The payment services landscape in Europe has changed dramatically over the years, with the advent of Payment System Directives (PSD) one and two bringing forth disruptive rules. However, as technology advances and customer expectations change, it has become necessary to adjust and amend these policies in order to stay up to speed with the ever-changing financial services business. Abreast of these developments, the European Commission (EC) approved a retail payments strategy in September 2020, aimed at revisiting and updating existing payment-services laws by 2022. In this article we explore the issues that PSD 1 and PSD 2 encountered previously, as well as the substantial changes that PSD 3 brings to the table.
Challenges from the Past: PSD 1 and PSD 2
PSD 1, enacted in 2007, established the groundwork for the European Union to establish a single market for payment services. It laid the groundwork for credit transfers, direct debits, and card payments, stimulating competition and innovation in the payment business. However, as time passed, it became evident that important components of the regulation needed to be revised.
PSD 2, which came into force in 2015 and went into effect in 2018, sought to alleviate some of these concerns while also introducing additional regulations. It, among other things, established the notion of strong customer authentication (SCA) to improve security, introduced new 'actors' in the form of third-party providers (TPPs), and created a framework for open banking. While PSD 2 addressed many of its predecessor's challenges and it also introduced new issues and complexities, providing space for additional improvement.
The Launch of PSD 3
The European Commission launched a retail payments strategy in September 2020 to stimulate innovation and growth in the payment services industry. Its implementation paved the way for reform of the current PSD structure. The decision to examine and perhaps alter payment services laws in 2022 was a critical milestone in this approach, emphasising the resolve to adapt to a changing financial sector. In June 2023, the EC published its draft of proposal of a payment services package that will replace PSD 2. We note that PSD 2 has been transposed into law in Cyprus in 2015, with the Cypriot Central Bank exercising supervisory duties on the directive's implementation and compliance by Payment Services Institutions and Electronic Money Institutions Member States will be required to transpose PSD 3 into national law within 18 months of its enactment.
Main Changes PSD 3 Brings
PSD 3 introduces several significant changes, focusing on various key areas:
Open Banking: PSD 3 introduces additional standards for specialised data access interfaces in open banking. It eliminates the need for banks to maintain two distinct data access interfaces and necessitates backup data access. All providers, including banks and payment service providers (PSPs), must set up a "dashboard" that allows customers to see, modify, and cancel data access privileges. There is also a requirement to offer access to financial data other than payment account data.
Cash Availability: The directive intends to increase cash availability in stores and through ATMs by allowing merchants to give cash services to clients without needing a purchase. It also makes the requirements for independent ATM operators clearer.
Consumer Rights: PSD 3 aims to improve consumer rights, particularly when funds are blocked. It intends to increase transparency on account statements and ATM fees, resulting in a more equitable and transparent experience for consumers.
Simplification: The directive merges e-money institutions (EMIs) with payment institutions (PIs) under one regulatory regime. Furthermore, all payment regulations relevant to PSPs will be incorporated in a directly applicable regulation, simplifying the regulatory environment.
Fairer Competition: PSD 3 encourages fair competition between banks and non-bank PSPs in order to bring down pricing. It gives PSPs access to all EU payment systems and secure payment and e-money institutions access to a bank account.
Fraud Mitigation: The directive extends refund rights for fraud victims, introduces a mandatory system to match IBAN numbers with account names, enforces stronger customer authentication rules, and establishes a legal basis for PSPs to share fraud-related information between them.
In conclusion, PSD 3 represents a significant step forward in the regulation of payment services in Europe. With a focus on open banking, consumer rights, simplification, fair competition, and fraud mitigation, it seeks to address the challenges of the past and ensure that the payment services sector continues to thrive, adapt, and serve the needs of European businesses and consumers in an ever-evolving financial landscape.
Finally, PSD 3 marks a substantial advancement in the regulation of payment services in Europe. It seeks to address past challenges and ensure that the payment services sector continues to thrive, adapt, and serve the needs of European businesses and consumers in a constantly evolving financial landscape, with a focus on open banking, consumer rights, simplification, fair competition, and fraud mitigation.
How we can assist:
From the early stages of evaluating the possibility of setting up a payment institution or EMI in Cyprus, we're well positioned to legally support all stages of setting up and operating a PI or EMI in Cyprus, including licensing and advice on supervision by the Cypriot Central Bank. We work alongside founders and their teams and our legal advice on the regulatory framework includes insights which make assist them in reaching commercial decisions with clarity and transparency.
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