The PSD2 was a truly historic piece of legislation that laid the foundations for a paradigm shift in financial services. The blockbuster Payment Services Directive 2 planted the seeds for Europe’s thriving Open Banking ecosystem. Now we’re awaiting a sequel. 

When the PSD3 comes into force at some point in the next five years, it will unlock vast new opportunities as well as creating significant challenges. It will enhance the functioning of Open Banking by removing obstacles to services and improving customers' control over their payment data, ultimately enabling innovative new players to enter the market. The new rules will also benefit non-bank Payment Service Providers (PSPs) by improving their access to payment schemes and systems as well as bank accounts in Europe. 

However, understanding the PSD3 is far from simple. Firstly, it’s important to appreciate that it’s not the only game-changing set of rules on the horizon. PSD3 is part of the Payment Service package alongside the Payment Services Regulation (PSR). Together, the dual sets of rules bring a much wider range of financial services into Europe’s data-sharing ecosystems, including pensions, insurance and more.

Additionally, the EU has put forward a legislative proposal for a Financial Data Access framework (FIDA) which establishes clear rights and obligations to manage customer data sharing in the financial sector beyond payment accounts - setting the foundations for Open Finance. The EU will also roll out new instant payment regulations during the same five-year time period.

This avalanche of new rules creates serious complexity which gives banks, fintechs and all other players a serious hill to climb. Compliance is no small task - which is why it’s prudent to start preparations for the symphony of rules and regulations as soon as possible.

Speaking at a recent Open Banking Excellence (OBE) Campfire, Brian Hanrahan, CEO of Nuapay, described the PSD3 and its companions as a “symphony” of new rules. He said that the first challenge will simply be recertifying and proving compliance. 

“Firms that are regulated need to be conscious of the requirement to recertify under the new standards,” he warned. “It's a bit of a burden, but not imminent, thankfully. There are a few areas in which the EU is raising the bar and players will need to live up to the expectations of regulators.”

PSD3 & PSPs: Boosting competition in Europe 

A crucial first step towards preparing for the PSD3 is understanding what it is trying to achieve. Anu Widyalankara, Director of Payments Strategy & Technology at EY, described it as an upgrade to PSD2 which provides the “kick and momentum in the market”.

“It really drives the point on access for PSPs, giving them direct and indirect access to all EU payment systems, including bank accounts, card schemes, and digital banking schemes,” she said. “This also stipulates that credit institutions have to give PSPs access to bank accounts in the future - which is quite different from PSD2. The EU is pretty much holding them by the collar and saying: ‘You have to let these PSPs join this regime.’”

There will be stricter rules around fraud and financial crime. The new legislation will enhance the refund rights for consumers granted under PDS2 and align with regulations we're putting in place here in the UK. Additionally, there will be changes to Strong Customer Authentication (SCA) and potentially a new exemption for merchants which allows them to make refunds without authentication.

“The PSD3, PSR, and FIDA put the onus of data access onto the consumer, so that through new they can manage and navigate the access they give to these PSPs through dashboards and standardized APIs,” Anu added.

“This will allow PSPs to read that data and provide better financial products on top, creating a new spearhead in terms of where we can take Open Finance.”

Preparing for a customer-centric future

Piers Marais, Chief Product Officer at Currencycloud, said that the industry needed to zero in on the exact needs of end users when planning for PSD3. If we understand how the new EU rules benefit our customers, we can deliver innovative products and services which solve their challenges or drive positive outcomes in their lives. 

He said: “We have to step back and say: ‘What is the end customer trying to do, how can we enable that and how do we talk to them in terms they can understand?’

“I suspect the most impactful service providers that will emerge in the new post-PSD3 era will be those that manage to translate our industry acronyms back into normal human speak for many different types of end customers in all sorts of different industries across the world. It’s not an easy task!”

As the EU creeps towards implementing the PSD3, we are likely to see financial institutions behaving differently.  

Nida Sattar, Head of Product - Payments at Allica Bank said that the PSD3 could prompt banks to change their approach to expansion.

“If banks are looking at expanding to anywhere in Europe or beyond, they should look at how Open Banking is being implemented,” she advised. “The potential of easier access to payment schemes might prompt a bank looking to expand internationally to go forward as an electronic money institution (EMI) rather than going for a full banking license. 

“Then, of course, there might be other additional safeguarding and liquidity requirements banks will need to be aware of. It will impact how you think about your expansion strategy.”

All players in the European Open Banking ecosystem have a stiff challenge ahead of them. Responding to the new rules cannot be delayed. Now is the time to prepare for the symphony of new rules and regulations  - because they will reach a crescendo much sooner than you think.