Key industry experts have offered their exclusive insights on the European Commission’s PSR/PSD3 and Financial Data Access (FIDA) proposals. 

Introduction

On 28 June 2023, the European Commission published several proposals to amend and modernise the current Payment Services Directive (PSD2) which will become PSD3 and establish, in addition, a Payment Services Regulation (PSR). These will ensure consumers can continue to safely and securely make electronic payments and transactions in the EU, domestically or cross-border, in euro and non-euro. Whilst safeguarding their rights, it also aims to provide greater choice of payment service providers on the market.

The Commission is also putting forward a legislative proposal for a framework for financial data access. This framework will establish clear rights and obligations to manage customer data sharing in the financial sector beyond payment accounts. In practice, this will lead to more innovative financial products and services for users and will stimulate competition in the financial sector.

Background

The second Payment Services Directive (PSD2), which was introduced in 2015, established rules for retail payments within the European Union (EU), covering both domestic and cross-border transactions in both euro and non-euro currencies. Its predecessor, PSD1, implemented in 2007, aimed to create a unified EU payments market by harmonising legal regulations.

PSD2 aimed to address barriers to innovative payment services while also enhancing consumer protection and security measures. In 2022, the European Commission conducted an evaluation of PSD2, seeking feedback from the European Banking Authority (EBA), the public, and an independent consultant. Based on this evaluation, the Commission proposed amendments to PSD2, accompanied by an impact assessment, to improve the functioning of EU payment markets.

These amendments represent an evolution rather than a revolution of the EU payments framework. Their goals include:

• Strengthening measures to combat payment fraud.

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• Granting non-bank payment service providers (PSPs) access to all EU payment systems, with appropriate safeguards, and the right to have a bank account.

• Improving the functioning of open banking, particularly by enhancing the performance of data interfaces, removing obstacles to open banking services, and granting consumers greater control over their data access permissions.

• Enhancing the enforcement powers of national competent authorities and facilitating the implementation of clarifying rules.

• Further improving consumer information and rights.

• Improving the availability of cash.

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• Consolidating the legal frameworks applicable to electronic money and payment services.

Overall, these amendments aim to streamline and improve the EU payment ecosystem, ensuring better security, increased innovation, and enhanced consumer experiences.

The Commission recognises the remarkable achievements of PSD2 in various aspects. One notable triumph is the successful implementation of Strong Customer Authentication (SCA), a pivotal measure in combatting fraud. Through SCA, the incidence of fraudulent activities has significantly decreased, safeguarding users’ financial transactions.

Moreover, PSD2 has proven its effectiveness in enhancing the efficiency, transparency, and diversity of payment options available to users. This comprehensive framework has empowered individuals by granting them improved choices and greater control over their payments. The result is a more user-centric payment system that caters to individual preferences and requirements.

However, it is important to acknowledge the challenges that PSD2 encountered along the way, particularly in achieving a level playing field for all Payment Service Providers (PSPs). Non-bank PSPs, in particular, have often faced obstacles in accessing key payment systems directly. This imbalance between bank and non-bank PSPs poses a significant hindrance to fair competition and stifles innovation within the payment market. Addressing this issue becomes crucial in fostering healthy competition and driving further advancements.

Additionally, Open Banking experienced lingering concerns regarding data access interfaces for these service providers. Resolving these issues and establishing a solid level playing field becomes imperative to ensure that all PSPs can fully leverage the potential of Open Banking and deliver innovative, user-centric solutions.

In summary, while PSD2 undeniably achieved notable successes in reducing fraud and enhancing user experiences, it also confronted challenges related to fairness, competition, and data access. By addressing these issues head-on, a stronger and more inclusive payment ecosystem can be fostered, benefitting both users and service providers alike.

Industry reactions

Below, we hear from experts on this key regulatory updates:

Todd Clyde, Chief Executive Officer at Token, comments:  

`Today’s publication of the European Commission’s proposals for a revised regulatory framework for payment services is an exciting development for the payments industry, demonstrating commitment to creating an even stronger foundation and infrastructure for open banking powered Pay By Bank solutions in all European markets.  

