The introduction of PSD3 marks a significant step forward in the financial sector, aiming to enhance security, foster innovation, and create a more equitable market for all players. This blog will delve into the key changes brought by these new regulations, exploring how they will impact merchants and what steps they should take to prepare.

Overview: what is changing?

When the Payment Services Directive 2 (PSD2) was introduced, its primary goals were to foster innovation within the payment industry, empower consumers by giving them more control over their data, and strengthen security for online payments. The EU Commission regularly revises these frameworks to keep pace with market developments. In reviewing PSD2, the Commission recognized both advancements in payment technologies and in fraud. Consequently, they have put forward new proposals to modernize and amend PSD2, resulting in the upcoming Payment Services Directive 3 (PSD3) and the introduction of the Payment Services Regulation (PSR).

The two new pieces: PSR1 and PSD3

What is PSR1?

The old PSD2 will be replaced by PSR1, which mainly focuses on key definitions and rules for Payment Service Providers (PSPs). By shifting from a Directive to a Regulation, the Commission aims to create an EU regulation that directly applies to all Member States. Directives typically require Member States to adapt them into their national legislations, allowing for slight variations in interpretation by each country. In contrast, regulations leave no room for interpretation and are directly applicable. This change will promote harmonization in the payments industry, ensuring fewer inequalities across EU Member States.

What is PSD3

PSD3 is an updated version of the PSD and PSD2. Since it is a Directive, not a Regulation, each Member State will need to transpose PSD3 rules into national law. This legislation mostly focuses on the licensing and supervision of payment institutions and aims to elevate open banking regulations. It will address the limitations of its predecessor by striving to harmonize rules across Member States and create a level playing field for new companies and start-ups in the payments and digital services sector within the European Single Market.

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An explanation of the revised payment services directive PSD2

Key Objectives of the PSD3 and PSR1

The revision of the new PSD2 will focus specifically on six different points:

Strengthening user protection and confidence

PSD3 and PSR1 aim to enhance user protection and build confidence in the digital payments ecosystem by addressing payment fraud. To do this, PSD3 and PSR1 enable payment service providers to exchange fraud-related data, enhance customer authentication requirements, extend refund protections for fraud victims, and mandate verification of payees' IBAN numbers against their account names for all credit transfers.

Enhancing consumer rights

The new regulations seek to bolster consumer rights by increasing transparency and clarity in financial transactions. This includes providing more detailed and understandable account statements, clearer information on ATM charges, and enhanced disclosure for credit transfers and money remittances, particularly those sent from the EU to third countries.

Enabling equal opportunities between banks and non-bank PSPs

One of the key objectives of PSD3 and PSR1 is to create a more equitable landscape for banks and non-bank payment service providers. This will be achieved by granting non-bank PSPs greater access to bank accounts and allowing them to participate directly in all EU payment systems. Banks will be required to justify any refusals of access, ensuring non-bank PSPs have the necessary opportunities to compete fairly in the market.

Making better Open Banking functionality

The regulations aim to improve the functioning of open banking by removing existing obstacles and facilitating innovative payment services. Important are the new rules addressed for API performance and minimum functionalities they should support, aimed at enhancing the API's reliability and functionality. Both customers and open banking services will benefit from this.

Improving cash availability

PSD3 and PSR1 also focus on enhancing the availability of cash by enabling retailers to offer cash services to customers without the need to purchase and by clarifying the operational rules for independent ATM operators. These measures aim to ensure that cash remains a viable and accessible option for consumers, particularly in areas where digital payments are not yet .

Incorporating Electronic Money Institutions (EMIs)

This includes merging the legal frameworks for electronic money institutions (EMIs) and payment institutions (PIs) under PSD3, which will streamline authorization and supervisory processes. This will create a more unified and efficient regulatory environment for all payment service providers, which are similar in nature, therefore should share the same legal requirements.

What does this mean for merchants?

The new rules from the EU Commission will most probably be in effect by 2026. These regulations will directly impact merchants’ payment processes, security measures, and customer interactions. Moreover, adapting to the new regulations can open up opportunities for cost savings and better service offerings, giving merchants a competitive edge.

How Merchants can prepare:

1. Update payment systems: Ensure all payment systems comply with new fraud prevention measures and transparency requirements.
2. Boost API integrations: Work with IT teams to integrate with improved open banking APIs for more reliable and innovative payment services.
3. Explore new PSP partnerships: Consider partnering with non-bank PSPs to benefit from increased competition and potentially lower fees.
4. Offer cash services: Prepare to offer cash services to cater to customers who prefer cash transactions.
5. Stay informed: Keep up-to-date with regulatory changes to ensure compliance and leverage new opportunities.

These areas of focus can help merchants with the transition to PSD3 and PSR1, ensuring they remain competitive and compliant.

Learn more about PSD3

The European Council is taking concrete steps to innovate and foster the financial sector as a whole, putting the interest of the citizens before anything. That’s why the new regulations aim to modernize payments, ensuring safety for citizens.

At Alphacomm, we are constantly updating our solutions and their features. To learn more about how we can help you comply with the new directives, get in touch with our team!