PSD3 - a new approach to payment services in the European Union

On June 28th 2023 The European Commission has published a package of changes to the rules governing the payment services sector, consisting of the revision of the Payment Services Directive and the implementation of PSD3, as well as the adoption of a new Payment Services Regulation (PSR). These pieces of legislation are intended to enable the development of the financial sector in the digital era, to strengthen consumer protection and to respond to the diagnosed problems that arose during PSD2. What changes are expected to take place?

Amendment of payment services legislation

The package of changes published by the European Commission in connection with the PSD2 review will include:

• strengthening anti-fraud mechanisms - by allowing more information to be exchanged between payment service providers, introducing a system for verifying inconsistencies between the IBAN number and the account holder's name in the case of credit transfers, strengthening customer authentication rules, extending customer redress rights, strengthening educational measures to raise consumer awareness of fraud;
• strengthening the position of non-bank payment service providers by providing payment institutions with direct access to certain payment systems and establishing additional rules to ensure the right of payment service providers to bank accounts;
• changes to open banking, including the introduction of dedicated and standardised APIs, or the removal of other obstacles to open banking services and increased customer control over data;
• enhanced harmonisation and enforcement - by merging electronic money institutions and payment institutions and retaining only the payment institution that will be able to obtain a licence to provide electronic money services.

The need for changes in the regulation of the payment services industry

There is no doubt that the modernisation of payment services regulation is necessary at this stage. Today, it is essential to adapt the existing regulations to the rapid development of technology and digitalisation. In the course of PSD2, some problems and areas for improvement have also been diagnosed, such as:

• the increasing scale of payment fraud;
• problems of open banking service providers;
• the relationship between banks and non-bank payment service providers;
• and problems in defining the concept of electronic money and the functioning of electronic money institutions.

Payment fraud and unauthorised payment transactions

The increasing number of payment frauds is a growing problem throughout Europe. This problem can also be seen in Poland, which has already attracted the interest of the Polish Financial Supervision Authority, which has recently communicated to supervised entities its expectation to take measures to counter fraud.

There is no doubt, however, that this problem also requires systemic solutions, especially in Poland, where, as a result of the erroneous translation of PSD2, significant difficulties arise in determining responsibility for so-called unauthorised payment transactions, which I have written about in articles (currently only in polish): Zwrot nieautoryzowanych transakcji – kontrowersyjne zarzuty prezesa uokik wobec sektora bankowego, Nowelizacja ustawy o usługach płatniczych – odpowiedź na problem zwrotu nieautoryzowanych transakcji and Kolejna odsłona sporu o zwrot nieautoryzowanych transakcji.

The fintech industry's relationship with the banking sector

There is also no doubt that non-bank payment service providers, often have problems "aligning" their relationship with banks. However, their cooperation with banks is necessary for the provision of services by non-bank payment service providers, which currently do not have the right of direct access to all payment systems.

Meanwhile, fintechs are often faced with a refusal to open a payment account or the subsequent termination of such an account. The reasons for this behaviour, are often explained by banks by unspecified risks, in particular anti-money laundering and anti-terrorist financing (AML) risks. However, supervisory authorities have not been interested in directly intervening in the above relations, while the general recommendations issued (e.g., the AML survey published by the KNF) have introduced more confusion and doubts and have not solved the problem at hand.

The planned changes will significantly strengthen the position of non-bank payment service providers in their relationship with banks. More importantly, however, the fintech industry is to be given direct access to key payment systems, which in many cases will eliminate the problem of the fintech industry's unhealthy relationship with the banking sector altogether.

Problems of open banking

Problems within the PSD2 regulation can also be seen in the context of the conduct of business by so-called TPPs (Third Party Providers), specifically AIS (Third Party Provider) and PIS (Payment Initiation Service) providers. These providers face obstacles with access to bank-issued APIs, as bank access interfaces lack standardisation and reliability. In turn, the established rules on fallback access are not working.

The new regulatory proposal is therefore intended to bring about much-needed standardisation in how TPPs interact with the banking sector. Key in this respect seems to be the establishment of a dedicated access interface (API) for the exchange of data between these entities, which should allow the elimination of the main barriers to the provision of services by AISPs and PISPs and improve their competitiveness in the market.

E-money and e-money institutions

The activities of electronic money institutions also raise real issues. It has become difficult for some supervisors to distinguish between the nature of the activities of electronic money institutions and payment institutions. More importantly, however, significant differences have emerged in the interpretation of the concept of e-money itself.

In this regard, a good example is the interpretation of the concept of e-money adopted by the Polish supervisory authority, which has resulted in a negligible interest in conducting business as an electronic money institution in Poland. The proposed changes may therefore significantly contribute to the popularity of e-money in Poland.

Assessment of the proposed changes

The proposed changes will be of key importance to the entire fintech sector in Poland. To a large extent, they may not only address the problems of the payment services market as a whole, but should also eliminate some of the sector's problems that are particularly visible in Poland. Hence, the entry into force of the changes under discussion may provide opportunities for many fintech entities.

We also welcome the emergence of the Payment Services Regulation, which should theoretically ensure greater legal uniformity across the European Union (which was a problem under the PSD2 Directive itself, also visible in Poland).
However, regardless of the assessment of the proposed solutions, the entire payment services sector will be obliged to adapt to the new rules and regulations, which, apart from the opportunity for development, may involve certain challenges and the obligation to introduce additional solutions and internal mechanisms.

It should also not be forgotten that the new PSD3 directive as well as the Payment Services Regulation is part of a broader package of regulatory changes across the financial sector in the European Union. Indeed, as part of its work on modernising financial sector regulation, the European Commission has additionally put forward:

• a legislative proposal on euro cash as legal tender and a legislative proposal establishing a legal framework for a possible digital euro, making up the so-called single currency package;
• a proposal for regulations establishing a framework for access to financial data.

Certainly, the entire financial sector is facing many key changes of an often revolutionary nature.

Next steps

The above regulations are a proposal for change, which will undergo further legislative process. It is therefore still uncertain what the final shape of these regulations will be.

It is worth following the legislative process in order to be ready for the upcoming changes, which will be crucial for the financial sector in general and the fintech sector in Poland in particular. The new regulations are expected to come into force in late 2025 or 2026.

Author: Michał Barwicki, attorney-at-law