Open Banking in Europe has come a long way since the European Commission's (EC) Second Payment Services Directive (PSD2) came into force in 2016. As a result, in May 2022, the EC published a targeted consultation to gather evidence for its review of PSD2 and inform its continuing work on open finance.
As the EC begins its consultation of existing regulations, new legislation like PSD3 could soon come to the floor.
PSD3, the next evolution of PSD2, will likely spur further innovation in payments, lending, insurance and more. As the new legislation emerges, many are wondering: what does PSD3 entail, when can we expect it to come into force, and how could it influence European financial services?
The Evolution of Financial Services in Europe
The first PSD, the EU Payment Services Directive, was implemented in 2007 to support the development of a single payment market in the European Union to promote innovation, competition and efficiency.
In 2013, the EC proposed an amendment to enhance these objectives — the PSD2.
PSD2 and the Birth of Open Banking
PSD2 came into force on 13 January 2018. The revised directive introduced new rules that would set the stage of Open Banking across Europe and the United Kingdom.
For the first time in history, consumers had the legal right to access their accounts with European banks and fintechs, through third parties, which allowed them to see financial data or initiate payments by providing consent.
Open Banking is revolutionising how individuals and businesses can use their financial data for their benefit. However, as new players and solutions enter the market, current legislation must be revised to ensure new payment methods are facilitated and regulated sufficiently.
What is PSD3 and How Is It Different from PSD2?
The EC’s consultation over PSD2 assesses whether the directive is still fit for purpose and how it could be amended. As such, PSD3 could amend the current legislation to make payments faster and safer while aligning better with the EU’s legal framework.
While PSD2 has transformed the European payments landscape by fostering innovation and accelerating the development of new services and products, many stakeholders believe there are several issues that PSD3 need to address.
The main consultation focused on two main areas: PSD2 and open finance.
PSD2 Targeted Consultation
The PSD2 Targeted Consultation covered topics that are important for Payment Service Providers (PSPs) and other firms with links to the payments sector to be aware of.
Areas of discussion included but weren’t limited to:
- Potentially amending or removing exemptions from PSD2 or whether new exemptions should be added.
- Possibly extending regulations to currently unregulated activities like payment transactions using crypto assets, Buy-Now-Pay-Later services, operating payment systems or payment schemes, digital wallet services (i.e. mobile apps for payments), and payment processing services.
- Potential adjustments to the safeguarding regime.
- Extending the execution timing requirements to one-leg-in transactions (where only one of the PSPs is located in the European Economic Area).
- Regulating so-called ‘triangular’ passporting (where an authorised PSP in Member State A uses the services of an agent in Member State B to provide payment services in Member State C).
- Changes to strong customer authentication requirements (SCA). For example, extending the SCA period from 90 days to 180 days to “reduce the current friction” for customers.
- Tackling fragmentation in Europe more effectively by including a more precise and concrete specification of API standards, directory services and infrastructure.
Open Finance Targeted Consultation
The questions in open finance consultation focused on:
- Usage of existing open finance services, such as the use of payment initiation services and account information services to access payment accounts.
- Types of extended financial services data that respondents would want to access via third-party providers, including data relating to mortgage, savings, investment, insurance, and pension services.
- Customer and data protection considerations.
When Will PSD3 Arrive?
The consultations are early steps in the European Commission’s review of PSD2 and do not constitute the EC’s final position or formal proposal. However, the nature of the questions likely indicates the key areas of focus, particularly in the PSD2 Targeted Consultation.
PSD3 is still early in the process. However, given the history of PSD2 being adopted in 2015 and made law by 2018, we could see the new directive formalised and adopted as early as the next 3-5 years.
How Does PSD3 Fit Into the EU’s Retail Payments Strategy?
The Retail Payments Strategy of the European Commission seeks to develop instant payments and EU-wide payment solutions that are cost-effective and that improve customer journeys.
Its key objectives include:
- Promoting cross-border European payment solutions
- Developing a competitive and innovative payments market
- Providing better, more secure payment infrastructure
- Supporting the international role of the euro
PSD3 could help facilitate cross-border payment solutions by creating more choice, more diversification, and strengthened resilience. Moreover, the updated directive could help ensure that the legal framework covers all important market players in the payments ecosystem, including technology companies.
Protection against payment fraud is high on the agenda for the PSD3 consultations. As such, the new directive will likely help ensure top-level consumer protection, including instant payments. PSD3 will support the strategy’s objective to ensure wide adoption of the highest security standards.
PSD3 also aims to create a regulatory framework to unite the fragmented approaches currently adopted by different EU member states. The new regulations will therefore support the Retail Payment Strategy’s goal of facilitating cheaper international payments, adopting global messaging standards, and supporting links between payment systems in different jurisdictions.
In summary, PSD3 will be the next step in how the EU drives healthy competition within financial services markets, enhances trade and empowers consumers.
PSD3 at a Glance
PSD2 encouraged new innovations and growth in banking. Now, PSD3 could drive even more data sharing within additional financial service areas, such as investing, financial planning, and borrowing.
The fast-changing environment requires business leaders to keep up with new developments.
FinXP is a leading European payment and banking solution provider for companies operating in high-risk industries. The company has growing Open Banking capabilities via its Oracle Flexcube Core Banking System and through the tailor-made integration solutions our inhouse development team can create.
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