker, more direct payments is implemented today. Are the banks ready? 

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The Second Payment Services Directive (PSD2) comes into effect today, and must be implemented by banks across Europe. PSD2 will allow customers to pay directly from their account, and have parties retrieve their information for this purpose, rather than having to send their credit or debit card payments through a third party such as Visa.

The directive is seen as fundamental to the adoption of open banking, which allows customers to share their personal data via open application programming interfaces (APIs). Open banking is expected to radically shake up the banking sector, by creating more of an open marketplace through which customers can peruse different products, and in return services can be increasingly tailored based on newly shared individual data.   

Speaking to Spotlight last year Imran Gulamhuseinwala, head of Open Banking Limited and the man responsible for introducing open banking to the UK, was emphatic about the integral role PSD2 will play. “PSD2 along with GDPR have always been some of the fundamental catalysts behind making open banking happen. I sometimes define open banking as the combination of PSD2 and GDPR.” General Data Protection Regulation (GDPR) is the EU regulation in place to protect customers’ data, failure to meet which can result in fines of up to four per cent of global turnover.

Some have been sceptical of the industry’s capacity to take this legislation on. Tom Blomfield, CEO of the digital bank Monzo, claimed in an interview with Spotlight that the banks were desperate to water down PSD2 in the run-up to implementation, because “the timelines are now just so tight that getting something live by January 2018 seems less and less likely.”

The effects of open banking will not be immediately obvious, but despite any reluctance by banks, PSD2 is here and they will need to get with the programme with this directive now.  

Augusta Riddy is a Special Projects Writer at the New Statesman.