Unlocking the Future of Payments: A Deep Dive into PSD3

Credit Somya Maheshwari Debasis Chakraborty

Imagine a world where managing your money is as effortless as swiping your phone—where built-in security and cutting-edge financial innovation are just a tap away. As businesses and consumers navigate this ever-changing landscape, staying updated with the latest payment regulations is not just a necessity—it is an opportunity.?

Enter PSD3, the Third Payment Services Directive, and the new Payment Services Regulation (PSR), the European Union's groundbreaking directives set to reshape the payment industry.

Launched as a refinement of PSD2, which streamlined services and promoted competition, PSD3 and PSR take it a step further. These regulations aim to enhance security, drive innovation, and ensure fairness in the payment’s ecosystem.

What is PSR?

The Payment Services Regulation (PSR) has been part of the European Union's efforts to create a safer and more efficient payment system for consumers and businesses. The original PSR came into effect in 2007, followed by an updated version, PSR2, in 2018. These regulations aimed to improve the transparency and security of electronic payments, while also encouraging innovation, such as enabling "open banking," where consumers can share financial data securely with third-party apps.

In June 2023, the European Commission proposed a new update to the PSR. This update focuses even more on protecting consumers and making sure payment services are consistent across all EU countries. The goal is to adapt the rules to the growing digital economy and ensure that people can use payment services safely, no matter where they are in the EU.

Here’s what the new PSR proposal includes:

1. Making payment services clearer: The new regulation will ensure that payment services are explained in simple, easy-to-understand terms, making it easier for people to know exactly what they’re signing up for.
2. Setting clear rules: It will provide clear guidelines for both payment service providers (like banks or payment apps) and users. This includes improving "open banking," allowing people to securely share their financial data with trusted apps for better services.

Once the new PSR is approved, it will automatically apply across all EU countries without needing to be individually implemented by each nation. This ensures a consistent approach to consumer protection and allows businesses to operate smoothly across the EU.

What is PSD3?

The Payment Services Directive (PSD) is a set of rules created by the European Union (EU) to regulate how payments are made and handled within Europe. The goal has always been to make payments safer, easier, and more efficient while promoting competition and innovation in the financial sector.

• PSD1 was introduced in 2007, laying the groundwork for a harmonized EU payment market.
• PSD2, released in 2015, expanded on this by encouraging open banking, where consumers could securely share their financial data with third-party services (like budgeting apps) to get better products and services. PSD2 also improved consumer protection and made payments safer.

Now, the European Commission is planning to release PSD3 in the first half of 2025. This is the next step in enhancing the payment services system in Europe.

Here’s what PSD3 aims to do in simple terms:

1. Protect consumers’ rights and personal data: PSD3 will strengthen rules to keep one’s personal information safe and secure when one uses payment services, whether through a bank or a third-party app.
2. Encourage competition: By making it easier for new companies to enter the payment industry, PSD3 will promote more innovation. This means consumers will have access to a wider range of financial products and services, with more choices on how to manage their money.

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1. Combat and mitigate payments fraud by introducing more robust measures for fraud prevention, including enabling payment service providers to share fraud-related information, enhancing the strong customer authentication rules and extending refund rights of consumers who fall victim to fraud.
2. Expand consumer rights and protections by providing customers more control over who accesses their data and for what purpose, improving transparency on their account statements and providing more transparent information on ATM charges.
3. Level the playing field between banks and non-banks by standardizing electronic payment laws and improving access to payment systems to all EU payment systems for non-bank PSPs to better foster innovation and competition.
4. Improve the function of open banking by removing remaining obstacles to open banking services, streamlining cross-border payments to improve parity in efficiency and security between domestic and cross-border transactions.
5. Improve the availability of cash in shops and via ATMs by allowing retailers to provide cash services to customers without requiring a purchase and clarifying the rules for independent ATM operators.
6. Strengthen harmonization and enforcement of payment rules, including updating the authorization, supervision framework and regulation for non-bank PSPs to ensure a level playing field across the EU.

What will PSD3 and PSR mean for consumers?