We are particularly pleased to see the European Commission’s proposal include measures aimed at increasing the baseline adoption, functionality and performance of open banking Application Programming Interfaces (APIs). API-based interfaces provide the most secure and performant way for Third Party Providers (TPPs) like Token.io to interface with banks, and ultimately support the delivery of innovative services and better outcomes for end users. Further, we believe formalising the explicit minimum baseline functionality required from banks’ open banking interfaces will help level-up the overall performance of the ecosystem.

We also welcome the European Commission’s statement that banks and TPPs are free to establish commercial arrangements for ‘premium’ APIs, through which enhanced functionality and value-added services beyond those required under regulation can be provided. Premium APIs, built on equitable commercial models, have the potential to enable the development of higher-quality and more innovative end-user propositions (such as dynamic recurring payments and payment guarantees) and will support the wider adoption of open-banking based payment propositions.

Both the PSR/PSD3 and Financial Data Access (FIDA) proposals are setting in motion a future for open finance in Europe by unlocking possibilities for innovation across the financial services and other industries.`

Commenting on the EU’s PSD3 / PSR and Open Finance proposals, 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.

Today’s 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.`

Speaking on the proposal, Ralf Ohlhausen (Chair, ETPPA) flagged that `it is quite positive to see several good provisions for TPPs, for example the list of prohibited obstacles, which we hope the co-legislators will make clear, is non-exhaustive. ETPPA will continue to strive for, amongst other things, more stringent governance, excellent APIs, and immediate contingency whenever that is not the case. We also believe that payment initiators must be allowed to assess any non-execution risks before initiating and that strong customer authentication is only needed when money is actually moved, not just being looked at.`

ETPPA looks forward to further contributing to the text by providing input to the European Parliament and the Council to help ensure the reviewed PSD2 benefits consumers in the true spirit of open banking by providing a wider variety of choice of services. 

ETPPA is now analysing the package (PSD3 and PSR) and looks forward to sharing our detailed position with the co-legislators and all the stakeholders. 

Off the back of this, Jan van Vonno, Head of Industry & Wallets at Tink said,

`PSD2 was a milestone in payments regulations recognised all over the world. In creating a single market for payments and embracing more competition for financial services, it was a major step forward for the EU. However, progress has arguably not been as quick as many had hoped, so the renewed drive that PSD3 and the PSR provides is a welcome addition to the development of open banking in Europe.

We are encouraged by many aspects of the new proposals, such as the benefits in giving authorities the required tools to better evaluate the dedicated interfaces (APIs) provided by banks and other financial institutions. To this end, we hope that the PSR in particular, will resolve much of the controversy surrounding API quality that is present in the relevant Regulatory Technical Standards (RTS) under PSD2.`

Responding to the European Commission’s proposal for PSD3, Tom Burton, Director of External Affairs and Public Policy at GoCardless said: 

`PSD2 was a watershed moment for payments, with the EU’s ideas for open banking now being copied around the world.

Whilst today 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.`

Next steps

After the publication of the proposals, they will undergo the legislative process, which involves the EU Parliament and EU Council. It is important to note that this process takes time. A realistic estimate for the duration is at least two years, followed by an additional 18 months for the proposals to officially come into effect. If all goes according to plan, the accepted proposals would become legally binding by the end of 2026.

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About Oana Ifrim

Oana Ifrim is a Lead Editor at The Paypers. Her expertise lies in the areas of Banking and Fintech innovation, with a particular focus on Open Banking, Open Finance, Embedded Finance, Banking-as-a-Service. She is responsible for  managing content and conducting interviews with key experts in the abovementioned fields, representing The Paypers at various banking and fintech events, researching trends and producing content, and providing strategic planning and coordination for large-scale, industry-specific research, reports, and projects. If you wish to get in touch with Oana, she can be reached via email at oana@thepaypers.com or on LinkedIn.