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Payment Initiation

PSD2 Payment Initiation via Pay: here's how it works. 

Since 2018, the PSD2 directive has been in force in Europe. Among other things, this directive mandates that all banks within the European Union must support payment initiation. With payment initiation, third parties like Pay. can execute transactions on behalf of consumers from their bank accounts.

A pilot is currently underway. From May 2023, payment initiation will be activated for all Pay.'s customers.

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PSD2 is the successor to PSD, also known as Payment Services Directive. This European directive aims to give banking in the European Union an open and transparent character, known as open banking.

The underlying idea of open banking is that an open market leads to more competition, choice, and innovation, ultimately benefiting consumers. By requiring banks to grant third parties access to a bank account, with the consumer's permission, these third parties can develop new services.

A Dutch example of such a new service is Buddy, a debt counseling app. PSD2 indeed contributes to the development of new, modern payment services. However, progress has been slow, partly because banks use a myriad of techniques and methods when it comes to implementing payment initiation. As a result, the number of payment initiation services in the Netherlands is very limited.

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PSD2 Payment Initiation versus iDEAL.

 Eventually, Payment Initiation could become more common and popular in the Netherlands. This is not only because support for Payment Initiation is mandatory for all Dutch banks, but also because alternatives, such as iDEAL, are becoming less attractive. iDEAL is gradually becoming more expensive to use, which could lead banks to discontinue their iDEAL support. Handelsbanken, a Swedish bank, has already done so. Banks are not required to support a service like iDEAL, but are obliged to support Payment Initiation. All Dutch banks are currently fulfilling this obligation.

In the short term, a new version of the current iDEAL is coming. iDEAL 2.0, as the project is currently called, includes more features than just payment initiation. As a result, iDEAL may retain its relevance in the future, despite the further development of Payment Initiation services.

One standard, but numerous exceptions. 

In the Netherlands, Rabobank was the first major bank to introduce an API connection in March 2019 to enable third parties to offer payment initiation services. Other Dutch banks, such as ABN AMRO and ING, have followed suit, but in most cases, they have provided their own API. There is no uniform IT landscape for a payment service provider to easily connect to.

Different banks also have different practices. For example, Bunq requires an IBAN upfront, while Rabobank, ING, and ABN AMRO do not. Banks like Knab and Revolut do not support end-to-end identification (E2E ID, a way to provide a transaction with a description or tag), while many other banks do. These differences make payment initiation look slightly different at each bank.

At the European level, the Berlin Group, a collaboration of 26 financial institutions from ten European countries, is trying to change this. The Berlin Group aims to make open banking as accessible as possible by offering a standard framework to which both banks and third parties can easily connect. Unfortunately, not all of Europe's major banks have joined this initiative, which is why open banking remains complicated, and the development pace is slow.

Convenience: 90-day consent is simple, Payment Initiation is user-friendly.

To use a payment initiation service, a consumer must first give permission to the respective service provider. This is done through SCA: Strong Customer Authentication. SCA requires a consumer to present at least two forms of identification. This process prevents fraud and ensures secure payment initiation.

Consumers who grant third parties permission to execute transactions on their behalf give this consent in accordance with the PSD2 directive for a maximum of ninety days. After that, consent must be given again. In some EU countries, this means a consumer must go through an SCA flow every three months to continue using the payment initiation service. This creates a high barrier for many users, leading to a significant drop-off rate.

In the Netherlands, however, the regulation is relatively lenient. While consumers must renew their consent every ninety days, they can do so simply by selecting "yes" or "no." Thus, there is no need to perform a comprehensive identification check every quarter. Payment initiation in the Netherlands is therefore relatively easy to use.

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Payment Initiation at Pay: intuitive flows for optimal customer satisfaction.

Not every company is allowed to start a payment initiation service. Strict regulations must be met, including those related to cybersecurity and privacy. A payment initiation service provider has access to consumers' bank accounts, so safety and reliability must be guaranteed.

At Pay, we comply with all relevant laws and regulations while also providing efficient flows that are intuitive for you as a seller. This means you won't be affected by the tangle of techniques and methods banks use. We offer simplicity and clarity, allowing you to provide your customers with payment convenience and freedom of choice.

To learn more about payment initiation, please contact us.

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