The upcoming PSD3 - a new direction for Europe?

While PSD2 has introduced several positive changes to the payments industry and society as a whole, the payment system and market conditions have undergone rapid transformations over the past decade. Consequently, it is evident that modification and more clarity are needed. An informative indication of what lies ahead can be found in an opinion issued by the European Banking Authority (EBA) in June 2022. This opinion outlines the primary areas of focus for the next version of the Payment Services Directive and is intended to guide the European Commission's review of PSD2, which is anticipated to take place in the upcoming years.

While the opinion includes over 200 proposals, the significant areas of focus for a substantial revision are as follows:

1. An increased scope: Merging the regulation with the Electronic Money Directive, taking into account the coming Digital Identity Wallets, and including Open Finance. 
2. Enhanced consumer protection: The EBA recommends that the PSD3 should introduce stronger consumer protection measures, including better disclosure requirements and more comprehensive dispute resolution mechanisms.
3. Increased security: The EBA calls for the PSD3 to strengthen the security of payment transactions, particularly in relation to fraud prevention and detection.
4. Improved cross-border payments: The EBA suggests that the PSD3 should aim to remove barriers to cross-border payments within the EU, including addressing issues related to currency conversion and exchange rate transparency.
5. Support for innovation: The EBA argues that the PSD3 should create an environment that supports innovation in the payment sector, particularly by encouraging the use of new technologies such as blockchain and artificial intelligence.
6. More harmonization: The EBA recommends that the PSD3 should aim to further harmonize the regulation of payment services across the EU, in order to create a more level playing field for payment service providers and to facilitate cross-border competition.

After carefully analyzing the opinion, there is a concern that the focus of PSD3 might be too narrow, addressing specific issues with PSD2 rather than considering the broader market changes. In my opinion, the most crucial aspect of the upcoming PSD3 is its potential to shape the future digital ecosystem of Europe under the guidance of the EU Commission. The Commission's jurisdiction over emerging technologies, such as digital identity wallets, presents opportunities beyond mere payment authorization and account opening. Drawing from experiences in the Nordics, we have observed that once robust customer authentication extends beyond payments, it unlocks new business models and becomes pervasive in society. Any scenario where identification is required, whether it involves private companies or government entities, is likely to adopt this type of authentication if it is available. Apart from facilitating innovative business models and service offerings, this approach offers significant societal savings by automating the labour-intensive identity verification processes. However, it is important to acknowledge the existence of significant risks, which we have previously discussed.

Therefore, a future PSD3 should consider requiring a high level of security that enables the authentication mechanisms to be employed in various contexts beyond payments. This might involve introducing new data protection and security requirements or reinforcing existing regulations to empower consumers with greater control over their data. By prioritizing consumer protection and data privacy, we can foster increased trust and confidence in the payments industry, benefiting both consumers and businesses. It is crucial to recognize that the scope of this change extends beyond payments and will impact every aspect of people's lives. Hence, it is essential to start planning for it now. Perhaps, it would be prudent to move away from referring to it solely as a new Payment Services Directive and instead adopt a broader name like the "Digital Europe Directive," where payments constitute only a fraction of its scope.

Looking ahead, the next step in this process is expected to occur this summer, with the European Commission providing further updates. If you're interested in staying informed, I recommend following us on LinkedIn for real-time information as it becomes available.