Understanding the Difference Between Open Banking and PSD2

PSD2 (the revised Payment Services Directive) is the European regulation that drives this change, requiring banks to open access and improve customer protection. Comparing them is important for businesses, financial institutions, and consumers because PSD2 sets the legal foundation, while open banking delivers the innovation and practical use cases. Together, they reshape how financial services operate, such as balancing regulation, security, and creativity. Understanding where they overlap, differ, and complement each other helps stakeholders see the benefits, opportunities, and challenges in today’s fast-changing financial ecosystem.

What is PSD2?

The Payment Services Directive 2 (PSD2) is a European Union regulation introduced to modernize and strengthen the payments industry. Building on the original PSD, it ensures that digital finance keeps pace with technology while protecting consumers. Its central goal is to increase transparency, competition, and security across the financial sector.

One of the key requirements of PSD2 is Strong Customer Authentication also known as SCA, which makes electronic transactions safer by requiring multi-factor verification, reducing fraud risks. Another important rule is secure access to account data, which allows regulated third parties to provide services while ensuring banks maintain strict safeguards. PSD2 also enhances customer rights, such as reducing liability in fraud cases and improving refund processes.

Beyond compliance, PSD2 has transformed banking by setting clear rules for how institutions must share data and handle payments. This regulation laid the foundation for innovations like open banking payments, enabling faster, safer, and more customer-focused services. By enforcing higher security standards and encouraging transparency, PSD2 has become a cornerstone of modern banking compliance, reshaping how businesses, banks, and consumers interact in today’s digital financial ecosystem.

What is Open Banking?

Open banking is a framework that enables secure financial data sharing between banks, fintechs, and authorized third-party providers. Instead of keeping customer information locked within one institution, it uses standardized APIs which stand for application programming interfaces, to allow seamless, consent-based data exchange. This creates a foundation for innovation, where new payment solutions, budgeting tools, and lending platforms can emerge, tailored to customer needs. Hence, by opening access, banks and fintechs can compete more fairly while offering personalized, customer-centric products that improve transparency and convenience. At the same time, safeguards like fraud detection in open banking ensure security remains a priority as data flows between multiple parties.

Although it gained momentum in Europe through PSD2 regulation, open banking is now expanding globally, with countries like the UK, Australia, Brazil, and parts of Asia adopting similar frameworks. This worldwide shift shows its potential to transform financial services, fostering collaboration across industries and giving consumers greater choice and control. To cut the long story short, open banking is not just a regulatory requirement but a global driver of innovation in finance.

Key Differences Between Open Banking and PSD2

So, open banking and PSD2 are closely linked, but they serve different purposes. PSD2 is the regulatory driver within the EU, while open banking is the broader framework of innovation that grew from it. Understanding their differences is essential for businesses, banks, and consumers because it clarifies how rules, technology, and global adoption come together. It also helps address practical questions, such as does opening a bank account affect credit score, by showing how regulation and innovation intersect.

• Regulatory Scope

PSD2 is EU law setting strict requirements for payments, security, and customer rights, binding all EU banks and providers. Open banking is an ecosystem using APIs for secure data sharing, enabling collaboration between banks, fintechs, and third parties to create innovative financial products and services.

• Geographic Coverage

PSD2 applies only in the EU and EEA, standardizing digital payments across member states. Open banking, however, has global reach, with frameworks in the UK, Australia, Brazil, and Asia. While PSD2 enforces European rules, open banking drives worldwide data-driven financial ecosystems, adapting to local regulations and market needs.

• Objective

PSD2 focuses on compliance, protecting customers, reducing fraud, and ensuring secure, transparent transactions. Open banking emphasizes innovation, customer-centric services, and data empowerment. Together, they balance security and creativity, enabling safe, flexible, and customer-focused financial growth across modern banking.

• Technology

PSD2 establishes rules such as strong customer authentication and secure access to accounts but does not dictate the specific tools or methods to implement them. Open banking fills this gap by using APIs, enabling secure, real-time data sharing between banks, fintechs, and third-party providers. This approach drives innovation in digital wallets, lending platforms, and financial management apps, effectively bridging regulatory requirements with practical technological solutions that enhance customer experience and service efficiency.

