PSD3 aims to address risk and concerns around fraud by establishing clear guidelines for consumer protection and transaction security. These include mandatory payee name and IBAN checks; refund guidelines that address spoofing fraud; and statement requirements that make it easier for consumers to review transactions, including reference to a payee’s commercial trade name for authentication.
Key takeaways
- The Third Payments Services Directive, or PSD3, builds on PSD2 and other regulations in Europe
- Expected impacts for PSD3 include increased consumer protection, open banking enablement and forward-looking approach
- To prepare, payment service providers will need to understand the potential scope and impact of the directive. We’re here to help
What is PSD3?
The initial draft of the Third Payments Services Directive, or PSD3, was introduced in June 2023 as an evolution of previous payments regulations in Europe. It’s an EU directive that applies to banks and non-bank payment service providers (PSPs).
This directive is still in draft phase and will likely be refined over the course of the next year. Its probable impact includes improving accessibility, improving customer protection requirements, improving open banking accessibility and adoption, increasing transparency in cross-border payments and increasing market competition.
We do not expect enforcement of PSD3/PSR before 2027, but there are steps that bank and non-bank PSPs can take now to prepare.1
- Stay informed of changes as additional drafts of the directive are released
- Enhance security measures and ensure you’re compliant with PSD2
- Review customer data handling practices and strengthen where needed
What is the difference between PSD2 and PSD3?
PSD2 was created to protect consumers and encourage competition. It introduced open banking to the EU and established strong consumer protection standards by requiring stricter security measures for online protocols. It was intended to be the core pillar to which other regulation would anchor. However, because payments evolved quickly (in part due to accelerated digitization driven by COVID), areas of opportunity for improvement and expansion of the directive have become apparent.
One goal of PSD3 is to address these inconsistencies and remove boundaries to avoid silos. It follows common themes addressed in previous directives, including enhancing consumer protections, promoting competition and innovation and facilitating a single market for payments.
The final draft of PSD3 will likely work to level the playing field between banks and non-bank PSPs by minimizing the risk of regulatory arbitrage.
What is the difference between PSD3 and PSR?
The revision of PSD2 has been drafted into two components: PSD3 and the Payment Services Regulation (PSR). PSD3, which is a directive rather than a regulation, primarily addresses licensing and supervision. It will need to be transposed into local law to be enforced.
PSR, on the other hand, is a regulation covering security, strong customer authentication and obligations of PSPs. The regulation is directly applicable to all EU member states without the need for local transposition.
Together, these two prongs of the PSD2 revision will likely help strengthen user protections, improve transparency and accessibility and encourage open banking adoption.
What are the impacts of PSD3?
While PSD3 is still in draft form and may evolve as new versions are released, there are a few likely impacts to expect.
PSD2 set the stage for open banking, establishing connectivity between European banks through APIs to enable the integration of third-party payment providers. As the PSD3 draft continues to evolve, future iterations are likely to include increased transparency requirements for banks, including the need for banks to provide a dashboard of client open banking consents.
To support cross-border and cross-currency payments, PSD3 aims to establish increased transparency and reporting requirements to allow for improved tracking and authentication for payments. The directive calls for clear foreign exchange rates so consumers can evaluate rates from various providers, as well as clear settlement times.
Regulatory housekeeping refers to components of PSD3 which address capability changes in payments that have emerged since the publication of PSD2 and efforts to pre-emptively address future considerations. This includes providing a legal framework for data sharing between banks and PSPs and granting nonbank PSPs access to payment systems and consumer financial information when authorized.
PSD3 also considers other regulations and innovations on the way. For example, the new Financial Data Access (FIDA) framework proposed in June 2023 encompassed nearly all financial services data, allowing consumers to grant third-party access to data held by financial institutions. PSD3 and FIDA will likely work together given their similar timelines and areas of coverage.
Who does PSD3 apply to?
Banks and non-bank PSPs alike will be subject to the PSD3 regulation in countries where it has been transposed into law. This expanded scope helps to level the playing field and establish consistency in consumer protections and experiences across payments providers.
Open banking and PSD3
PSD3 will look to increase competitiveness within open banking by:
- Strengthening rules around APIs, including setting requirements for functionality and performance
- Requiring open banking providers to make dashboards available to users for monitoring
- Increasing transparency related to open banking services
For those who move quickly to adopt open banking solutions, there are a handful of potential benefits. These include smoother transactions, secure API interfaces that allow payment validation and improved visibility.
The open banking team at J.P. Morgan Payments is here to help empower our clients to offer open banking options that fit their business needs. Learn more here.
Stay informed
It’s an exciting time to be in European payments. As a local bank with global expertise, J.P. Morgan Payments is positioned to help local, regional and global clients understand relevant regulatory nuance. Reach out to your J.P. Morgan representative for more information, or explore open banking solutions here.
