What is PSD2 and why does it matter to small businesses?

When running your own business, you must keep on top of changing rules and regulations. Payments are an obvious and essential part of all small business operations, so new laws affecting the industry could significantly impact your company. There’s always a temptation to ignore regulation changes. After all, small business owners already have a lot of various areas to juggle, from sales to bookkeeping and everything in between. But it’s important to understand the implications for your business to ensure you are compliant in any financial activity.  

In this article, we’ll explain what PSD2 is and how it might apply to your business. We’ll be diving into the following areas:

• What is PSD2?
• What does PSD2 aim to do?
• What does PSD2 mean for small businesses?

PSD stands for Payment Services Directive. The EU adopted the original Payment Services Directive in 2007, and it created a single market for payments in European Union territories. This meant all member states could make payments through the same ‘systems’, making it easier and more secure to make financial transactions cross borders. It also was created to create better ‘competition’ between large financial institutions and smaller challenger banks and promote innovation in financial services.

PSD2 is a continuation of the original law. Most sections of PSD2 came into law in January 2018 but some parts of the legislation had longer timeframes to allow businesses to adapt. The last deadline for change was in December 2020 in the EU, and September 2021 for the UK (to allow businesses recovery time from the pandemic). So now that all aspects of the PSD2 law are in play, what are the areas it looks to improve?

There are three main areas that the PSD2 law changes.

Firstly, the law has banned surcharging. This ban eliminates extra charges when customers pay via credit/debit cards or prepaid cards in EU countries. The ban does not apply to commercial cards (business account credit/debit cards) in all EU countries; for example, the UK has decided to continue surcharging on commercial cards. But this aims to improve trust with customers by eliminating any unforeseen charges at checkout. 

PSD2 also encourages more transparency around currency conversion, charges and complaints. It has also improved the customer experience through regulating ‘earmarked’ funds. Earmarking is when a business holds a specific total as a deposit for certain purchases (like pre-authorising funds when booking a hotel or renting a car). These rule changes have allowed a better customer experience and enable businesses to build trust with customers more easily because of the transparency they have to provide and the faster financial services.

PSD2 requires certain transactions to carry out Strong Customer Authentication (SCA). The change is to create more security for making purchases and reduce fraud. 

Using SCA on certain transactions means using two-factor authentication (2FA) at checkout, which could potentially cause a less smooth customer experience as they’ll have to go through more screens to get to the final purchase. The customer will have to provide two of the following things for two-factor authentication:

• Something only the customer knows, such as a PIN or password.
• Something that only the customer will have, such as a card or a mobile phone number.
• Something unique to a customer, such as a fingerprint or face recognition.

The SCA two-factor authentication does not apply to all transactions, such as recurring payments or low-value transactions, and you can find a list of exemptions from the European Commission here.

PSD2 has also changed Open Banking and third-party access. The biggest banks in the UK had to create programmes and tech so that other payment providers (non-banks) could access customer data. This regulation was a massive change and allowed other payment providers to be able to access bank accounts to make payments on behalf of customers. 

This aspect of PSD2 also encourages the creation of new services so that customers can have more choices when it comes to their payment needs.

Ultimately all of the rules and updates to the original PSD2 allow customers more choice, security and control over their financial payments. 

Businesses that are not in the financial services sector will be unlikely to be affected by the changes that PSD2 has brought in.

However, if you take online payments via debit or credit card, it may affect how your customers make purchases. If this applies to you, you should check that the payment processor you use on your website can manage customer authentication properly to ensure your business is compliant with the SCA rules.

Your payment provider is responsible for ensuring they are compliant, but it’s essential to know how you could fall short of the regulations to avoid any issues. Though your customers will benefit from increased security with SCA, and in turn, trust you more, they will go through a slightly longer checkout experience which comes with a risk of them exiting the webpage. The customer experience at checkout will be the main area your business may be affected by the implementation of PSD2.

Now you understand the uses of PSD2, you could make managing your business money simple too. Financial management can be stressful and time-consuming when you’re self-employed — that’s why thousands of business owners use the Countingup app to make their financial admin easier. 

Countingup is the business current account with built-in accounting software that allows you to manage all your financial data in one place. With features like automatic expense categorisation, invoicing on the go, receipt capture tools, tax estimates, and cash flow insights, you can confidently keep on top of your business finances wherever you are. 

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward! 

Find out more here.