PSD2
regulationFull Name: Payment Services Directive 2
Definition
PSD2 (Payment Services Directive 2, Directive 2015/2366/EU) is a complete European Union regulation that governs payment services and payment service providers throughout the European Economic Area. Enacted in 2015 and fully enforced since 2019, PSD2 introduced Strong Customer Authentication (SCA) requirements, mandated open banking through secure API access, and strengthened consumer protection for electronic payments. In the evolving European digital identity space, the EUDI Wallet represents a natural convergence point where PSD2 payment authentication and eIDAS 2.0 identity verification meet, enabling smooth, secure financial transactions backed by verified digital identity.
Strong Customer Authentication and the EUDI Wallet
PSD2's most significant impact on the EUDI Wallet ecosystem comes through its Strong Customer Authentication (SCA) requirements. SCA mandates that electronic payments above certain thresholds use at least two independent authentication factors from three categories: knowledge (PIN, password), possession (smartphone, token), and inherence (fingerprint, facial recognition). The EUDI Wallet inherently satisfies these requirements through the combination of the device it runs on (possession), the biometric authentication required to unlock it (inherence), and optional PIN protection (knowledge).
When a user initiates a payment that requires SCA, the EUDI Wallet can serve as the authentication device. The bank or payment provider sends an authentication request to the wallet, which prompts the user for biometric verification. Once authenticated, the wallet generates a cryptographic proof using the device-bound private key stored in the secure enclave, which the bank can verify as meeting all SCA requirements. This eliminates the need for separate banking apps, SMS codes, or hardware tokens.
The dynamic linking requirement of PSD2, which mandates that the authentication be linked to a specific amount and payee, can be implemented through the wallet's credential presentation mechanism. The wallet displays the transaction details to the user before authentication, and the cryptographic proof includes a hash of these details, ensuring that the authentication cannot be reused for a different transaction.
Open Banking Integration
PSD2 introduced the concept of open banking by requiring banks to provide Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs) with secure access to customer account data through standardized APIs. The EUDI Wallet can enhance this ecosystem by providing a standardized identity verification layer that simplifies the customer onboarding process for third-party financial services.
When a customer wants to connect a new financial service to their bank account, the EUDI Wallet can present verified identity credentials that the bank can immediately trust, reducing the friction of KYC (Know Your Customer) processes. This is particularly valuable for cross-border financial services, where identity verification has traditionally been a major barrier. A French fintech can verify a German customer's identity through their EUDI Wallet just as easily as a local customer.
The combination of PSD2 open banking and EUDI Wallet identity verification also enables new financial products that were previously impractical. Account aggregation services can verify customer identity across multiple banks, payment initiation can be combined with identity-verified digital signatures for high-value transactions, and automated financial compliance checks can use wallet-presented credentials for real-time verification.
From PSD2 to PSD3 and the Digital Euro
The European Commission proposed PSD3 and the Payment Services Regulation (PSR) in 2023, updating the regulatory framework to address the evolving digital payments environment. PSD3 is expected to further integrate digital identity verification into payment flows, explicitly recognizing the role of the EUDI Wallet as an authentication and identity verification mechanism. The regulation also addresses emerging challenges such as payment fraud prevention, instant payment requirements, and digital currency integration.
The Digital Euro project, being developed by the European Central Bank, represents another convergence point with the EUDI Wallet. If implemented, the Digital Euro would likely use the EUDI Wallet as one of its primary access points, allowing citizens to make digital currency payments authenticated through their verified digital identity. This creates a complete digital financial ecosystem where identity, authentication, and payment are smoothly integrated within a single wallet application.
Financial institutions preparing for PSD3 should consider how their EUDI Wallet integration strategy aligns with both the updated payment regulation and the eIDAS 2.0 requirements. Early adoption of EUDI Wallet-based authentication can position banks and payment providers for compliance with upcoming regulations while improving the customer experience and reducing authentication friction.