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Open banking: will PSD3 change everything?

| Article by: Abilio RodriguesProfile Image Abilio Rodrigues 5 min

It was back in 2016 that the revised Payment Services Directive, commonly referred to as PSD2, was first introduced in the European Union (EU). This piece of legislation had the broad goal of modernising banking operations, while helping the creation of a single digital market in the EU. 

Consumers are often seen as the main beneficiaries of the PSD2, but with it came more competitiveness in the financial services market, tailored services, products and quicker payments. 

In a nutshell, here are the three main benefits that were introduced by the revised Payment Services Directive: 

  1. Increased consumer rights
  2. Improved security 
  3. Permission for regulated third-parties to access payment account information

How does the PSD2 work?

There is a lot of freedom in the way each Member State of the European Union adopts the PSD2 regulations and implements it under their own laws. 

But here is the gist of how the PSD2 works. Banks and other financial institutions are required to provide APIs (Application Programming Interfaces) for regulated and licensed external service providers, that we know as third-party providers

These providers can then use those APIs to offer a variety of account information and payment services. These can range from personal finance management apps to, for instance, software designed to help e-commerce with direct PSD2 compliant payments. 

PSD3: is it already necessary?

Although we can all grasp the benefits of this regulation in our daily lives and in the quality of products and services that it promotes, the European Union is already pushing for consultation regarding improvements to the current version of the document. 

This process took off in May 2022, and there is already a fair amount of speculation about what the new revision of the Payment Services Directive will bring to the table. More importantly, the financial market is very interested in knowing what it will pertain to the banking system and to the payments sector. 

Answering the question above, we can firmly say yes, a new revision is already necessary. Mainly because the European Union has clauses to review and update guidelines and legislation at regular intervals. 

Why? Because a well functioning market has to take consumer needs and technological advances into consideration, not to mention social and economic conjectures – something that we are now well aware of. 

If we go back a few years, the first version of this regulation, the PSD1, was introduced in 2007, with the revised document being put into action in 2016. Now, 6 years passed, the world has changed enough to grant a fresh look at what can be improved to balance the market and improve people’s lives. 

What is the PSD3

The new revision of the Payment Services Directive will probably be drafted by the European Commission (EC) after this ongoing round of consultations, aiming to regulate electronic payments and the banking ecosystem as a whole in the European Economic Area (EEA).

We are still in a very early stage of this consultation phase, so the PSD3 should not come into full effect before 2026, at the earliest. 

Most likely, the PSD3 will improve some key elements of the present regulation, deepening the focus on security, consumer rights and the value of services and products offered in the current financial landscape.

From PSD2 to PSD3: what are the main differences

It’s also important to ascertain if stakeholders feel that the current version still lacks features that allow them to fit their purposes.

Here are some of the questions that are being asked right now, regarding the PSD2:

  • Was the PSD2 effective: has the PSD2 managed to fulfil its main goals? What are its main benefits, and the main challenges it faced? Can they be solved by the PSD3?
  • Was the PSD2 worth it: was the PSD2 a justified regulation? Did it promote equality across the board?
  • Is a new revision relevant: how did the market evolve, which are its new players, technologies, and needs?
  • Will the PSD3 be efficient: what are the costs and potential benefits of the implementation of PSD3? 

Looking back at the main challenges the PSD2 has faced, the EC has already highlighted some key areas that could, and probably should, be addressed in the PSD3. 

This should give us an idea about what needs to be done in the future, to secure greater competition in the financial market.

Regulating new products and services

PSD2 brought FinTechs and Big Techs to the mix, allowing for products and services that were not available before. Buy Now, Pay Later (BNPL) solutions, contactless payments, digital wallets — all of these will probably be analysed and integrated in the PSD3. 

Cryptocurrency has also seen a great surge in interest, so it’s very likely that the EU will try to improve on their safety and transparency.

Fighting against payments fraud

The PSD2 has largely improved on safety, especially in payments. Third-party Providers (TPPs) were instigated to use Strong Customer Authentication (SCA), but this didn’t completely remove payment fraud from the picture. 

The PSD3 will probably introduce necessary changes to make sure new payment solutions are safe to use, by implementing new security and transparency features — perhaps a revision of SCA.

Accessing account information

Access to payment systems and infrastructure can be a focus point of the PSD3. API standardisation is touted as extremely important for an open finance economy, as it could be key to improve their quality.

This also has the potential to help FinTechs that are interested in accessing account data, by reducing barriers to entry.

Improving regulation enforcement

The licensing and supervision of Third-Party Providers, especially Payment Initiation Service Providers (PISPs) will also probably be refined, as they become increasingly more relevant. 

Broader impact of the PSD3

The EU has strong expectations regarding this new revision of the Payment Services Directive, especially in the economic spectrum.

Digitalisation is proving to be a challenge despite all its obvious advantages, but one that must be surpassed if we want to push for even more competitiveness and for the greater development of the single digital market. 

Ideally, the PSD3 can also have a severe positive social impact, by mitigating possible deterrents to practical application, convenience, and consumer protection. 

There is, however, still a long way to go. After this consultation phase is completed, we should have to wait for the first half of 2023 for the EC to draft the final document.

Only then will each Member State of the EU/EEA have to transpose it to national law, which makes it very unlikely that we see the new PSD3 come to fruition before 2026. 

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