What is PSD3? An overview of changes and timelines

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What is PSD3? An overview of changes and timelines


This content is contributed or sourced from third parties but has been subject to Finextra editorial review.

In June 2023, the European Commission announced plans to modernise the Payment Services Directive, ushering in the third Payment Services Directive (PSD3). The long-awaited proposal outlines changes designed to adapt the directive to developments in the European payments market and ongoing digitisation of payments.

PSD3 will have a significant impact on banks, PSPs, third-party providers, as well as merchants. The following is an outline the key elements of the proposal and timelines of implementation.

What’s changing?

Current PSD2 legislation came into effect in 2016 in order to drive more integration across the European payments market, level the playing field for payment service providers and to enhance safety for both businesses and consumers. PSD2 is a revised version of the original Payment Services Directive.

The proposed changes outlined by the European Commission in 2023 will result in the repeal of the existing PSD2 directive, which will be replaced by two new pieces of legislation: PSR1 (Payment Services Regulation) and PSD3.

What is PSR1?

PSR1 replaces PSD2 and will address all rules concerning PSP activities. The shift from a directive towards a regulation will ensure a more consistent application of the legislation across all EU member states, because regulations follow stricter ‘as is’ rules of application.

The outlined PSR1 proposal includes specific requirements regarding authentication rules, API performance, risk-based fraud prevention, and more.

What is PSD3?

PSD3  the new directive focusing specifically on licensing and authorisation for payments firms. While PSR1 will encompass the key definitions and rules for PSPs, PSD3 is designed to oversee the supervision of PSPs. As it’s a directive as opposed to a regulation, EU member states will need to transpose PSD3 rules into national law.

What benefits will we see from PSR1 and PSD3?

Designed to level the playing field between banks and PIs and increase security, the proposed changes will offer several key benefits to market participants in the EU:

  1. Better open banking services: The PSR1 proposal includes clear guidelines on API performance, which, once applied, will lead to higher standardisation across API standards, less downtime, and increased access to support.
  2. Streamlined authentication: PSR1 will have direct impact customers’ checkout experience. Explicitly addressing (and prohibiting) many of the EBA’s outlined obstacles to open banking, the regulation will improve user experience and increase adoption.
  3. Improved access to payment systems and accounts: The outlined proposal strengthens the requirement to grant payment institutions non-discriminatory access to payment systems and accounts held by credit institutions.
  4. Extended IBAN checks: PSR1 also improves security by extending the existing IBAN name check requirements. The draft proposal requires sending PSPs to verify, at no charge, the consistency between name and unique identifier of the receiving payee before a credit transfer is initiated.
  5. Improved fraud prevention: The draft proposal additionally introduced the exchange of fraud data between banks and PSPs in order to improve fraud detection and prevention across the region. Additional aspects include specific liability requirements, fraud reporting mechanisms and PSU awareness.  
  6. Clearer framework for e-money: The newly outlined PSD3 directive merges the existing PSD2 with the E-Money Directive (EMD2). This creates a simpler framework for e-money and payment institutions as both are similar in nature and risk and should therefore have homogeneous legal requirements.

When is PSD3 coming?

The proposed changes are currently undergoing reviews and amendments in the European Parliament and the Council of the EU. The finalised version is expected to be published by late 2024 or early 2025. After publication, member states have an 18 month transition period, during which states will transpose the directive into national law and prepare compliance for newly introduced regulation.

Based on these timelines, PSD3 and PSR1 are expected to come into effect in 2026.

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This content is contributed or sourced from third parties but has been subject to Finextra editorial review.