The upcoming Payment Services Directive 3 (PSD3) is expected to transform how payment service providers (PSPs) and electronic money institutions (EMIs) operate within the EU. This guideline will help you to navigate potential future developments.
1. Why the Transition from PSD2 to PSD3?
The move toward PSD3 is underpinned by several challenges and limitations identified in the current Payment Services Directive (PSD2) and the Electronic Money Directive (EMD2). The aim is to merge these separate regimes for payment services and electronic money into a unified framework.
Regulatory Arbitrage: Unfair Competition
What’s the Issue?: The European Commission has noticed that some PSPs strategically select their home countries to be those Member States where the application of Union rules on payment services is more lenient or favorable.
Impact: In the Commission's opinion, such practice creates an uneven playing field and distorts competition among Member States, especially those that employ stricter rules or more active enforcement policies.
PSD3’s Approach: The new directive aims to mitigate such practices, ensuring that competition is more evenly balanced across Member States.
Delineation Difficulties: EMI vs. PI
What’s the Issue?: National financial supervisory authorities have found it challenging to distinguish between services offered by Electronic Money Institutions (EMIs) and Payment Institutions (PIs).
Impact: This ambiguity complicates the regulatory landscape and can result in overlaps or gaps in supervisory practices.
PSD3’s Approach: Under PSD3, EMIs will cease to exist. Instead, there will be only Payment Institutions (PIs) that will be authorized to offer both electronic money and payment services, thus simplifying the regulatory scope.
Lengthy Licencing Processes
What’s the Issue?: An EBA Peer Review conducted in January 2023 concluded that the authorization process for PSPs is excessively time-consuming.
Impact: Such delays hinder market entry and can negatively affect competition.
PSD3’s Approach: The directive mandates the European Banking Authority (EBA) to develop draft regulatory technical standards for authorizations, as well as a common assessment methodology, to speed up and standardize the process.
Banking Challenges for PSPs
What’s the Issue?: PSPs frequently experience difficulties in opening bank accounts, often due to vague concerns related to Anti-Money Laundering (AML) and Counter-Terrorist Financing (CFT) controls.
Impact: This has significant implications for the operation and financial viability of PSPs.
PSD3’s Approach: The directive requires banks to offer detailed explanations for any denial of access to a bank account or withdrawal of such a service. PSPs will also have the right to appeal such decisions to national authorities.
Consumer Protection Against Fraud
What’s the Issue?: With an upswing in consumer interest in electronic payments, there’s a concurrent increase in the risk of fraud.
Impact: Consumers could be significantly affected, eroding trust in electronic payment systems.
PSD3’s Approach: The European Commission, under the PSD3 framework, will enable PSPs to share fraud-related information, thus enhancing collective security measures.
2. What Other Changes Does PSD3 Bring?
Safeguarding Funds: Evolving the Safety Net
New Mandate: One of the critical areas of reform in PSD3 focuses on safeguarding customer funds, which will require Payment Institutions to avoid concentration risk.
Operational Implications: In practice, PSPs should not use the same method to safeguard their customer funds. This will necessitate exploring multiple safeguarding avenues, potentially requiring PSPs to restructure their current safety measures.
Engagement with Credit Institutions: Moreover, PSPs must spread the risk by not keeping all customer funds with one credit institution. This diversification aims to protect consumers by reducing the systemic risk tied to the failure of a single credit institution.
Winding-up Plans: Preparedness and Continuity
Regulatory Requirement: PSPs must have a winding-up plan in place as a condition for authorization under PSD3.
Key Components: These plans should cover what steps would be taken in the event of the firm’s failure, how an orderly wind-up of activities would occur, and what arrangements are in place for the continuity or recovery of critical functions that are outsourced or performed by agents and distributors.
Initial Capital Requirements: Raising the Bar
Increased Financial Commitment: PSD3 calls for an increase in the initial capital that a Payment Institution must have, raising it to a minimum of €150,000.
Scope: This requirement is particularly relevant for Payment Institutions intending to offer a range of services like maintaining accounts, executing transactions from payment accounts, issuing payment instruments, and acquiring.
Account Information Service Providers: Financial Resilience
Alternative to Indemnity Insurance: PSD3 allows registered Account Information Service Providers to hold their own funds of €50,000 as an alternative to currently required professional indemnity insurance.
Flexibility: This offers greater flexibility to providers in how they choose to safeguard against operational and financial risks.
3. When Will PSD3 Come into Force?
The Timeline for PSD3 Implementation
Official Commencement: According to the disclosed draft dated June 28th, 2023, it is expected that the final version of the PSD3 directive will officially come into force in 2026.
Preparatory Steps for Stakeholders
Three-Year Window: Stakeholders have a roughly three-year window from the date of the draft's disclosure to prepare for the full implementation of PSD3. This period is crucial for Payment Service Providers (PSPs), Electronic Money Institutions (soon to be obsolete under PSD3), and other financial entities to align their operations with the new regulations.
Revisit Existing Compliance Frameworks: Given the expansive changes that PSD3 will bring, financial institutions must review their existing compliance frameworks and possibly revamp them to align with the new directives.
Resource Allocation for Compliance: Organizations should consider earmarking funds and human resources for managing the transition from PSD2 (or EMD2, where applicable) to PSD3. This could include legal consultations, technical upgrades, and training sessions for staff.
Regulatory Monitoring
Interim Updates: While the official implementation is slated for 2026, organizations should closely monitor any interim updates or modifications to the directive that may be introduced by the European Commission or the European Banking Authority (EBA) before the full implementation date.
National Authority Guidelines: As PSD3 aims to harmonize practices across Member States, there may be supplementary guidelines issued by national authorities to assist local institutions in compliance. Staying abreast of these guidelines will be essential for seamless transition and compliance.
The information provided is not legal, tax, investment, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your own legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. Some parts of the text may be automatically generated. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information.
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