The European Commission’s payments landscape is evolving once again with the introduction of PSD3 (Payments Services Directive 3) and the new Payments Services Regulation (PSR).
Building on the foundation of PSD2, these initiatives aim to foster innovation, enhance security, and provide more opportunities for non-bank players in the European payments market.
Announced in June 2023, PSD3 and PSR are designed to address the gaps left by PSD2, while adapting to the rapid shifts in the fintech and banking sectors.
However, ongoing challenges will require continued collaboration and refinement to ensure a truly harmonised and effective financial ecosystem.
Why PSD3 and PSR?
Since the implementation of PSD2 in 2016, significant advancements have been made in areas like Open Banking, and security protocols such as Strong Customer Authentication (SCA) have been introduced to reduce fraud.
However, with the rapid digitization of the economy and the rise of sophisticated fraud schemes, the payments sector is facing new challenges.
To address these, the European Commission has introduced PSD3 and PSR.
In short, PSD3 focuses on the regulatory framework for payment service providers (PSPs), while PSR zeroes in on the specific use cases and clarifies obligations for banks and other stakeholders.
Key Changes Introduced by PSD3 and PSR
1. Enhanced Customer Protection and Security
The battle against payment fraud remains a top priority for the European Commission. While PSD2 introduced Strong Customer Authentication (SCA) and reduced fraud by 70-80%, the growing complexity of attacks – such as authorised push payment (APP) fraud and spoofing – demands new measures. PSD3 and PSR address these concerns by:
Clarifying SCA rules: New Regulatory Technical Standards (RTS) will further refine transaction monitoring requirements and update SCA exemptions, ensuring tighter security for both merchant-initiated and Mail Order Telephone Order (MOTO) transactions.
Mandatory Verification of Payee: Initially launched in 2022, this service will now be expanded to cover all credit transfers within the EU. This ensures that consumers are alerted to discrepancies between the payee’s name and unique identifier, thereby reducing fraud and ensuring seamless cross-border payments.
2. Opening Access to Payment Systems for Non-Bank PSPs
Historically, access to EU payment systems like TARGET2 and other central banks’ clearing and settlement mechanisms (CSM) was reserved for traditional banks.
Under PSD3, Payment Institutions (PIs) and Electronic Money Institutions (EMIs) will now gain access to these systems. This is a significant shift, as it breaks down barriers for non-bank players, fostering a more competitive environment.
For example, Instant Payments were previously restricted to banks, but following the reassessment of the Directive 98/26/EC, PIs and EMIs are now included.
By April 2027, they will be required to comply with instant payment regulations, promoting further inclusion of fintech players in the payments ecosystem.
3. Expanding Open Banking
Open Banking has allowed consumers to share financial data with other service providers, driving innovation in financial services. However, PSD2 fell short of fully unlocking its potential.
PSD3 and PSR seek to address the challenges by:
Improving data interfaces and removing obstacles that hinder the seamless flow of information.
Introducing a Permission Dashboard, giving consumers more control over who has access to their financial data and enhancing transparency.
These changes will not only make Open Banking more accessible but also encourage the development of new, innovative services that benefit consumers and businesses alike.
4. Harmonisation and Simplification for EMIs and PIs
PSD3 merges the previously distinct frameworks governing EMIs and PIs. Under the old system, regulatory inconsistencies across EU Member States led to confusion and enforcement challenges.
PSD3 seeks to harmonise and simplify these frameworks, allowing supervisory authorities to better manage their oversight responsibilities.
This move will create a more streamlined payments industry with uniform regulations across the EU, promoting fairness and consistency for all players.
5. Addressing Remaining Challenges
Despite the positive steps introduced by PSD3 and PSR, certain issues remain unresolved.
One such challenge is IBAN discrimination, which occurs when consumers are unable to complete cross-border SEPA payments due to their bank account’s location.
Additionally, the rules surrounding virtual IBANs and the differentiation between fraud and gross negligence remain unclear, potentially causing future complications.
Another challenge involves the segregation of funds for EMIs, where current regulations allow for five days to separate client funds from operational funds.
This timeframe will be reduced to 24 hours under PSD3, raising concerns about the speed and efficiency of money transfers between accounts.
Looking Ahead: PSD3 and PSR Implementation
The PSD3 and PSR proposals are currently under review by the European Parliament and Council.
With an estimated 18-month transition period, the finalised regulations are expected to come into effect by 2026.
This timeline allows EU Member States and industry players to align their systems with the new rules, setting the stage for a more secure, competitive, and transparent payments landscape.
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