As the clock ticks down to new regulations that will change the face of Open Banking, data access, and security, Alex Reddish, Managing Director of Tribe Payments, takes a deep dive into what PSD3, PSR and FIDA have in store for the financial sector.
On June 28th 2023, the European Commission (EC) introduced a draft proposal for an upgraded Payment Service Package, comprising an updated Payment Services Directive (PSD3), an innovative Payment Services Regulation (PSR), and brand-new Financial Data Access Framework (FIDA).
Banks, non-banks and fintechs now have just one year to prepare for these changes, which are set to take effect from 2025.
They will see existing regulations evolve and new ones structured to align with the transformational shifts we’ve seen in payments usage, along with the emergence of Open Banking and the move to a digital-first economy.
One of the key aims of the new regulatory trio is to level the playing field between banks and non-banks, in particular by giving non-bank payment service providers access to all EU payment systems, with appropriate safeguards, and securing those providers’ rights to a bank account.
But each will change the financial landscape in different ways.
What PSD3 means for Open Banking
PSD3 will expand the scope of PSD2 to take into account new challenges around fraud, digital payment transformation and access to payment systems.
The introduction of PSD3 also marks a new era in Open Banking, with the potential to significantly enhance the performance of Open Banking APIs and increase the adoption of Open Banking services.
Currently, just 10% of the UK population is using Open Banking, and usage pales into insignificance when compared with the tens of billions of card transactions processed by the major global card schemes.
The proposed PSD3 text states that there will be no charging for the use of Open Banking interfaces, and there will be no mandating of standard APIs.
It remains to be seen if this will significantly build on the number of active Open Banking users in the UK, which reached the milestone of eight million users at the end of 2023.
PSD3 will also contain updated provisions for fighting new types of payment fraud, including socially engineered fraud and authorised push payment (APP) fraud.
PSD3 promises to beef up fraud prevention by enabling the sharing of more fraud-related data at an industry level.
Something that will prick up the ears of payments providers is that the EC is opening redress rights to consumers in respect of fraudulent payments including, in some cases, APP transactions.
In this regard, the proposed PSD3 appears to mirror the UK’s recently mandated APP reimbursement requirements.
Here is a potential battleground for the EC on one side and the banks and payment service providers who could find themselves liable for reimbursing customers for authorised transactions deemed fraudulent at a later date.
European players will be keeping a close eye on how the UK payments industry responds to APP fraud requirements over the next 12 months.
How does The PSR come into play?
The chief aim of the PSR is to improve consumer protection, and it will essentially update and replace the parts of PSD2 not covered in PSD3.
Once adopted and implemented, PSR will apply to every EU member state.
It will introduce changes to the existing Open Banking framework to improve access to these services.
Under PSR, Payment Initiation Service Providers (PISPs) and Account Information Service Providers (AISPs) will be allowed to build custom API interfaces that can connect directly to banks and other payment providers.
On the face of it, this should improve uptake and adoption of Open Banking.
But banks and payment entities will also have to disclose quarterly statistics on their API performance and availability.
This is sure to spur competition in the market, galvanise better API build quality to interface with banks, and direct businesses towards the better-performing providers.
Is FIDA the push Open Banking needs?
The final part of the new regulations is FIDA, which aims to give financial information service providers (FISPs) the right to access real-time customer data arising from nearly all financial services data, including current and savings accounts, credit cards, mortgages, loans, and pension accounts.
In the age of real-time digital finance, by leveraging real-time transaction data from a wider range of consumer account products, fintechs and banks can make more informed, data-driven decisions that reduce risk, lower default rates (and therefore reduce credit losses) and improve financial inclusion.
Rather than relying on incomplete static snapshots of a single point in time, real-time Open Banking and Open Finance data could produce a 360-degree view of an individual’s true financial circumstances, enabling fintechs to hyper-personalise products and services to grab more market share.
However, unlike PSD3, FIDA has no predecessor or foundation of legislation to build on, and only a points of interaction with PSD3.
It will be interesting to see if FIDA can give Open Banking and Open Finance the push they need to gain meaningful traction.
Will politics hinder progress?
The EC has optimistically put forward the first half of 2025 for the final adoption of PSD3 and FIDA. But much could hinge on the results of the European Parliament elections, set to take place in June 2024.
Most legislators are broadly in favour of the proposed frameworks, which have met little opposition so far on their way through the legislative journey, but surprise election results could yet prove problematic.
If European parliamentarians find themselves at loggerheads it could hinder the passage of any pending legislation and leave the payments industry in limbo.
What remains to be seen is whether these regulatory updates will effectively balance consumer protection with commercial concerns.
It’s clear that policymakers have good intentions, but it’s vital that new regulatory frameworks don’t squeeze the ability of ecosystem players to innovate and compete, and inadvertently reduce payment choice and convenience for consumers.
While the road to PSD3, PSR and FIDA still stretches on, the opportunities at the end are significant.
By understanding these changes and preparing for them, banks, non-banks and fintechs can not only navigate the new landscape, but they can leverage it to drive growth and success.
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