PSD3 and PSR: minor update or major overhaul?

Introduction

The EU electronic payments market grew significantly in recent years. Since the adoption of PSD2 in 2015, payment volumes rose from 184.2 trillion EUR in 2017 to 240 trillion EUR in 2021 (also accelerated by the COVID-19 pandemic) according to the European Commission (EC). Simultaneously, digitalization of financial services rapidly progressed (e.g. the widespread adoption of mobile banking apps that allow consumers to handle their finances via their smartphones). In order to keep up, the EC has presented proposals for the Payment Services Directive 3 (PSD3) and a new Payment Services Regulation (PSR) with the aim to further strengthen the foundation laid by earlier PSDs.

The proposals seek to revise existing rules to increase innovation and to cater for fair competition in the electronic payments market a.o. by allowing non-bank Payment Service Providers (PSPs) to compete with banks more easily. At the same time, consumer protection and security of transactions will be strengthened by the proposals. The question comes up whether this is merely an update or a complete overhaul?

New legislation and PSD2 shortcomings

The EC notes that PSD2 has effectively contributed to preventing fraud by introducing Strong Customer Authentication (SCA). Furthermore, PSD2 increased the efficiency, transparency and choice of payment instruments for consumers. The EC however, also notes that PSD2 wasn’t perfect. With these proposals the EC wishes to address some of the shortcomings of PSD2. The four main objectives of PSD3 and PSR are to:

1. Improve consumer protection and security (and prevent payment fraud)
   Payment fraud is a significant problem in the payments industry. Since PSD2, new types of fraud have arisen, like ‘spoofing’ (impersonation fraud). Fraud incidents negatively affect consumers’ confidence in the financial system. In order to combat and mitigate payment fraud effectively and to maintain consumer confidence, PSD3 and PSR wish to enhance consumer protection by strengthening customer authentication rules, increasing the exchange of fraud related information between PSPs, introducing IBAN/name matching and implementing various improvements on consumer rights, such as overall transparency and extending the right to refunds in cases of fraud.
   
   
2. Level the playing field between banks and non-bank PSPs
   When it comes to providing payment services, non-bank PSPs (like payment institutions (PIs) and electronic money institutions (EMIs)) compete with banks. However, since such services require a bank account, non-bank PSPs are dependent on banks to provide these services. Problematically, PIs and EMIs often face issues obtaining a bank account and are therefore excluded from participating in the electronic payments system. PSD3 and PSR aim to further level the playing field between banks and non-bank PSPs by enhancing the access of non-bank PSPs to a bank account. Arguments for refusing a bank account have to be more substantive: banks need serious grounds, e.g. suspicion of illegal activities.
   
   
3. Encourage Open banking (OB)
   New PSPs offering OB services have entered the payments market. OB allows financial data to be securely shared between banks and PSPs, upon the consumer’s request and consent. This should empower consumers to use their data for their own benefit (e.g. a PSP offers solutions that provides insight into a consumer’s spending pattern or keep track of budget or savings). Regulating OB was a major innovation of PSD2. The EC however, raises concerns regarding the accessibility to OB services for PSPs such as Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs). Other concerns relate to the performance of data access interfaces and the control given to consumers over their data permissions. To resolve these issues and to improve OB, innovation and fair competition, PSD3 and PSR will introduce a list of prohibited obstacles to data access (e.g. payments initiation via a PISP is restricted to payees on the payer’s beneficiaries list) and a permissions dashboard in which users can withdraw data access to any OB provider at any given time. This will allow OB users to better control their payments data and simultaneously provides them with a clear insight in the rights they have granted to PSPs.
   
   
4. Improve enforcement possibilities by national competent authorities
   Cross-border payments are becoming more common, although most payment systems remain focused on national territories. The result is a fragmented EU payments market (e.g. iDEAL only works in the Netherlands). PSD3 and PSR aim to fix this by:·      

• moving certain sections from PSD2, a directive, into PSR, a regulation.Although the respective rules are not changed, this amendment will result in a more coherent, uniform EU legal framework. Regulations do not require transposition into national law:they directly apply;
• merging the E-Money Directive (EMD) into PSD3; the EMD and EMIs will cease to exist. As a result, solely PIs that can be authorized to offer e-money services will remain. This should foster harmonization and simplification of applicable legislation; and
• reinforcing provisions on implementation and penalties by including a list of infringements and corresponding administrative sanctions and measures. Consequently, the nature of sanctions and measures will be known in advance.

In conclusion

As the proposals will now be subject to review and debate by both the European Council and the European Parliament (which may take several years) and with the usual transitional period being 18 months, PSD3 and PSR will likely enter into force by the end of 2026. According to the EC, PSD3 and PSR should represent an evolution or update – not a revolution or major overhaul – of the EU payments framework. However, the definitive impact of the proposals is yet to be determined.

Please contact us for more information

Deloitte Legal closely monitors developments surrounding this topic and can help you to become PSD3 and PSR prepared. Please contact Jochen Blaffert if you have any questions regarding the PSD3 and PSR proposals or any other financial law matters.