How PSD2 Supports Open Banking

PSD2 directly supports open banking by creating the legal framework that requires banks in the EU to provide secure access to customer account data. Without this regulation, open banking would not have been possible, as banks traditionally controlled and restricted data sharing. PSD2 ensures that customers can safely grant permission for their data to be shared with trusted third parties. The directive also mandated the use of APIs, which act as the bridge between regulation and real-world applications, enabling standardized and secure communication between banks, fintechs, and service providers. Thanks to PSD2 compliance, fintech innovations such as budgeting apps, instant payment services, lending platforms, and personalized financial management tools have flourished. These solutions demonstrate how regulation and technology together reshape modern financial services.

Benefits of Open Banking and PSD2 Together

When combined, open banking and PSD2 create powerful benefits for the financial ecosystem. Together, they deliver stronger data security and fraud prevention by enforcing strict regulatory standards while enabling secure, API-driven data sharing. Customers also gain more choice and transparency, with access to a wider range of financial products tailored to their needs. For SMEs and consumers, barriers to accessing credit, payments, and financial tools are lowered, making services faster and more affordable. Finally, this regulatory-innovation partnership encourages fintech innovation and cross-industry collaboration, allowing banks, fintechs, and third-party providers to work together on new solutions. The result is a more secure, competitive, and customer-focused financial environment where regulation ensures trust, and open banking drives creativity and growth across global markets.

Challenges of Open Banking and PSD2

Open banking and PSD2 also face several challenges despite their benefits. One major issue is the uneven adoption speed, as banks and countries vary in how quickly they implement standards, creating inconsistency across markets. Technical barriers also remain, with API integration and standardization proving difficult, slowing down interoperability between institutions and providers. Another challenge is finding the right balance between encouraging innovation and meeting strict compliance requirements, which can sometimes limit flexibility. In addition, consumer trust and awareness are still developing, many customers are unfamiliar with how open banking works or worry about data security. Overcoming these challenges is essential for achieving the full potential of PSD2 and open banking, ensuring secure, seamless, and widely accessible financial services worldwide.

The Future of Open Banking and PSD2

The future of open banking and PSD2 is moving toward global open finance, expanding beyond payments and banking into insurance, investments, and digital identity services. As technology evolves, regulatory updates like a potential PSD3 may strengthen security, data rights, and standardization. This evolution will unlock broader ecosystems where financial data flows seamlessly across industries, driving more personalized services. Long-term, collaboration between banks and fintechs will deepen, blending regulatory compliance with innovation. Together, these trends suggest a financial landscape that is more integrated, customer-focused, and globally connected, shaping the next era of digital finance and financial inclusion.

FAQs

What is the difference between open banking and PSD2?

PSD2 is EU regulation ensuring secure data access, while open banking is the innovation ecosystem it enables, driving customer-focused financial services.

Does PSD2 apply outside of the EU?

PSD2 applies only within the EU, but similar regulations exist worldwide, enabling open banking frameworks in the UK, Australia, Brazil, and Asia.

How does PSD2 improve security in open banking?

PSD2 improves open banking security through Strong Customer Authentication, standardized APIs, and strict compliance monitoring, reducing fraud and protecting customer data.

Can open banking exist without PSD2?

Yes, open banking can exist globally without PSD2, driven by market demand, but in Europe, PSD2 provided the regulatory foundation for its development.

References

Mollie: Open banking vs PSD2

https://www.mollie.com/growth/open-banking-vs-psd2-explained

Bottomline: Understanding the difference between Open Banking and PSD2

https://www.bottomline.com/resources/blog/understanding-difference-between-open-banking-psd2

Exactly: An Ultimate Guide On PSD2 And Open Banking

https://exactly.com/blog/psd2-open-banking

Unlimit: PSD2 vs Open Banking: What You Need to Know

https://www.unlimit.com/blog/payments/psd2-vs-open-banking-what-you-need-to-know