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Modulr glossary

PSD2 (Payment Services Directive 2)

PSD2 (Payment Services Directive 2) is a European Union regulation that aims to increase competition and security in the payments industry. It mandates Strong Customer Authentication (SCA) and enables Open Banking. An extension and updating of EU instant payments regulation – PSD3 – is expected to be announced across Europe in 2025. The European Unions' second Payment Services Directive (PSD2) is broadly in alignment with the UK’s Open Banking regulation and has been a key element in building a digital single market for the continent. There is significant overlap with Open Banking in how the package of regulations is designed to make it easier both for consumers to access their own data and for businesses to access it on their behalf. There are also provisions around stronger identity authentication to decrease fraud in digital transactions, and overall PSD2 is part of a wider narrative of increased competition and transparency arising from the digitisation of banking.

Applications

E-commerce:

Reduces fraud in online card payments by verifying the cardholder's identity

Banking and fintech:

Helps issuers and payment providers comply with Strong Customer Authentication (SCA) requirements.

Advantages

  • Enhanced security: Reduces unauthorised transactions by verifying that the genuine account holder is authorising the payment
  • Fraud prevention: Helps reduce chargebacks related to fraud.

Challenges

  • User Experience: Additional authentication steps can cause friction and increase checkout abandonment
  • Implementation complexity: Requires integration with card schemes and issuer systems.

Related Terms

OTP Compliance Strong Customer Authentication PSD2
Item created by Modulr, Updated on
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