The European Commission has proposed the third Payment Services Directive (PSD3), which marks an important development in the payment services landscape. Building upon the achievements and lessons learned from its predecessor, PSD2, PSD3 seeks to enhance and broaden the open banking ecosystem.
Key Principles of PSD3
- Transition from Directive to Regulation: PSD3 will shift many elements from a directive to a regulation, ensuring more consistent application across all EU member states.
- Enhanced Open Banking Services: PSD3 emphasises improving the quality of Application Programming Interfaces (APIs) provided by banks, which will lead to better open banking services.
- Streamlined Authentication: PSD3 aims to simplify the authentication process, making it more user-friendly and efficient.
- Direct Access for Fintechs: A significant change is the proposal to allow fintechs to connect directly to payment systems, levelling the playing field between non-bank payment service providers and banks.
- Improved Consumer Control: Users will have greater control and visibility over their open banking mandates by introducing a centralised dashboard for managing data sharing.
- Enhanced Fraud Prevention: The new directive will introduce measures like payee name checks and encourage banks to collaborate more in tackling fraud.
Difference Between PSD2 and PSD3
The shift from PSD2 to PSD3 directive will bring about significant changes in the European financial regulatory landscape. One key change is the transition of various elements from a directive under PSD2 to the Payment Services Regulation (PSR) under PSD3, meaning that more consistent implementation across the EU will be ensured.
Moreover, PSD3 places greater emphasis on the performance and functionality of APIs, introducing minimum standards for open banking APIs. It also requires banks to provide quarterly performance reports and improve payment status and error messaging.
In terms of user experience, PSD3 aims to streamline open banking data flow by reducing unnecessary friction for a smoother user journey. Additionally, it introduces a centralized dashboard that enables users to conveniently manage their data sharing.
Security measures are also enhanced in PSD3 with features like payee name checks, which boost consumer protection and confidence. Another groundbreaking proposal under PSD3 allows fintechs direct access to payment systems, eliminating the need for intermediary banks and providing them with more direct integration into the financial ecosystem.
PSD3 Implementation Timeline
Currently, in the proposal stage, this directive could be fully implemented by 2026. Below are the steps the directive has to go through before full enforcement.
- Proposal Phase: The European Commission proposed the PSD3 payments directive on 24 May 2023. This marked the beginning of the legislative process for the directive.
- Consultation and Feedback: Following the proposal, there will be a period of consultation and feedback from various stakeholders, including Member States, financial institutions, and consumers. This phase ensures that the directive is well-informed and addresses the needs and concerns of all parties involved.
- Adoption by the European Parliament and Council: Once the consultation phase concludes and necessary revisions are made, the directive will be presented to the European Parliament and the Council for adoption. This step solidifies the directive's legal standing.
- Transposition into National Laws: After adoption, Member States will have a specified period to transpose the directive into their national laws. This ensures that the provisions of PSD3 are uniformly applied across the European Union.
- Implementation and Compliance: Financial institutions and payment service providers will then have to ensure that their operations comply with the provisions of PSD3. This might involve updating systems processes and ensuring consumer rights are upheld.
- Review and Adjustments: As with any significant directive, there will be a review phase to assess the effectiveness of PSD3 in achieving its goals. Based on feedback and real-world application, adjustments might be made to refine the directive further.
