The European Union takes the comfort and security of its citizens seriously. When it comes to payments, the EU has issued the Payment Services Directive (PSD) to harmonize customer rights with the rights and obligations of payment providers. PSD, particularly its second version, PSD2, is also beneficial for merchants since it offers a better customer experience and therefore increases customer loyalty. This is thanks to the Request to Payment (RtP) option, which makes transactions faster, more secure, and more transparent. RtP allows third-party merchants to reduce their transaction costs, decrease fraud, and receive payments without delay. Keep on reading to learn more about PSD2 regulation, how it reshapes the transaction flow of banks and FinTech companies, and why PSD2 is good for merchants.
In this article, Intellias dives into:
- Compliance and regulations in the financial sector
- What PSD2 is and how it’s shaping the future of banks
- How PSD2 will influence merchants through RtP
- The RtP flow and its advantages for retailers
The financial landscape: compliance and regulations
The financial industry is a battlefield between physical and digital payment methods. And demand for innovation has prompted regulations. The Payment Card Industry Data Security Standard (PCI DSS) was implemented to drive more attention to the security of credit card data. 3D Secure (3-domain structure), a protocol developed by Visa and Mastercard to eliminate debit and credit card transaction scams, has shown excellent results in improving authentication and decreasing fraud.
Now, in the era of online payments, we have to think of new safety measures. PSD2 is one of them. Let’s have a closer look at the Payment Services Directive and its impact on merchants.
What is PSD2 and how is it shaping the future of banking?
The Payment Services Directive was designed to regulate electronic payments and build a separate payment market across the European Union. The goal of PSD2 is to guarantee transparency and enhanced security of digital payments. PSD2 was passed in January 2018, and banks and FinTech companies have to comply with it by September 14, 2019.
Here’s how PSD2 works:
Source – Elastic
The directive’s superpower is securely connecting third parties (payment providers, FinTech companies, and services) with customers’ bank data via protected APIs.
How will PSD2 influence merchants through RtP?
Merchants have always wanted loyal customers, and there’s no better way to get them than by enhancing the quality of services. This includes providing seamless online payments, eliminating fraud, and reducing chargeback rates. PSD2 helps to improve the customer journey by implementing Request to Pay (RtP).
A Request to Pay is a request for a transaction made by one party to another, mainly from a merchant to an authorizer. This technology revolutionizes the transaction flow and decreases the number of steps it takes to make online payments, bringing the financial system closer to the instant payment ecosystem. The RtP management flow can be:
- person-to-person (P2P)
- business-to-business (B2B)
- business-to-consumer (B2C)
- government-to-business (G2B)
- government-to-person (G2P)
- government-to-business (G2B)
To implement RtP in Europe, companies have to use the Open Banking model, which requires banks to have open application programming interfaces (APIs).
This is what Open Banking APIs look like:
Source – Payments Cards & Mobile
The RtP ecosystem provides a range of benefits for consumers, including control, flexibility, transparency, and fraud detection. Consumers can use RtP to choose when to pay, set up recurring payments, postpone regular and non-regular charges, and monitor transaction statuses in real time.
As far as merchants are concerned, RtP changes how they manage their cash flow. RtP lets third-party merchants create payment requests and send them directly to banks. This way, the customer doesn’t provide their data to the retailer, while PSD2 and Open Banking APIs serve as intermediaries between the parties. The advantage of RtP is enormous in this case: transactions aren’t delayed, since the bank doesn’t have to process the request and accept the payment.
The ultimate benefit for retailers is that they don’t have to pay a transaction fee like they usually do with contactless payments. And with no intermediaries involved in completing the transaction, merchants receive the payment without delay.
The RtP flow and its advantages for retailers
The diagram below shows what the RtP flow looks like.
Source – Citi
- Checkout. During the checkout phase, the customer chooses to pay via a specific bank.
- RtP initiation. After the bank is chosen, a secure payment request is sent to the customer’s bank to proceed with the transaction.
- Authentication. During this step, the customer authenticates with their bank. The PSD2 regulation allows for quickly connecting through an API, making the process transparent.
- Approval. At this phase, the customer can verify the payment with advanced security methods like voice recognition, face recognition, and Touch ID.
- Confirmation. The merchant is notified that the transaction has gone through.
- Payment. At this phase, the merchant’s bank receives the specified sum of money from the customer’s bank and the transaction flow is completed.
The benefits of this flow are hard to ignore:
- Security. In the RtP flow, merchants work with banks that are already compliant with PSD2, minimizing the risk of a data breach.
- Transaction transparency. RtP uses the Open Banking model for processing payments. Tokenization is a distinct feature of RtP.
- No fees. Point of sale (PoS) terminals are expensive to install and maintain. Instead, you can use an mPOS that saves money and works with the newest technologies, ensuring a better customer flow with RtP.
- Real-time transactions. The RtP flow lets merchants receive payments quickly. Some experts say there will soon be global real-time networks for this purpose.
Digital online payments have brought new regulations. PSD2 is reshaping the payment and FinTech domains and introducing Request to Pay (RtP) technology that makes transactions instant. For merchants, RtP will serve as the ultimate solution to bring the customer purchase experience to the next level. With RtP, transactions are transparent, hard to compromise, fast, and efficient for both customers and merchants.
But not all financial institutions are ready for PSD2 compliance. Interdependence with other requirements including GDPR (the General Data Protection Regulation) and eIDAS (electronic IDentification, Authentication and trust Services) makes it even more challenging. To be PSD2 compliant, banks have to reorganize their existing infrastructure for Open Banking, which means implementing an API, Strong Customer Authentication (SCA), and Access to Account (XS2A).
Intellias has deep experience developing advanced FinTech solutions as well as vast expertise in the retail product development, so if you decide to build one for your business, don’t hesitate to contact us.