PSD2 Compliance: Best Practices for Payment Service Providers

In the rapidly-evolving world of financial technology, Payment Service Providers (PSPs) are encountering new hurdles when it comes to compliance. The Payment Services Directive 2 (PSD2) is a rule that sets out tight guidelines for how PSPs should function, including requirements for secure data transfer and strong consumer authentication. To be competitive and maintain customer trust, PSPs must implement psd2 compliance solution that enables them to meet the demanding standards of compliance.

In this post, we will cover some of the best practices that PSPs may implement to guarantee they are PSD2 compliant and stay ahead of the curve in the increasingly competitive payments sector.

Understand PSD2 Prerequisites

To achieve PSD2 compliance, payment service providers (PSPs) need to comprehend the requirements of the rule. PSD2 mandates PSPs to provide strong customer authentication (SCA), adopt open banking, and undertake transaction monitoring. PSPs need to ensure that they have the required infrastructure and resources to achieve these criteria.

Implement Strong Customer Authentication

SCA is a critical PSD2 prerequisite. PSPs need to adopt SCA to comply with PSD2. SCA demands that customers give two or more factors of verification when making online payments. 

The two factors of authentication can be something the consumer knows (e.g., password), something the customer owns (e.g., smartphone), or something the customer is (e.g., biometric data).

PSPs can employ several authentication mechanisms, such as one-time passwords (OTPs), biometric authentication, and hardware tokens, to perform SCA. All PSPs should use a secure, PSD2-compliant authentication technique.

Adopt Open Banking

Open banking is another key PSD2 requirement. Open banking allows clients to exchange their financial data with third-party providers (TPPs) securely. PSPs need to implement open banking to comply with PSD2.

To grant TPPs secure access to client data, PSPs must provide APIs. PSPs need to ensure that consumer data is protected when exchanged with TPPs. PSPs can utilize numerous security techniques, such as encryption and tokenization, to protect client data.

Configure Transaction Monitoring

Transaction monitoring is an essential PSD2 requirement. PSPs must keep tabs on all financial dealings if they are to identify and stop any fraudulent acts. Many techniques are available to PSPs for monitoring financial transactions, including machine learning algorithms and rule-based systems.

If PSPs want to effectively employ transaction monitoring, they must equip themselves with the appropriate infrastructure. To identify potentially fraudulent transactions, PSPs must establish criteria and thresholds. Moreover, PSPs must have a system in place for investigating and reporting fraudulent activities.

Do Frequent Audits

Consistent auditing is crucial for ensuring PSD2 conformance. PSPs should do audits on a routine basis to spot any areas of noncompliance and fix them as soon as possible. Audits can also allow PSPs to identify areas for improvement and apply best practices.

PSPs can undertake internal audits or hire external auditors to conduct audits. Audits can look into many different aspects of a business, such as SCA, open banking, and transaction monitoring. It is the responsibility of PSPs to maintain reliable and current audit reports.

Educate Employees

If a PSP is serious about meeting the requirements of PSD2, it must ensure that its staff is well-informed. Workers need to understand the requirements and their role in maintaining compliance. PSPs can conduct training and awareness initiatives for staff to educate them about PSD2.

Deploy Data Protection Measures

PSPs need to implement data protection procedures to ensure the security of consumer data. PSPs have a number of tools at their disposal, including encryption and tokenization, for keeping their customers’ information safe. PSPs also need to guarantee that only authorized workers have access to client data. PSPs also need to ensure that client data is securely discarded when no longer needed.

Have a Contingency Plan

PSPs should have a contingency plan in place to deal with unexpected situations, such as system breakdowns or cyber-attacks. The contingency strategy must include procedures for recognizing and addressing difficulties swiftly. 

The procedures for informing consumers and authorities of any problems that may affect their data or transactions should also be included in the contingency plan. PSPs should routinely examine and test their contingency plan to ensure that it is effective.

Check Regulatory Changes

Regulatory standards and reporting requirements could evolve over time. Service providers must keep an eye on the regulatory landscape to get wind of any new obligations or modifications to existing ones. 

As new regulations are introduced, PSPs must have a system in place to review and update their compliance policies and processes to ensure they are up-to-date and in accordance with the law.

Partner with Experienced Vendors

PSPs can cooperate with competent vendors to ensure PSD2 compliance. Experienced vendors can offer PSPs the appropriate infrastructure and resources to meet PSD2 regulations. 

Solutions from vendors including authentication, transaction monitoring, and open banking APIs are available to PSPs. It is the responsibility of PSPs to vet potential vendors to ensure they have a history of offering solutions that are in line with industry standards.

Conclusion

With the continuing expansion of fintech, it is more critical than ever for PSPs to adopt a proactive approach to compliance and stay up to date with the newest industry standards. It’s the only way for them to keep their clients happy as they expand their operations.