On June 28th, the European Commission released its legislative plans for a third Payment Services Directive (PSD3), a first Payment Services Regulation (PSR), a Financial Data Access proposal, and the Single Currency Package, which paves the way for the digital euro.
All of these have the potential to reshape retail banking and payment services in the EU, and here are some of the most significant changes that these legislative packages bring forward.
The EU is enacting most payment rules in a directly applicable regulation and reinforcing provisions on implementation and penalties.
The PSR outlines sanctions for payment account access and fraud prevention measures such as Strong Customer Authentication (SCA). Non-compliance could lead to maximum fines of at least 10% of annual turnover for businesses and €5,000,000 for individuals.
The PSR also gives the European Banking Authority (EBA) the power to temporarily prohibit or restrict certain types or specific features of a payment service or instrument or an electronic money service that it believes is potentially causing consumers harm. Further, national regulators are being given greater powers to investigate potential failures to comply with the regulation.
SCA has been regarded as a success by EU regulators in bringing down card fraud. Yet, the Commission is making some changes to it with the new legislation. For example, payment services providers (PSPs) will need to now make SCA accessible for all customers, including those who are disabled or elderly. This means that authentication can no longer be limited to digital channels.
PSPs will have to enable a variety of ways of performing SCA and will be prohibited from making it dependent on owning a smartphone.
In addition, the EU is taking on fraud types that PSD2 rules haven’t been able to prevent. For example, the PSR includes a requirement for PSPs to refund a consumer if they have been a victim of authorised push payment (APP) fraud, provided that the consumer has reported this to the police and notified the PSP immediately.
In a bid to further level the playing field between banks and payment firms, the new legislation amends the Settlement Finality Directive (SFD).
The SFD was crafted nearly 30 years ago, and the Commission’s interest in opening up direct access to payment systems for payments and e-money firms was first outlined in the 2020 Retail Payments Strategy.
Currently, payments and e-money institutions have to rely on banks to gain access, which the Commission regards as a structural dependency on banks and unfair on fintechs, considering that payments and e-money firms are also competitors for the provision of payment services.
Interestingly, unlike other parts of the legislation, this could be introduced at an earlier date. This is because members of the European Parliament are hoping to amend the SFD via the EU’s Instant Payments Regulation, which has progressed much more than the latest legislative package.
With the advent of PSD2 comes the end of the Electronic Money Directive (EMD), something advocated for by the EBA last year.
Firms that are currently authorised as EMIs will meanwhile become payment institutions, but with rules that are specific to electronic money services. This change is likely to prevent firms from forum shopping, as the definition of what electronic money is varies from member state to member state.
Open banking’s goals are being spread out to other parts of the financial sector with the Financial Data Access legislation.
The proposal makes way for consumers to share their data with financial institutions and fintech firms.
It is hoped that this will mean cheaper and better data-driven products, such as comparison tools and personalised online advice.
Unlike the PSD2, the open finance framework includes the standardisation of customer data and the required technical interfaces as part of financial data sharing schemes, of which both data holders and data users must become members.
In addition, this legislation makes way for fees to be introduced, which PSD3 and PSR rule out. The Commission views this as an incentive for better quality interfaces and has said that compensation must be reasonable.
As part of its Single Currency Package, the EU has put forward legislation for a digital euro.
The digital euro would be available alongside existing means of payment, like cards and applications, and when used offline, would have the same privacy as when paying with cash, as banks would only be able to see the same amount of data as when cash is withdrawn from an ATM.
Basic services will be provided free of charge to individuals, and similarly to PSD3, an emphasis has been put on financial inclusion. For example, the digital euro needs to be easy to use for those with disabilities and citizens who do not have a bank account would be able to open and hold an account with a post office or another public entity, such as a local authority. Merchants will be required to accept the digital euro, except very small merchants who choose not to accept digital payments.
The Single Currency Package also makes way for better access to cash. Member states will need to ensure widespread acceptance of cash payments, as well as sufficient and effective access to cash. National authorities will need to monitor and report on the situation and take measures to address any problems identified.
Further, the Commission will be able to intervene to specify measures if needed.
The PSD3 also puts in place new requirements to improve the availability of cash in shops, by allowing retailers to provide cash services to customers without requiring a purchase.
Learn more about EU payments legislation:
Instant Payments Legislation: Political Agreement Reached Between Parliament and Commission
Payment Services Directive 3 (PSD3): how will it impact your financial institution?