PSD2 and the Future of Customer Authentication: Knowledge, Possession and Inherence

By Mirko Hüllemann, managing director of Heidelberger Payment GmbH

(Editor’s note: As cross-border assumes an increasingly prominent role in the digital commerce mix of merchants around the world, knowledge of unfamiliar regulatory environments becomes more important. For merchants around the world, Europe, which contains several of the largest e-commerce markets in the world—with the U.K. in a sort of limbo—is a vital region. Changes to the Payment Services Directive starting next year will impact any merchant with plans to sell in Europe and payment services providers that operate there.)

The EU’s first Payment Services Directive was introduced in 2007. Several years ago, the EU decided to revise the PSD to explicitly include online-based payment services. The European Commission enacted the new PSD2 in October 2015. It is expected to enter into force in January 2018. Member states have until then to incorporate the binding requirements of the PSD2 in national law.

Although the Regulatory Technical Standards (RTS)—the final draft of which the European Banking Authority (EBA) is expected to provide at the start of 2017—seem to leave a great deal of freedom in their implementation, the second edition of the Payment Services Directive has unavoidable consequences in the area of customer authentication for payments in online trade. Ideally, this will result in greater convenience and security for end customers, while giving merchants and service providers the opportunity to gain competitive advantages through new services.

Four specific objectives of the PSD2

The general objective of the PSD2 is to make electronic payments in Europe more secure and convenient for consumers. From the perspective of the EU Commission, the directive is also a step towards a digital single market, which intends to benefit consumers and companies as well as contributing to economic growth. The EU Commission highlights four changes implemented by the PSD2:

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