From a consumer's point of view, the most important parts of PSD3 and PSR are:

• Better security checks: Stronger customer authentication will make online purchases safer.
• Tighter rules on who can access your account: There will be stricter controls on who can see and use one’s payment and account information.
• Improved protection for your rights and personal data: Consumers will have more safeguards to keep their personal information safe.
• A permission dashboard: One will be able to easily see and manage which companies or apps one has allowed to access your financial data through open banking.
• More competition: This will lead to more choices, with new and better payment services for consumers.

What will PSD3 and PSR mean for banks?

PSD3 and PSR will make Open Banking even stronger, allowing financial services to be built into more third-party apps and tools, making banking more open and less dependent on traditional banks. These new regulations will set new expectations for banks, including:

• Stricter rules for better technology: Banks will need to improve their systems to ensure smoother, faster service.
• Harsher penalties for non-compliance: Banks will face tougher punishments if they don't follow the rules.
• No more country-specific differences: The same rules will apply across all EU countries, making things more consistent and easier to implement.

While these changes may be challenging for banks, the ultimate goal is to provide customers with better and more innovative services, which is a positive step forward.

PSD2 vs PSD3

Banks, payment service providers, and other organizations affected by the EU's Payment Services Directives can think of PSD3 as a continuation of PSD2, rather than a major shake-up of the current payment system in Europe.

Here are the main differences between PSD2 and PSD3:

• Stronger security checks (SCA): PSD3 will require even tougher authentication to make payments safer.
• Better fraud protection: Especially against scams like “spoofing,” where fraudsters pretend to be someone else.
• Improved data sharing: To make open banking more efficient, helping third-party apps work better with your bank.
• More consumer rights: Including clearer communication, better transparency on fees and statements, and stronger protections for your money.

PSD3 aims to make the payment industry better for everyone—businesses, banks, payment services, fintech companies, and especially consumers. It promises more transparency, stronger security, and better protection for consumers, further positioning the EU as a global leader in regulating and innovating financial services.

Product Marketing Under PSD3

With PSD3’s new features, product marketing strategies will need to adapt to the changing landscape. Here’s how businesses can leverage PSD3 to enhance their marketing efforts:

1. Highlight Security Features: Emphasize how PSD3’s enhanced security measures protect user data and transactions. Use clear and reassuring messaging about data protection and fraud prevention. For example, a budgeting app could market itself as “The Most Secure Way to Manage Your Finances” by showcasing its compliance with PSD3’s stringent security requirements.
2. Showcase Seamless Integration: PSD3’s improved data portability and integration capabilities allow for smoother experiences across different financial services. A personal finance management tool could advertise its ability to seamlessly integrate with multiple bank accounts and other financial apps, making money management effortless.
3. Focus on Transparency: Leverage the increased transparency requirements of PSD3 to demonstrate clear pricing, fees, and terms. Make it easy for users to understand what they’re paying for and how they benefit.

Monetization Strategies with PSD3

As PSD3 paves the way for innovation, it also opens up new opportunities for monetization. Here’s how businesses can capitalize on the changes:

1. Subscription Models: With improved services, companies can introduce subscription models for advanced features. This could include enhanced analytics, additional security layers, or premium customer support.
2. Partnerships and Ecosystem Development: PSD3 encourages collaboration between various financial services. Form partnerships to offer bundled services or integrate with other platforms to provide a comprehensive solution.
3. Freemium to Paid Conversion: Offer basic features for free and provide an option for users to upgrade to a paid version with additional functionalities. PSD3’s focus on innovation can help one to develop compelling premium features.

What’s Next?

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PSD3 and PSR are a significant update to Europe’s payment rules. In preparation for the revised rules, platforms and marketplaces will have to review the use of exemptions such as the commercial exemption, if applicable, or continue to rely on regulated payment providers to offer payment solutions.

In light of PSD3/PSR and any upcoming EBA guidance, businesses will also have to continuously review requirements for SCA. Payment providers that have built SCA updates into their authentication engine can help with optimizing the number of payments that require SCA and maximizing the success rate of two-factor authentication while minimizing fraud.

During the course of 2024 and 2025, the European Commission, the European Parliament, and EU Member States will finalize the new rules. PSD3 will subsequently have to be transposed into national law by the EU Member States.?