In 2026 the existing second Payment Services Directive (PSD2) will formally be replaced by two new pieces of legislation: the first Payment Services Regulation (PSR1) and
PSD3. The European Commission’s aim is to boost payments security and level the playing field between banks and payment initiators (PIs).
With the
transition period well underway, market participants across Europe are pulling their proverbials up and considering the benefits that
PSD3 could bring.
In this article Finextra considers the directive’s six headline changes and the use cases they may engender.
1. Better open banking services
In an
overview of PSD3’s goals and timelines, Finextra notes that “the PSR1 proposal includes clear guidelines on application programming interface [API] performance, which, once applied, will lead to higher
standardisation across API standards, less downtime, and increased access to support.”
So, what will this mean in practice? Essentially, this change will further dissolve hurdles on the road to providing all-out open banking services.
According to Dutch payment company, Ayden, “Payment Initiation Service Providers (PISPs) and Account Information Service Providers (AISPs) will be allowed to build custom interfaces that connect to banks
and other financial institutions…Banks and financial institutions will have to share more information about their API performance by publishing quarterly statistics on interface availability and performance, creating a higher level of transparency.”
Ayden goes on to state that this gives firms a clearer view over the partners that would be best for their payment processing needs: “In case of bank downtime or disruptions, banks need to allow third parties (AISPs and PISPs) to use their own banking interfaces,
leading to more efficient payment processes for digital businesses and their customers.”
2. Streamlined authentication
The new regulations may also have a direct impact on customers’ checkout experience, Finextra
reveals: “Explicitly addressing (and prohibiting) many of the EBA’s outlined obstacles to open banking, the new regulation will improve user experience and increase adoption.”
On the ground this will mean customers enjoy a more streamlined and convenient open banking experience, avoiding multiple app redirections, complex authentication steps, session timeouts, and inconsistent user interfaces, writes Andrei Scutari, open banking
head of sales, Salt Edge, in a Finextra
blog post. “Payments will no longer be restricted to trusted beneficiaries lists or domestic beneficiaries, and the new regulation also seeks to improve payment status and error messaging,” he adds.
3. Improved access to payment systems and accounts
Finextra’s introductory article on PSD3 also
notes that the “outlined proposal strengthens the requirement to grant payment institutions non-discriminatory access to payment systems and accounts held by credit institutions.”
This is significant because better access to payment systems will bolster the sector’s potential for competition and, therefore, innovation. For the consumer this takes form as upscaled products, services and better prices – helping meet her sundry and unique
financial needs.
4. Extended IBAN checks
PSR1 also improves payments security by extending 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,”
summarises Finextra.
For all those exchanging Euros, this means greater protection against fraud and less cash lost to it, because – as
writes Renate Prinz, partner, McDermott Will & Emery LLP – “prior to initiating the payment process, any discrepancies must be communicated to the payer; enhancing the transparency and accuracy of transactions.”
Clearly, the European Commission’s regulatory gaze is becoming laser-focused on transaction monitoring; setting higher standards for oversight. These new measures run alongside updates to the strong customer authentication (SCA) rules.
5. Improved fraud prevention
“The draft proposal additionally introduced the exchange of fraud data between banks and PSPs to improve fraud detection and prevention across the region,” continues Finextra’s
article. “Additional aspects include specific liability requirements, fraud reporting mechanisms and PSU awareness.”
Supporting the drive to push fraud from payments is a timely development. According to
Nick Green, director, Purple Patch Broking, “APP fraud is now the number one payments threat and is expected to reach $5.25 billion by 2026.” Last year alone, UK bank fraud losses topped £1 billion.
The European Commission’s directive tackles this issue by enabling PSPs to voluntarily exchange data such as the location of the user, the time of the payment, the device used, spending habits, and the merchant in question. The thinking is that underhand
activity can be spotted in emergent trends – potentially leading to the capture of financial criminals.
In addendum, market stakeholders are committing to better educate customers about fraud risks.
6. Clearer framework for e-money
The newly outlined PSD3 directive also merges 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.
This amounts to the ability for payment institutions, too, to issue e-money – giving more end-users access to the benefits associated with electronic money, such as increased flexibility, convenience, security and transaction efficiency.
PSD3: What’s the use?
In point of a washup, here are some payments products and services that would be made possible, or at least augmented, by the enforcement of PSD3 and open banking: