Open Banking and PSD2 difference: complete guide for businesses

Understanding the difference between Open Banking and PSD2 is crucial to using the latest technology well. These are ways of handling financial data and bank accounts, leading to a more seamless process for users.

We’ll be looking at the EU regulation contained in PSD2 that allows Open Banking. We’ll also see how Open Banking is being used as a growing market practice by modern financial institutions. It’s a secure framework that allows pay-by-bank transfers and SEPA Instant in the EU.

Find out why the Open Banking and PSD2 details are crucial to businesses that want to make smart banking decisions.

PSD2 explained

PSD2 covers the EU’s Second Payment Services Directive. This revised payment services directive is legislation from the European Union that sets out how payment services are regulated and how payment service providers must operate. 

The idea behind this payment services directive was to stop banks from monopolizing customer data and payment processing. Now, they need to share the information with other regulated financial institutions and third-party providers, such as fintech companies.

This market innovation increases competition in the payment services market while ensuring the complete security of financial data used for Open Banking. Security is achieved through strong customer authentication (SCA). It is used as a form of explicit consent for Open Banking.

Access to account (XS2A) is another key element of this process. It requires banks to provide secure methods for third-party providers to see financial data and initiate payment services directly. 

APIs are application programming interfaces. The API requirements require banks to provide the APIs needed to share data. This payment services directive also ensures that all fintechs need to be licensed as third-party providers (TPPs) to access the data with customer consent. 

Further details of what PSD2 is are included here. If you’re planning to use Open Banking for your business, this is a solid starting point for understanding how it is regulated. We can now look at the difference between PSD2 and Open Banking in more detail.

Open Banking explained

What is Open Banking, and how does it work? While the previous section covers PSD2 requirements, we need to look at the Open Banking process and technical standards to see how they are used for data sharing through secure third-party access.

• Open Banking and PSD2 go together. In the EU, the Open Banking rules and processes are based on the PSD2 legislation. The main difference between Open Banking and PSD2 is that they’re simply different parts of the same modern approach to banking and money management.

• It requires banks to securely share data via Open Banking processes.

• It has created an ecosystem for data sharing with fintechs. The combination of PSD2 and Open Banking allows data to be shared safely following consumer protection rules.

• It enables account-to-account payments. It’s now easy for payment account providers to share the information needed for a smooth, fast process.

• Can be an alternative to traditional card payments to reduce costs and possible issues. By bringing together Open Banking and PSD2, the payment process can be carried out seamlessly using online banking services rather than cards.

Key differences between PSD2 and Open Banking

It’s not a question of Open Banking vs. PSD2, since they work together. However, here are the main differences to bear in mind.

Area	PSD2	Open Banking
Overall definition	This is the European Union legislation, known as the Second Payment Services Directive.	The framework for sharing financial data that was created by the PSD2
Main purpose	State the regulations and safety measures	Allow data sharing between banks and other financial institutions
Scope covered	EU payment services and providers	This is the part of the PSDe legislation that covers the use of APIs and access to financial data
How is it implemented?	This is a legal requirement for all banks and third party payment providers in the EU	Open Banking technology and APIs
Payment types covered	Cards, accounts.	Pay-by-bank and account-to-account methods are enabled.
Who does it cover?	All EU banks, fintech, and payment providers.	Banks, fintech companies, third party providers
Result	More competition and better security through strong customer authentication	New payment methods and a more open financial ecosystem
Main benefits	Strong regulation and compliance framework	New payment methods and more innovation

How PSD2 made Open Banking possible in Europe

The emergence of PSD2 has provided the regulatory foundation for Open Banking. It lays down the rules that establish customer trust and standardize Open Banking APIs. 

It has opened up the financial products industry across the EU member states. By giving fintechs access, third-partythird-party app creation has grown, and new open APIs have entered the market.

It has fostered innovation and competition, as well as improved security. The way that secure APIs for mobile phones and web platforms have emerged has made it easier to protect data privacy while allowing easy access.

Why this matters for businesses

There are several key reasons why the broader range of payment initiation methods introduced by PSD2 and Open Banking is good news for businesses.

Lower payment costs

It is important because card payments include a chain of intermediaries, such as banks and card issuers. With each company taking a small percentage of each transaction, the biggest difference between Open Banking and cards is the lower cost.

pen Banking payments help the cash flow

With instant access to payment information, there’s no need to wait on funds or worry about potential chargebacks. 

Improved compliance

The security standards for Open Banking are extremely high. Ше means that the account information is kept safe while allowing seamless access.

Secure data sharing

There is greater control over the way that data is shared. Ше means that there is no risk of unauthorised access, with multi-factor authentication keeping the data safe.  

A better customer experience

Above all, Open Banking is designed to enable faster payments with the customer’s consent. They no longer need to worry about delayed payment or data privacy.

Examples of Open Banking payments

The different ways that Open Banking can be used for online transactions ensure that Open Banking and PSD2 have transformed various areas of the payments process.

• Account-to-account payments. This term covers payments that move between bank accounts without a card network. Open Banking is used from the bank’s online portal or by using a third-party API. This is why an API for money transfers is one of the safest and most convenient options created by open banking and PSD2 regulations.

• Pay by Bank. It’s a customer-facing button that is often used in the checkout section of websites to initiate payments safely. The customer can pay without revealing any of their banking data to the company. They look at Pay by Bank explained goes into more detail about how this slick service works.

• SEPA Instant Transfers. In this case, open banking can be used to provide customer account information and initiate a Credit Transfer (SCT Inst) across the EU.

• Subscription payments. The Open Banking version of a direct debit is an automated payment that can be set up and canceled very easily.

How Genome uses open banking

Genome uses Open Banking technology to provide a range of banking industry products while fostering innovation and protecting customer account information.  The business account opening process is secure, following know your customer (KYC) and anti-money laundering (AML) regulations to add extra protection and peace of mind.

• Pay by Bank. This process starts at a merchant checkout, when a customer selects Pay by bank for payment. Genome allows its merchants to accept payments via Open Banking, using instant bank payments.

• SEPA Credit & SEPA Instant. As a licensed Electronic Money Institution (EMI), Genome provides a dedicated IBAN account option that can be used for SEPA transfers and payments in the European banking industry.

• API-based integrations. One of the key aspects of Genome’s services is that it’s built using API-first architecture. This means that businesses are able to easily embed final services like open banking payments into their platforms with no fuss.  

• Secure online payments. This is the key to safe online banking with a merchant account from Genome. By using this secure method, the merchant can seamlessly process online banking payments with none of the risk associated with card payments.

If you want to know what a merchant account is and how to use open banking to make it easier to run, find out how Genome lets you sign up effortlessly and in next to no time.