Understanding PSD3 Regulation in Modernising the Fintech and Payment Industry

Following the comprehension of PSD (Payment Services Directive) and PSD2 (Revised Payment Services Directive), the next step in the evolution of payment services is the development of PSD3 regulation. This will be accompanied by the implementation of PSR (Payments Services Regulation) and the Open Finance Framework. Notably, this transition will introduce the concept of Financial Services Information Providers (FSIP) and Financial Data Access (FIDA). 

PSD3: Redefining the Payment Industry

The forthcoming PSD3 Directive represents more than a mere upgrade or improvement of its predecessor, PSD2. Instead, it will serve as a distinct and novel regulatory framework, drawing upon the foundations established by both PSD2 and the e-Money Directive.  

PSD3 regulations function as the comprehensive framework outlining the principles governing licensing and the criteria for attaining the status of a licensed Payment Institution or an e-Money Institution (EMI). This regulation provides extensive details regarding the authorization and supervision of Payment Institutions (PIs) and Electronic Money Institutions (EMIs).  

One of the key features of the PSD regulations is the impact it has had on cross-border transactions. Current cross-border transactions are often slow, expensive, and lack transparency. With PSD3, the EU aims to address these issues by enforcing rules that will ensure speedy, affordable and transparent cross border transactions.  

This PSD3 proposal system is designed to enhance consumer protection, ensure secure payments, and ultimately foster innovation and competition within the fintech space. Most importantly, it also encompasses a few measures aimed at ensuring adequate financial inclusion. 

To mitigate fragmentation throughout Europe, the commission made the decision to consolidate the remaining aspects into a Payment Services Regulation. This approach was chosen to circumvent the need for the transformation process and the subsequent interpretation into national law. 

With Tavas from Macro Global, deploy the optimal combination of Open Banking APIs and technologies utilising the prevailing Open Banking ecosystem to accomplish the desired business outcomes. 

New Regulatory Bodies of PSD3

Among many other changes, the Third Payment services Directives introduced new PSD3 regulatory bodies, each with their mandate and function. These include the Financial Instruments Service Provider (FISP), the Financial Innovation Databases (FIDA), and the Payment Systems Regulator (PSR). 

FIDA: The Promoter of Digital Economy

Financial Innovation Databases (FIDA) is a legislative proposal, PSD3 regulatory body, made by the European Commission for a framework governing access to financial data. This framework will create explicit rights and obligations to regulate the sharing of consumer data in the financial industry beyond payment accounts. Once ratified by EU institutions, this framework would pave the way for Open Finance by encouraging innovation in the financial services industry and increasing competitiveness. 

The European Commission’s goal with FIDA is to integrate Europe’s financial sector into the digital economy. Although the extent of the data covered by this proposal could potentially be expanded, it is a step in the right direction towards enabling the creation of new business cases and cutting-edge solutions for all value chain participants. 

Payment Services Regulation:  Strong Ally of PSD3 Regulations 

The European commission’s Payment Services Regulation (PSR) is closely associated with PSD3 and has binding legal effect across all EU Member States without the necessity for implementation in national laws. 

Recent guidelines from the European Commission state that PSR must offer clear guidance on the disclosure of terms and information needed to make payments. 

By expanding IBAN verification, refining SCA rules, and strengthening fraud information transmission amongst PSPs, PSR in combination with ‘PSD3 regulations and compliance’ hope to increase user protection and consumer trust. 

Open Banking competitiveness is enhanced by mandating dedicated data access interfaces for ASPSPs (Account Servicing Payment Service Providers), outlining data interface specifications, and introducing dashboards for consumers to monitor what data access privileges they have offered and to whom, and to withdraw access. 

This significant PSD3 proposal increases the number of non-bank PSPs that can open a bank account for a Payment Institution/Electronic Money Institution (PI/EMI) and give them the option of direct involvement in all payment systems to improve access to data. 

PSR also replaces unclear elements of PSD2, strengthens penalty provisions, and consolidates E-money legislation into PSD3 and PSR to improve enforcement and harmonise implementation. 

The PSR is beneficial for PSPs as it unifies the legal framework within which they may conduct business throughout the entire EEA. 

Tavas’ cloud-based, mature Open Banking compliance solution will help you enter new markets faster by exploiting the advantages of Open Banking. 

Financial Infrastructure Security Protocol (FISP): Steering PSD3 Governance  

The Financial Infrastructure Security Protocol (FISP) is an integral part of the revised Payment Services Regulations (PSD3) and serves as the backbone for operational security. FISP focuses on security guidelines, data handling principles, and operational practices, strengthening the payment service directives. 

