PSD3: The Long Road Ahead

From an e-money directive merger to a fraud prevention overhaul, all is up for grabs as Brussels begins to revisit the Payment Services Directive for a third time.

In May, the European Commission issued their feedback forms for PSD2 and an open finance framework, a year later than the commitment that had been made in the EU’s Retail Payments Strategy. 

While there is no exact timeline, a continued bugbear for many when it comes to EU-crafted regulation, it seems likely that in the next year or so, there will be a PSD3 in some form being proposed by the Commission. 

Payments and banking insiders all have their opinions on what the Commission needs to address. While many will acknowledge that PSD2 was a game-changer for competition, its flaws have been exposed for quite some time. 

Combined with a lack of financial incentives for banks to participate in open banking, PSD2 has led to a situation where the rules of PSD2 are applied differently, depending on the country. 

Some complain that it has not allowed fintechs to disrupt the market as was intended, due to banks’ clunky API processes, for example. 

Banking associations have meanwhile lamented the extra costs incurred, complained that the EU is prescribing innovation not promoting it, and meant certain business models are more privileged than others. 

European regulatory involvement in payments properly began with the now almost forgotten Payment Service Directive in November 2007. PSD was brought in to create an EU-wide framework and a single licencing structure for payment service providers (PSPs) over existing national frameworks. 

The key aims were to “remove legal barriers to market entry”, “ensure a level playing field for all payment systems” and “maintain consumer choice”.

 

 

PSD Timeline

Common API Standard

It is clear that both the industry and regulators have accepted that there is a need for change. However, what that change entails differs depending on who you speak to. For example, the European Banking Authority (EBA) has come out in favour of a common API standard in the EU in its recommendations to the European Commission. 

At VIXIO’s webinar, its payments chief Dirk Haubrich told our audience that a single API scheme had huge benefits, allowing one of the key objectives of the PSD2 to materialise and to be fulfilled – which is the creation of a single EU payments market.He did, however, point out that it does contrast with other objectives.

Meanwhile, Andrei Cazacu, TrueLayer’s EU policy lead, was more sceptical and cautioned that a common API standard would still be left to individual banks to implement. This means that even the same API can be implemented in different ways within the same standard, which in turn means that open banking providers such as TrueLayer have to treat each API on a case-by-case basis.

“Just having the standard doesn’t mean it’s implemented in a standardised way.”At the webinar, he also pointed out that the market is solving some of the issues. For example, there’s a lot of innovation in the API aggregation space. Cazacu suggested that some may even agree that the API aggregator space is one of the more seriously competitive spaces in open banking, where companies specialise in connecting to all these APIs and leaving more room for other fintechs to develop end-user facing solutions.

The API debate is likely to rage on throughout the process. It is something that everyone has an opinion on, and has come up as a problem in conversations with national regulators. The Commission has shown some interest in the issue before, and much like the EBA, expressed some remorse that it wasn’t tackled during PSD2 – something that regulators have said was due to time constraints. 

Potential PSD2 E-Money Merger

Another issue that panellists were keen to discuss was the potential merger of the PSD2 with the E-money directive. 

This possibility has been bubbling up for some time. National regulators in the Nordic and Baltic region called for the latter to be scrapped and fed into a broadened PSD2 in July 2020, while the Commission itself posed the possibility in its Retail Payments Strategy.

The idea was one of the headline grabbing recommendations made by the EBA, and at our webinar, Haubrich explained that it would be an opportunity to resolve a significant number of challenges that the banking watchdog thinks the industry faces, as well as supervisors. 

As with the API proposal, the EBA’s ambition here is better harmonisation, and Haubrich reassured that a merger does not mean that the two will come together completely.

For example, the merger does not automatically mean that all requirements in the directives will apply equally to all types of institutions, he pointed out, which is already the case in PSD2.

Unsurprisingly, however, trade associations such as the Electronic Money Association have already pushed back against the possibility of a merger – arguing that payments and e-money firms have fairly different requirements, which has prompted hesitation over whether the merger will mean harsher or less harsh rules.

The Emerging European Landscape

PSD2’s next iteration will be a significant theme in the coming years. The Commission will need to consider how it can account for a payments world that has changed dramatically since PSD2 was agreed.

There has been the rise of big tech and also Buy Now, Pay Later (BNPL) and that has come at the same time as scandals such as Wirecard, which account in part for why prudential requirements are an area to watch.

All payments companies understandably invested heavily to comply with PSD2 and embrace the changes that it introduced, but have, of course also dealt with its downsides.

And while the Commission’s consultation has closed for now, there is plenty of time to get talking with trade associations and working out the issues that you want Brussels’ to be paying attention to.

Key Takeaways

So, for now, the key takeaways are that everything is at stake. There are a variety of players, whether co-legislators or industry players, who will want to make sure PSD3 works for them.

In addition, people should anticipate new compliance requirements and costs too. A single API standard, for example, could bring benefits but also additional investment, as with customer authentication rules to account for new fraud trends.

Meanwhile, the potential PSD/E-money merger looks very likely to come to fruition, with suggestions from the Commission and the EBA alike. This will reshape the payments market and may result in changes for both types of firm.

Closing Thoughts

Currently, it remains unclear which direction PSD3 will go, and there is no clear timeline for the path ahead. This creates uncertainty for firms, however, they can be proactive and track the major developments with VIXIO PaymentsCompliance. With industry-leading insights and in-depth regulatory analysis, you can gain the full context of potential developments. 

VIXIO recently held a webinar with industry experts, regulators and analysts into potential PSD3 developments and the impact they could have on your business. It is now available to view here.

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