As the UK’s payments sector nears the final transition deadline for Policy Statement 21/3 (PS21/3), merchants need to grasp the regulatory and operational shifts it brings.
PS21/3: Key considerations for merchants
Issued by the Financial Conduct Authority (FCA), PS21/3 introduces enhanced safeguarding and prudential risk management requirements for payment service providers (PSPs) and electronic money institutions (EMIs).
Although merchants themselves are not the direct targets of these regulations, they are deeply affected through their partnerships with payment processors, acquiring banks and gateways.
For merchants, understanding these changes is critical not just for maintaining smooth payment operations but also for positioning themselves as reliable actors within the payments ecosystem.
Understanding PS21/3’s Scope and Objectives
PS21/3 reflects the FCA’s effort to improve the financial stability and consumer protection standards across the UK’s payments industry.
Specifically, it focuses on ensuring that PSPs and EMIs maintain more robust systems for safeguarding client funds and managing operational risks.
This regulatory push stems from concerns about the financial health and resilience of some non-bank payment firms, particularly those handling significant payment volumes.
While merchants are not directly regulated by PS21/3, they need to ensure their payment partners comply with the updated standards, as non-compliance on the part of a provider could disrupt merchants’ own operations or even expose them to counterparty risk.
This indirect exposure makes it essential for merchants to actively engage with the evolving regulatory landscape.
Core Changes Impacting Merchants
1. Strengthened Safeguarding Protocols
PS21/3 requires PSPs and EMIs to adopt stricter protocols for protecting customer funds. These firms must ensure that funds are segregated and reconciled more promptly to reduce the risk of shortfalls in insolvency scenarios.
For merchants, this means reviewing contractual agreements with payment partners to ensure alignment with these strengthened safeguarding requirements. Merchants may also need to revisit contingency arrangements to address potential disruptions if a payment partner’s compliance falls short.
2. Enhanced Operational Resilience Standards
The FCA’s emphasis on operational resilience requires PSPs to demonstrate how they would maintain critical payment services during disruptions such as cyberattacks, system failures or insolvencies.
Merchants should expect increased scrutiny of the resilience practices of their payment providers, with greater transparency into incident response capabilities and continuity planning. These factors should become part of merchants’ ongoing vendor due diligence.
3. Accelerated Reconciliation and Reporting
PS21/3 imposes more frequent and granular reconciliation obligations on PSPs and EMIs, ensuring that customer funds are accurately tracked and segregated.
Merchants may experience changes in settlement processes, including potentially faster reconciliation windows or additional data-sharing requirements. These changes could alter cash flow dynamics, making proactive communication between merchants and their payment partners essential.
Preparing for a Smooth Transition
Merchants should take several proactive steps to adapt to these regulatory-driven shifts:
- Conduct a Payment Partner Audit: Request documentation from PSPs and acquiring banks to verify their PS21/3 compliance measures, particularly around safeguarding and operational resilience.
- Review and Update Contracts: Amend service agreements to explicitly reference PS21/3 compliance obligations, including clear terms around safeguarding processes, reconciliation timelines, and incident response protocols.
- Upgrade Internal Controls: Align internal payment reconciliation procedures with the accelerated timelines imposed on PSPs, and enhance monitoring of incoming settlements to ensure prompt anomaly detection.
- Strengthen Customer Communication: If new processes cause changes to refund timelines, settlement speeds, or dispute resolution, merchants should clearly communicate these updates to customers to preserve trust and satisfaction.
Compliance as a Strategic Asset
While PS21/3 is a regulatory necessity, merchants can leverage compliance readiness as a competitive differentiator.
Merchants that partner with highly compliant and resilient PSPs will be better positioned to attract both customers and investors who prioritise security and reliability.
Furthermore, demonstrating rigorous oversight of payment processes enhances broader governance and risk management frameworks, which is increasingly important in a regulatory environment that is likely to grow stricter over time.
The approaching end of the PS21/3 transition period should serve as a catalyst for UK merchants to revisit their payment strategies.
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