What Does the European Union Payment Service Directive 2 Mean for US Businesses?

The EU payment service directive 2 (PSD2) could transform the payments industry. Businesses located in America need to understand and prepare for it, too, as it will soon begin to have an impact on them also.

Keep reading below to find out all about the European Union Payment Service Directive and how it could impact your business:

What is PSD2?

The EU Payment Service Directive 2 was introduced to create safer and more innovative payment services. It has three main benefits:

1. It improves security through SCA (Secure Customer Authentication)

The main aim of PSD2 is to reduce the number of fraudulent payments online. In September 2019, a new EU regulation was introduced to the PSD2.

This regulation was called the Strong Customer Authentication (SCA), and it requires two-factor authentication for online payments made in the UK and Europe. Authentication requires two actions. Customers can choose to have a combination of knowledge, possession, or inherence. 

Knowledge requires you to enter a pin or password. Inherence is about using voice recognition or a fingerprint, while possession is having access to a code or payment card.

It was created to protect consumers when they are making payments online. 

2. It increases customer rights 

Not only does the PSD2 support greater transparency of terms and conditions, but it also requires payment providers to resolve any complaints quickly.

The quicker a complaint is dealt with, the quicker a business can recover and lessen the impact. Even if the complaint is not directed at you, but more so at the payment provider, you will still be held accountable by many for the issue.

Customer complaints can result in a reputation knock, which is hard to fix, a lowered search engine ranking, and a loss in revenue. 

3. It enables 3rd party access to account information 

This allows merchants to retrieve your data from your bank (once they have your permission) and make payments on your behalf, using customer accounts. This can be done securely and quickly. 

PSD2 and US Businesses

Lots of businesses in the US believe that because the PSD2 is only enforced in the EU, it will not have an effect on their business, but this isn’t the case.

The SCA mandate also applies to the following US businesses operating in the EEA:

• US businesses who want to expand into the EU – any business wanting to operate in the EU will need to comply with the SCA and PSD2 requirements. 

• US businesses who have EU customers and traffic – businesses that receive a large amount of traffic from the EU will need to set up an EU entity. 

• Headquarters in the US with entities located in Europe – businesses that are not SCA and PSD2 compliant run the risk of declining payments and declining authorization rates. 

Even if your business doesn’t operate in the EU, it is a good idea to make sure your business is PSD2 and SCA compliant. Businesses that comply with these regulations are much more likely to be able to prevent or detect fraud. 

Why is preventing and detecting fraud so important for businesses? 

A business can become a victim of many types of fraud, including payroll fraud, corruption, and financial statement fraud.

Preventing fraud is vital, especially when it is such a frequent occurrence for businesses across the states. On average, businesses lose an average of 5 percent of income because of cases of fraud.

Unfortunately, this can often happen overnight, and in a world where cost-management is crucial to a business’s success, you cannot afford to let fraud impact your finances and reputation. When you detect a case of fraud and deal with it quickly, customers will have more confidence in your business.

What impact will the PSD2 have? 

Naturally, this will shake up the payments market, more so for those in the eCommerce market. It will forever change the process of payments online, but for the better, by ensuring there is better transparency, which allows customers to make more informed choices, and how incidents are reported.

As part of the PSD2, incidents must be reported, whether they are complaints, cases of fraud, or any system downtime. In addition, it also opens up the number of payment choices.

However, above it all, as PSD2 enhances customers’ rights and provides a safe way of making payments, this increases their confidence in using business online. If your business takes charge to fall in line with this, then it can only benefit you in the long run too.

How Can Businesses in the US Prepare?

Almost all businesses in the US will be affected by the Payment Service Directive 2.

If you think your business will be affected, then you will need to make sure you are preparing your business for this. You need to do the following: 

i). Fully understand the PSD2 

Take the time to fully understand the PSD2 before you do anything. This blog is one of many that can provide helpful guidance on the matter.

This ensures that you are not walking in blindly to this. Make sure to understand exactly how it can impact your business, both now and in the future. For example, have you considered how long it will take to include the 2-factor authentication?

By understanding as much as possible about PSD2, you can more accurately set goals within reasonable timeframes. 

ii). Make sure that your business is SCA compliant 

One way you can prepare is by purchasing SCA optimization. SCA optimization not only ensures regulatory compliance, but it also takes advantage of SCA exemptions too.

You can learn more about the benefits of SCA optimisation from this company. By taking the time to make your business SCA compliant, you are protecting your business. 

iii). Decide on a payment strategy 

Will you start offering more payment options? Think about your customers’ needs and determine whether your current options are enough or whether you need to expand.

You might also benefit from taking a look at what your competitors are doing. Are they offering more than you, and is this an attractive appeal to many customers, or is it too overwhelming?

Gathering data for this is a must if you want to make a sensible decision. 

iv). Find credible third-parties 

You need to be sourcing credible third-parties that will be able to carry out the payments on your behalf — these need to be offering you good value while also maintaining a great reputation. 

v). Be open with your customers 

Let your customers know what you are doing to ensure that you gain the permission required for third-parties to make payments on your behalf, for example. Being open and honest with your customers could benefit you and enhance your reputation as a business.

By telling them of the benefits of PSD2, you can increase their confidence in doing business with you. It also allows your customers to prepare themselves.

vi). Make Your Business Ready 

PSD2 is likely to have a huge impact on the payment industry around the world. Although this regulation is only being implemented in the UK and EU, it is still likely to impact businesses in the US.

Therefore, make sure your business is ready in advance so that if PSD2 starts to take the world by storm, you are ready and raring to go.