Payment Services Directive 3 (PSD3): how will it impact your financial institution?

The European payments market is driven by regulatory change. With regulators seeking to stimulate innovation and competition in the interest of European consumers and businesses, whilst ensuring risks are kept under control, the change is relentless. Staying afloat of everything happening in Brussels and how it will impact the payments market can be challenging.  

In June 2023, The European Commission announced a raft of new measures which when implemented will fundamentally transform the way payments are made across the EU. 

The Commission is proposing that PSD2 is split into two different legislative instruments – a Payments Services Directive, which needs to be transposed into national law, and a Payment Services Regulation, which applies directly to European Subjects. The Directive will deal with the authorisation process for Payment Institutions, which will now include Electronic Money Institutions, whereas the Regulation will establish the framework payment service providers need to operate in. By making this framework a Regulation, the European Commission seeks to harmonise the way the rules are enforced across the Union. The European E-Money Directive (EMD2) will also be merged with these instruments – creating a level playing field for EMIs and PIs. 

Speaking of leveling the playing field, the European Commission aims to amend the Settlement Finality Directive to allow Payment Institutions to have direct access to clearing systems. This would allow non-bank Payment Services Providers to maintain central bank accounts, and access both Eurosystem and private market clearing infrastructures as direct participants; no longer needing to rely on commercial banks for settlement accounts. There are even rumours that this change would be introduced earlier, through the instant payments legislation, so we’ll see how this plays out. 

When a similar change was introduced in the United Kingdom, this posed some challenges as the Bank of England was insufficiently prepared to deal with bankruptcies – which are traditionally more common with payment institutions than with banks. 

This regulation providing a more harmonised European approach doesn’t only prevent forum shopping but also grants additional powers to regulators to monitor and halt activities that pose risks to European payment service users. 

Non-compliance with Strong Customer Authentication requirements could now lead to fines of up to 10% of global turnover. And complying with SCA requirements is set to become even more challenging than before, as the requirements are becoming even more strict, including the provision of SCA methods for clients that are not reliant on a smartphone. 

Additional changes brought about by this legislative package include a requirement to provide confirmation of payee services for all payment methods; whereas this was only limited to instant payments in the IP legislation. The Commission is cracking down on Authorised Push Payment fraud, requiring banks to quickly reimburse clients if there were indicators present that could have allowed the bank to identify the transaction as suspicious. Great news for consumers, but we hope that this doesn’t lead to irresponsible and risky payment service user behaviour. 

In addition to all of this, the Commission is seeking to introduce a Financial Data Access legislation, also known as FIDA. This would extend open banking requirements beyond payment accounts, mandate uniform interface standards, and make ways for fees to be introduced. 

Your bank is certain to be impacted by these new legislations. RedCompass Labs, with our experience in both good and bad payments, can help you navigate these changes and ensure your strategies, infrastructures, and fraud prevention mechanisms are up to the task. Are you a non-bank payment service provider? You might soon be able to generate some significant savings by directly accessing clearing systems, please don’t hesitate to reach out for a call to discuss your options. If you’re a bank servicing these institutions, please do contact us to help you assess the impact of this legislation. 

Learn more about EU payments legislation:

Instant Payments Legislation: Political Agreement Reached Between Parliament and Commission

All You Need To Know About The EU’s New Payments Legislation