ARTICLE
PSD3: Banking’s next chapter
18 September 2023
In June 2023, the European Commission introduced a draft proposal outlining a comprehensive Payment Services package, which includes the third Payment Services Directive (PSD3) and a new Payment Services Regulation (PSR), intended to replace the current PSD2 and Electronic Money Directive.
PSD2, introduced in 2015, modernised payment regulations across the European Union, covering both euro and non-euro transactions, as well as domestic and cross-border payments. The initiative undeniably enhanced consumer protection, streamlined processes, lowered costs, enriched user experiences, and expanded personalised service offerings. Notably, open banking was a significant component of PSD2 in the EU. Nevertheless, seven years after its inception, open banking has yet to deliver the promised innovation and growth.
Consumer confusion
The top-down regulatory approach of open banking initially led consumers to perceive change as forced, causing reluctance and confusion. According to our research, a lack of clarity and planning resulted in poor consumer understanding, with 80% of respondents using open banking tools while 61% claim not to use open banking, and 52% have not even heard of the term. Clearing this misunderstanding is crucial to unlocking the full potential of open banking.
Download our Disruption Diaries report Let’s talk openly to find out what consumers really think and know about open banking.
Still, open banking holds revolutionary potential, offering users benefits like consolidated financial information, faster invoice payments, instant loan decisions, and budgeting app management. While financial services users may not grasp the technical details, adoption is growing, with global users increasing from 18 million in 2018 to 89 million in 2023, according to Statista. This surge, largely driven by the pandemic, necessitates traditional banks' active pursuit of open banking to stay competitive against emerging challengers.
A fresh start
During the past years, the payment services market has undergone significant evolution. The EU's third Payment Services Directive (PSD3) package aims to ensure the payment sector can effectively navigate the ongoing digital transformation, seizing opportunities and mitigating risks, particularly for consumers. The PSD3 will be coupled with a new Payment Services Regulation (PSR) to build on the progress made since PSD2’s introduction. In summary, the key changes outlined in the proposals include:
- transition from a directive to a regulation, aiming to standardise payments throughout the EU,
- enhanced APIs to improve open banking services,
- simplified authentication processes, to reduce friction during checkout,
- direct access to payment systems for fintech companies, fostering innovation,
- implementation of IBAN and name matching for a risk-based approach to combat fraud,
- consolidation of e-money and payments institutions to streamline licensing procedures,
- re-authorisation for firms under PSD3.
This revision was crucial to address emerging payment services, bolster consumer protection, and enhance security measures in response to evolving technology and digital challenges. The adaptation of the regulatory framework sought to enhance the efficiency, security, and accessibility of payment services within the EU, while simultaneously promoting innovation and upholding robust safeguards for consumers and businesses.
Following standard legislative procedures, the final versions of the package could be available by late 2024. With an anticipated 18-month transition period granted to member states, the directive and regulation are expected to take effect around 2026.
Open banking can radically improve our industry if banks lead the charge in educating consumers and embracing its opportunities. The dawn of open banking may have been delayed, but the sun can still rise.
Get our free Disruption Diaries report Let’s talk openly to learn more about consumer attitudes towards open banking.
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