In late 2015, Payment Services Directive 2 (PSD2) was announced to bring about changes for businesses that took payments from customers in the EEA. Eight years later, the European Commission is suggesting further proposals to bring about improvements in consumer protection and competition in electronic payments, empowering consumers. The dawn of PSD3 is here.
In 2017, it was difficult to imagine electronic payments growing at the rate they have as the industry was worth €184.2trillion. However, with the pandemic as a catalyst, the value of electronic payments shot up to €240trillion in 2021. Since then, digital technologies have been enabling new providers into the market. The development of these technologies has been a two-sided coin though, as more sophisticated types of fraud emerged. As such, the European Commission is looking to make changes through PSD3.
The Commission has proposed two sets of measures:
Revising the payment services directive:
The Commission’s proposal will amend and modernise the current Payment Services Directive (PSD2) which will become PSD3. Additionally, it will establish a Payment Services Regulation (PSR). It consists of a package of measures which:
- Combat and mitigate payment fraud by enabling payment service providers to share fraud-related information between themselves, increasing consumers’ awareness, strengthening customer authentication rules, extending refund rights of consumers who fall victim to fraud and making a system for checking the alignment of payees’ IBAN numbers with their account names mandatory for all credit transfers.
- Improve consumer rights. For example, where their funds are temporarily blocked, improve transparency on their account statements and provide more transparent information on ATM charges.
- Further levelling the playing field between banks and non-banks, in particular by enabling non-bank payment service providers access to all EU payment systems, with appropriate safeguards, and securing those providers’ rights to a bank account.
- Improve the functioning of open banking, by removing remaining obstacles to providing open banking services and improving customers’ control over their payment data, enabling new innovative services to enter the market.
- Improve the availability of cash in shops and via ATMs, by enabling retailers to provide cash services to customers without requiring a purchase and clarifying the rules for independent ATM operators.
- Strengthen harmonisation and enforcement, by enacting most payment rules in a directly applicable regulation and reinforcing provisions on implementation and penalties.
This proposal ensures consumers can continue to safely and securely make electronic payments and transactions in the EU. They can be domestic or cross-border, in euro and non-euro. Whilst safeguarding the rights of customers, it also aims to provide a greater choice of payment service providers on the market.
Legislative proposal for a framework for financial data access
This proposal will establish clear rights and obligations to manage customer data sharing in the financial sector beyond payment accounts, namely:
- The possibility, but no obligation for customers to share their data with data users (e.g financial institutions or fintech firms) in secure machine-readable format to receive new, cheaper and better data-driven financial and information products and services (i.e such as financial product comparison tools, personalised online advice).
- Obligation for customer data holders (e.g financial institutions) to make this data available to data users (e.g other financial institutions of fintech firms) by putting in place the required technical infrastructure and subject to customer permission.
- Full control by customers over who accesses their data and for what purpose to enhance trust in data sharing, facilitated by a requirement for dedicated permission dashboards and strengthened protection of customers’ personal data in line with the General Data Protection Regulation (GDPR).
- Standardisation of customer data and the required technical interfaces as part of financial data sharing schemes, of which both data holders and data users must become members.
- Clear liability regimes for data breaches and dispute resolution mechanisms as part of financial data sharing schemes so that liability risks do not act as a disincentive for data holders to make data available.
- Additional incentives for data holders to put in place high-quality interfaces for data users through reasonable compensation from data users in line with the general principles of business-to-business (B2B) data sharing laid down in the Data Act proposal (and smaller firms will only have to pay compensation at cost).
Background and next steps
In practice, this proposal will drive more innovation in financial products and services for users and foster competition in the financial sector. For example, consumers will benefit from improved personal finance management and advice.
Previously burdensome processes such as comparison services or switching to a new product will become smoother and cheaper. For example, automated processing of mortgage applications. SMEs will also be able to access a wider range of financial services and products, such as more competitive loans resulting from their creditworthiness data being more easily accessible.
The proposal fulfils a key commitment in the Commission’s 2020 Retail Payments Strategy, by ensuring the rules applicable to the EU retail payments industry remain fit for purpose, taking into account market developments, as well as promoting the development of instant payments in the EU. On that front, it complements the Commission’s proposal from 2022 for a Regulation to make instant payments in the euro available to all citizens and businesses holding a bank account in the EU and in EEA countries.
In parallel, the Financial Data Access proposal contributes to the commitment set out in the 2020 Digital Finance Strategy to put in place a European financial data space. Overall, this financial sector initiative fits into the broader European data strategy. Furthermore, it builds upon the key principles for data access and processing set out in its accompanying initiatives, such as the Data Governance Act, the Digital Markets Act and the Data Act proposal.
The state of open banking
Highlighting how impactful open banking can be, the chair of the Open Finance Association, Nilixa Devlukia, said: “We welcome the European Commission’s proposals to improve the payments and open finance ecosystem in Europe.
“Open banking and open finance are fundamental for the future of finance in Europe. Together, they will further empower consumers and businesses by giving them more freedom and options to use their financial data and account functions via trusted third parties.
“We are very encouraged to read the Commission’s proposal for PSD3/PSR, which recognises the need to strengthen the free open banking baseline and to allow the industry to collaborate on value-added services which generate a return on investment for all parties. This approach, combined with the separate proposal for instant payments, will help enable open banking to grow into a seamless pan-European payment solution.
“Industry and regulators should also continue working together towards harmonising rules and towards better implementation of API standards.
“With open finance, the EU can draw lessons from open banking and create a framework that helps level the playing field in order to deliver new, innovative financial services products and more choice for consumers.
“The proposals are a clear step in the right direction. We look forward to working with our partners in EU institutions and in industry to create a digital payments and financial data access framework that will help accelerate investment and innovation and position Europe as a leader in the next generation of open banking and open finance services.”
The next payments milestone
Tom Burton, director of external affairs and public policy at GoCardless, the payment processing solution, expressed his excitement for the change and stated, “PSD2 was a watershed moment for payments, as the EU’s ideas for open banking are now being replicated worldwide.”
“Whilst this marks the start of a long political process, GoCardless is delighted to see an improved version take shape. The focus has to be on creating consistent, high-quality standards and infrastructure that will strengthen open banking’s foundations and having the right blend of regulatory obligations and commercial incentives to create a genuinely sustainable framework. This will help European businesses reap the benefits of cheaper, faster, safer payments and innovative data services that can fuel their growth.
“We look forward to championing our customers’ interests as this process unfolds.”