Introduction

On 28 June 2023, the European Commission published several proposals, whereunder proposals for the Payment Services Directive 3 (PSD3) and the Payment Services Regulation (PSR). Their predecessor, the Payment Services Directive 2 (PSD2), was introduced with the aim of revolutionizing the (EU) payment market by improving user protection, promoting innovation and creating a level playing field for payment service providers (PSPs). However, PSD2 had some shortcomings and new regulation was necessary to keep up with the fast evolvements in the world of payments.

Background

The Commission notes that PSD2 achieved successes in certain areas. The first achievement is the implementation of Strong Customer Authentication (SCA), which has played a crucial role in reducing fraud. Additionally, PSD2 has been effective in increasing the efficiency, transparency, and choice of payment instruments for users, providing them with improved options and greater control over their payments.

However, the Commission also acknowledges that PSD2 faced issues in achieving a level playing field for all PSPs. Non-bank PSPs do not often have direct access to key payment systems, resulting in an imbalance between bank and non-bank PSPs. This imbalance has a negative impact on fair competition and innovation in the payment market. Furthermore, there were remaining issues with Open Banking (OB) regarding data access interfaces for these service providers. Also, cross-border payment services are increasing while the payment systems remain focused on national territories of Member States, resulting in disparity in regulation and ‘forum shopping’. On these issues a solid level playing field seemed necessary.

Four key problems

In this context there are four key problems that PSD3 and PSR try to solve:

1. there is the persistent problem of fraud. Payment users, especially consumers, are still exposed to fraud risks, and therefore they lack confidence in the payment industry;
2. the Open Banking framework functions imperfectly. The OB service providers are having trouble getting access to data and are therefore struggling to innovate and grow;
3. EU supervisors have inconsistent powers and obligations: the disparity in regulation of Member States results in a fragmented payment market. Furthermore, this results in inefficiencies in regulatory obligations and costs. EU supervisors don’t have the authorization to create a functioning level playing field;
4. there is an unlevel playing field between banks and non-bank PSPs. Non-banks PSPs are disadvantaged compared to banks because of uncertainty and inequality in regulatory obligations from PSD2 and national legislation.

Objectives PSD3 and PSR

These key problems within the current payment industry have led to the following objectives from PSD3 and PSR:

1. Strengthening user protection and confidence involves further improvements to:

• SCA application,
• improved fraud information exchange between PSPs,
• the obligations of customer education on fraud,
• extended IBAN verification,
• improved accessibility of SCA for users with disabilities,
• measures to improve the availability of cash and improving payment service user rights.

2. To improve Open Banking (OB) competitiveness

• mandatory dedicated data access interfaces for Account Servicing Payment Service Providers (ASPSPs),
• permissions dashboards for users to manage OB access,
• detailed specifications for OB data interfaces will be established.

3. The improving enforcement and unifying implementation entails:

• replacing ambiguous aspects of PSD2 with the directly applicable PSR,
• reinforcing penalty provisions,
• integrating the e-money regime within PSD3 and PSR.

4. To facilitate access for non-bank PSPs by

• widening the accessibility to a bank account for Payment Institution/Electronic Money Institution (PI/EMI)
• granting them the possibility of direct participation of to all payment systems.

Difference between Directive (PSD3) and Regulation (PSR): the advantage of PSR

PSD3 will remain an EU Directive and provides rules for the authorization of payment institutions. A Directive needs to be transposed into the national laws of the various EU Member States.

PSR is an EU Regulation and will, once adopted and entered into force, apply directly in the EU Member States. There is thus no need for implementation in national laws. PSR will – in short – provide rules in relation to (i) transparency of conditions and information requirements for payment services and (ii) rights and obligations in relation to the provision and use of payment services. This second part also includes provisions on Open Banking. For payment service providers, the advantage of the PSR is that it creates a single legal framework for all operations across the EEA. Therefore, uncertainty and inequality between national legislation of Member States will be reduced.

Open Banking in PSR

According to the Commission, the provisions regarding Open Banking encompass several modifications in comparison to PSD2 and include the integration of specific provisions which are currently found in a Regulatory Technical Standard. Key changes in Open Banking include the imposition of a dedicated interface for data access and the removal of the requirement on Account Servicing Payment Service Providers (ASPSPs) to maintain a ‘fallback’ interface, barring exceptional circumstances. To enable Open Banking users to manage their data through Open Banking in a transparent way, ASPSPs are required to offer them a “dashboard” allowing the withdrawal of data access to any Open Banking provider.

The disappearance of E-money institutions

Another notable change to mention is the disappearance of the distinction between E-money institutions and payment institutions. According to the proposed legislation, there will only be payment institutions, which can be granted authorization to offer e-money services as well.

Next steps

The published documents are proposals examined by the European Commission. These proposals will undergo a review by both the Council and the European Parliament. Once the final texts are agreed upon and adopted, they will become enforceable. However, a specific transitional period applies for the rules of the PSR. Regarding the enforcement of PSD3, it is necessary to implement the Directive into national legislation within a timeframe to be determined by the EU legislator.

We are there to assist!

The future will tell if the PSD3 and PSR will achieve their goals. For now, we will take a deep-dive in these proposals on payment services, and we will certainly share our observations with you. If you have any questions about the PSD3 and PSR, our team is ready to help you!