What does the new Payment Services Directive (PSD3) mean for the financial services industry?

The new Payment Services Directive (PSD3) proposed by the European Commission (EC) on 28 June 2023 marks a significant milestone in the evolution of the financial services industry. Designed to address emerging fraud risks and ensure that the European Union's (EU) financial sector remains adaptable in the face of digital transformation, PSD3 places consumers' interests, competition, security, and trust at the forefront.

The PSD3 proposal recognizes the critical need to fortify the EU's financial sector and equip it with the necessary tools to address these emerging challenges. With the ongoing digital transformation reshaping how financial services are delivered and consumed, it is imperative to establish robust regulations and frameworks that protect consumers, promote trust, and foster innovation. It goes without saying that PSD3 empowers consumers, promotes competition, and paves the way for a more dynamic, inclusive, and customer-centric financial services industry.

By prioritizing consumer interests, competition, security, and trust, PSD3 aims to future-proof the EU's financial sector, ensuring it remains resilient, adaptable, and capable of effectively navigating the risks and opportunities presented by the digital revolution. When it comes to the proposal, one thing is certain:The EC's comprehensive approach not only bolsters the security and integrity of payment systems but also promotes a level playing field, encourages collaboration, enhances consumer rights, supports open banking, improves cash availability, and strengthens harmonization and enforcement.

By taking proactive measures to combat fraud and foster a secure and consumer-centric financial ecosystem, PSD3 reinforces the EU's commitment to maintaining a thriving and trustworthy financial services industry in the digital era.With its comprehensive coverage across six key areas, PSD3 aims to combat payment fraud, enhance consumer rights, level the playing field between banks and non-banks, support open banking, improve cash availability, and strengthen harmonization and enforcement. 

First, it aims to combat and mitigate payment fraud, by enabling payment service providers to share fraud-related information between themselves, increasing consumers' awareness, strengthening customer authentication rules, extending refund rights of consumers who fall victim to fraud and making a system for checking alignment of payees' IIBAN numbers with their account names mandatory for all credit transfers. These changes are vital for maintaining a secure and resilient payment system, fostering industry growth, and ensuring the confidence of consumers and stakeholders.

Second, it enhances consumer rights, in cases for example where their funds are temporarily blocked, improves transparency on their account statements and provide more transparent information on ATM charges. These provisions are expected to enhance consumer trust, foster accountability among financial institutions, and contribute to a fair and transparent financial ecosystem that benefits both consumers and the industry as a whole.

Third, it levels the playing field between banks and non-banks, in particular by allowing non-bank payment service providers access to all EU payment systems, with appropriate safeguards, and securing those providers' rights to a bank account. This provision is not only expected to promote a level playing field but also encourages collaboration and partnerships between banks and non-banks, fostering synergies and driving further advancements in the industry. Overall, this aspect of PSD3 contributes to a more inclusive, competitive, and customer-centric payment landscape.

Fourth, it enhances the functioning of open banking, by removing remaining obstacles to providing open banking services and improving customers' control over their payment data, enabling new innovative services to enter the market. Ultimately, PSD3's support for open banking will pave the way for a more dynamic and innovative financial ecosystem, benefitting both consumers and the industry as a whole.

Fifth it improves the availability of cash in shops and via ATMs, by allowing retailers to provide cash services to customers without requiring a purchase and clarifying the rules for independent ATM operators. This means that consumers will be able to conveniently access cash services in various locations, including shops, without the need to make a purchase. This expansion of cash services is expected to improve financial inclusion by catering to individuals who rely on cash transactions for their daily needs. Upon closer inspection it becomes apparent that the clarification of rules for independent ATM operators will ensure consistency and transparency, promoting a more efficient and reliable ATM network. Overall, these measures are expected to contribute to the accessibility and availability of cash, enabling smoother financial transactions for individuals and bolstering the functioning of the overall payment system.

When considering all aspects of the PSD3 proposal it becomes evident that it will strengthen harmonisation and enforcement, by enacting most payment rules in a directly applicable regulation and reinforcing provisions on implementation and penalties. This harmonisation is expected to reduce complexity and eliminate potential disparities between member states, facilitating cross-border transactions and fostering a more integrated European payment market. Furthermore, the reinforcement of provisions on implementation and penalties will enhance compliance and accountability among payment service providers. This will ensure that industry participants adhere to the established rules and regulations, leading to a more robust and secure payment ecosystem.

These measures have far-reaching implications, including maintaining a secure payment system, fostering industry growth, enhancing consumer trust, promoting collaboration, driving innovation, improving financial inclusion, facilitating cross-border transactions, and establishing a well-regulated payment landscape within the EU. There's no denying that PSD3 is expected to improve consumer protection and competition in electronic payments and to empower consumers to share their data in a secure way so that they can get a wider range of better and cheaper financial products and services.

Scrutinizing the proposal from various angles reveals that the measures have been desiged to 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 the rights of customers, it also aims to provide a greater choice of payment service providers on the market.

It is also fair to say that PSD2 will lead to more innovative financial products and services for users and it will stimulate competition in the financial sector. For instance, consumers will benefit from improved personal finance management and advice. Panning out to see the bigger picture, it becomes evident that previously burdensome processes such as comparison services or switching to a new product will become smoother and cheaper, including for example, automated processing of mortgage applications. Furthermore, SMEs would also be able to access a wider range of financial services and products, such as more competitive loans resulting from their creditworthiness data being more easily accessible.

To conclude, PSD3 signifies a significant step forward for the financial services industry. By addressing emerging fraud risks, enhancing consumer rights, promoting open banking, improving the availability of cash services, and strengthening harmonization and enforcement, PSD3 aims to create a more secure, transparent, and inclusive payment landscape in the EU. The directive recognises the importance of adapting to digital transformation while safeguarding consumer interests and fostering competition and innovation. It offers practical implications such as improved consumer protection, increased competition, and access to a wider range of financial products and services. Overall, PSD3 sets the stage for a more consumer-centric and dynamic financial ecosystem, benefitting both individuals and businesses alike.