The PSD2 Directive has been the banking regulation that has encouraged the rise of Open Banking in Europe and has forced large banks to open up their customer information and infrastructure to third parties.

The PSD2 Directive is the banking regulation that has encouraged the rise of Open Banking in Europe. Broadly speaking, the PSD2 Directive is a European regulation on electronic payment services. The main purpose of this regulation is to improve the security of payments in Europe, promote openness and innovation and encourage innovation in banking with the aim of benefiting both individual and business end consumers.

But before getting fully into the PSD2 directive, what is Open Banking?

Open Banking, or “Open Banking”, is a phenomenon that has revolutionized the financial world in recent years. Open Banking is a term that defines the opening of bank information and its availability to third parties (third party providers) via APIs for the development of financial applications. The types of information shared by banks can be of all kinds, but generally, and to give an example, the banking institution will allow access via API to the information of a bank client, their bank balance, their movements, details of their transactions etc This movement was a revolution for the sector, since previously all information was exclusive to financial institutions and they had no obligation or intention to share it. However, today, thanks to this opening, new Fintech startups are capable of creating high value-added services by connecting users to their bank information and offering highly personalized services.

In 2007, the European Commission approved the Open Banking Directive PSD1 (“Payment Services Directive 1”), which for the first time regulated a framework for the financial revolution that was to come in the coming years. This first directive established for the first time the presence of a new type of company, payment service providers, implemented a regulatory framework that allowed non-banking companies to carry out financial transactions, and promoted the integration of the SEPA network of European payments.

In 2018, the PSD1 Directive was replaced by the new PSD2 Directive approved by the European Commission. The new regulation, which came into force progressively from January 13, 2018, brought about fundamental changes in the banking industry by facilitating third-party access to bank infrastructure. This new directive improved the existing regulation and served even more to force the opening of banking information. This directive mainly changed the European banking paradigm, since for the first time in history it forced banks to open and offer their clients’ information publicly via API (Application Programming Interface). In other words, the customer information that until then was exclusive property of the bank, thanks to the new regulation became the customer’s private information. What does this mean? By transferring ownership of information from the bank to the customer, this means that the customer can authorize other third-party companies or applications to use that information on their behalf to provide innovative personalized financial services. This PSD2 regulation has been a big change for the sector, and the results of the regulation are still in their early stages.

The Payment Initiation Service (PIS) makes it easy for third parties to initiate payments on behalf of the customer. As we said, this is something very new, since until very recently payments could only be made from the client’s banking platform. However, thanks to PSD2, third-party platforms can initiate payments outside of banking interfaces and on the customer’s side. To do this, only the customer’s banking user credentials are requested and this allows the external platform to begin the payment initiation process. The application of these services is infinite. For example, in the E-commerce sector, platforms can charge their customers instead of requesting the customer’s credit card number. They will only request the customer’s online banking credentials and by this means the payment will be executed. On the other hand, this can also be used by the “market place” spaces, so that the platform can initiate payments between the two counterparties of a purchase-sale simply by requesting the credentials to initiate the payment. Lastly, billing platforms may include payment methods between companies for the payment and collection of invoices.

Open Data refers to the evolution of the Open Banking and Open Finance movement towards a new stage, in which people are interested in the total opening of their information. Therefore, we are not only referring to information collected by banks or other financial services institutions. In this case, reference is made a little further, that is, to the opening of information contained in the companies that provide supplies such as telephone, gas, electricity, water or other types of services such as health, education…. This movement will allow new emerging companies to create new fully customized services based on the information contained in the clients. To contextualize, let’s take the example of health information. With this information, a health app could provide personalized recommendations to its users based on information about diseases and physical health that their doctor may have, for example. Therefore, the total opening of information is a new movement that little by little will affect us in all the different areas of people’s lives.

The Account Information Service is another of the fundamental pillars of PSD2. Similar to payment initiation, the account information service (AIS) allows third parties to access bank information (individuals and companies) and extract their balance information, movements, transaction details, etc. This therefore allows numerous platforms to offer their customers access to their banking information from platforms that are not the banking platform. Simply by requesting access by requesting banking credentials, this third-party platform will obtain access to all customer data, thus being able to offer numerous additional and personalized services. The typical use of this service has been that of savings platforms, which access your bank information and provide you with advice and recommendations to reduce expenses, categorize expenses, etc.

The other great novelty of the PSD2 regulation was the introduction of new security requirements and standards, also known as Strong Customer Authentication (SCA). This translates into greater security in transactions, which from the application of these requirements will begin to request two security parameters to carry out each transaction. For example, receiving a mobile message and entering a password, or fingerprint verification, or facial recognition.

Thanks to PSD2, and as a consequence of Open Banking, Snab has been able to create a non-banking platform that allows our customers to access their information and bank movements from one place, centralizing all banking and treasury management in Snab, in a secure way, and complying with all PSD2 regulatory standards.