PSD1: what is it all about?

The First Payment Services Directive (PSD1), which came into force in France in 2009, was the forerunner of several innovations in the payments sector.

The first in a series of directives, it marked a major turning point for financial services in France and Europe.

PSD1 was designed to harmonise the European payments market by promoting the emergence of a Single European Payment Area (SEPA).

Its main goal was to increase efficiency, security and competition in European payment services, while aiming to stimulate innovation by allowing new players to enter the market.

To achieve these goals, PSD1 established a strict common legal framework for payment services throughout the EU.

PSD1, a directive to structure payment services

PSD1 has made it possible to structure payment services according to four main principles:

Promoting new players in the payments value chain by defining categories of payment services

Payment institutions: They are authorised to provide payment services such as credit transfers, direct debits, card payment transactions, etc.
Electronic money institutions: They can issue e-money, stored on an electronic medium, for making payments.
Third-party payment service providers (third-party PSPs): These players provide consent-based access to users’ bank accounts, paving the way for innovation and the evolution of traditional players.

Developing uses around new payment functions

Third-party PSPs can access consumers’ bank accounts using dedicated interfaces to initiate payments, which has led to the creation of new services such as account aggregation and the initiation of payments on behalf of third parties.

Offering a framework for secure payments in Europe and promoting consumer protection

Since PSD1 came into force, payment transaction times in the SEPA area have been shortened (to 1 working day).
It is also possible to dispute credit transfer and direct debit transactions over a longer period (up to 13 months, depending on the transaction).
Securing online transactions in particular requires identification at national and European level.

PSD1, an effective tool for promoting innovation

PSD1 has created a favourable environment for innovation by opening up the payments market to new players.

It has enabled the emergence of non-bank third-party payment service providers (PSPs), such as fintechs.

These new players have been able to develop innovative payment solutions tailored to the changing needs of companies and end customers.

By promoting the opening up of payment infrastructure and introducing provisions such as access to accounts, PSD1 has encouraged the creation of new payment interfaces.

This has stimulated competition between the various players in the market, improving the quality and efficiency of the services on offer.

Traditional companies in the banking sector have also benefited from this openness to innovation.

PSD1 has enabled them to work with start-ups and technology companies to develop innovative payment services.

These collaborations have created beneficial synergies, combining the banks’ traditional expertise in security and regulation with the agility and innovation of new companies.

PSD1, at the heart of cross-border payments

Before PSD1, cross-border payments were often costly, slow and complex due to the fragmentation of national payment systems.

The directive harmonised the rules for euro payments within the European Economic Area (EEA), making cross-border transactions more efficient and less costly.

By eliminating the additional costs associated with cross-border euro payments in the EEA, PSD1 has encouraged international trade and economic integration between Member States.

This has been particularly beneficial for companies performing transactions within the EEA, as they can now process payments more transparently and cost-effectively.

Consumers have also taken advantage of this harmonisation to make payments when travelling within the EEA, without fear of exorbitant fees or lengthy processing times.

This has helped to strengthen economic and cultural ties between EU Member States.

PSD1 and personal data security

Data security is a major concern in the payments sector, for companies and consumers alike.

PSD1 introduced strict data security and fraud prevention requirements, obliging payment service providers to implement robust protection measures.

Strong authentication, for example, has been made mandatory for online transactions in order to reduce the risk of fraud by identity theft.

Similarly, the directive requires companies to report security incidents to the relevant authority and to the customers concerned, thus promoting greater transparency and accountability in the event of a data breach.

In addition, PSD1 laid the foundations for stricter data protection standards with the introduction of the General Data Protection Regulation (GDPR).

GDPR came into force in 2018 and applies to all companies processing personal data in the EU, including those operating in the payments sector.

Conclusion

PSD1 has opened up the payments market to new players such as fintechs and third-party payment service providers, promoting competition and innovation in the sector.

By improving the customer experience, facilitating cross-border payments and strengthening data security, this directive has brought many benefits to the European payments sector.

Nevertheless, these rapid developments and the new challenges in terms of security are forcing all players to remain vigilant and adapt to regulatory changes.A precursor to PSD2, which further strengthens the categories of payment institution and payment security, PSD1 was an essential milestone in the transformation of the payment services sector in Europe.