FISP harmonizes security measures across payment service providers, eliminating potential cyber threats and ensuring higher levels of financial data protection for consumers. This alignment eliminates potential cyber threats and increases consumer trust and confidence. Banks and FinTech companies are the soldiers on the frontline under PSD3 directive, and the implementation of FISP requires these institutions to enhance their security practices, increasing consumer trust and confidence. 

The new regulatory bodies of PSD3 represent a landmark evolution in the regulation of payment services, enhancing the security of money transactions and instilling customer trust. Understanding the finer aspects of PSD3 regulations with frameworks in place, we can rest assured that our payment transactions are safe and secure. 

Tavas, Macro Global’s Open Banking solution, builds confidence between banks and TPPs, helping them conform more closely to Open Banking regulations, while also ensuring that their customers’ identities are protected.

Highlights of EU-PSD3 Proposals

The EU Commission has proposed several highlights in its payments proposals, known as PSR1. These proposals aim to harmonize the payments market across all EU member states and improve the quality of open banking services. Some of the key highlights include: 

Transformation of PSD2 to PSR1 

The PSD2 revised regulations have been transformed into PSR1, aiming to broaden the path from open banking to inclusive banking, fostering data sharing and a more accessible and equitable financial system.  

It offers enhanced user experience, security-reinforced data sharing, and a competitive landscape by streamlining data access. The transformation unwinds opportunities and challenges but promises a significant leap forward in the realm of financial services by redefining data sharing norms and bringing us closer to a more inclusive, user-focused world of finance. 

Better APIs for Open Banking 

Introduces new rules on API performance and functionality to ensure a higher quality of implementation across banks. It also requires the sharing of the account holder’s name with payment initiation service providers (PISPs) before initiating a payment. 

Fraud Prevention Via IBAN and Name Matching  

PSR1 extends the requirement for IBAN, and name checks to all forms of credit transfers, reducing cases of fraud or misdirected payments.  

Integration of e-money and Payment Institutions 

PSD3 merges the licensing and authorisation regimes of PSD2 and the E-Money Directive, creating a clearer and simpler framework for e-money and payment institutions.  

Direct Access to Payment Infrastructure for Fintechs 

PSR1 allows payment and e-money institutions to directly access payment settlement infrastructure, reducing their dependence on banking partners and promoting competition and innovation. 

Simplified Authentication 

The revised Payment Services Directives prohibit obstacles to open banking and requires authentication journeys to be as seamless as online banking. Users will no longer have to go through lengthy authentication processes or type in their own lengthy IBAN for payments. 

Re-authorisation for Payment Firms 

Payment and e-money institutions will need to seek re-authorisation within 24 months (about 2 years) of the new rules coming into force to ensure their fitness to operate and protect consumers and businesses. 

Overall, PSD3 proposals aims to improve the payments market, enhance open banking services, and create a more efficient and secure payment ecosystem in the EU. 

We, with Tavas, diligently observe and execute the modifications that impact the Open Banking Regulatory framework in a consistent manner, to assure our preparedness for the future and maintain a competitive edge among the industry counterparts.

PSD3: Modernising the Payment and Fintech Sector

PSD3 is a significant milestone in the fintech sector, offering transformative potential for the payment industry. It provides enhanced protection against fraud and sensitive data misuse, enhancing consumer confidence in electronic transactions.  

PSD3 also promotes innovation by mandating open banking regulations and stimulating a healthy competitive environment. It also promotes standardization and interoperability across the banking sector, ensuring seamless and user-friendly experiences for consumers.  

Additionally, PSD3 regulations pave the way for a more competitive landscape in the payment services market, with charges associated with electronic transactions expected to decline significantly.  

Overall, PSD3 proposals play a pivotal role in redefining the fintech and payment industry by bolstering security, encouraging innovation, promoting standardization, and reducing costs, resulting in a modernized and more efficient payments landscape. 

The Tavas, Open Banking Product Suite and Solutions, provide financial institutions with the ability to safeguard their brand, reputation, and business operations from fraud and financial risks. Additionally, these solutions enable the secure handling of payment service user data through the implementation of multi-factor authentication.

The Future: PSD3 Regulation

PSD3 regulations are projected to be an important catalyst in the fintech sector, which is undergoing a constant process of transition and modernization. The ramifications of PSD3’s integration with cutting-edge technology like AI (Artificial Intelligence), blockchain, and machine learning are vast.  

The potential benefits of this groundbreaking law are definitely thrilling, but the route to full adoption may be hard and challenging. Although PSD3 regulations and compliance are currently in their early phases, it is anticipated that they will be finalised by mid-2025 and put into action by 2026.  

Macro Global’s Open Banking solution, Tavas, equips the financial institution with the tools it needs to provide a seamless customer experience and gives it the agility to seize emerging opportunities as it prepares for the next generation of banking. 

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