Deciphering Payment Services Directive (PSD)
The Payment Services Directive (PSD) is a European Union (EU) regulation to standardize and regulate payment services across the European Economic Area (EEA). It consists of directives issued by the European Commission to create a single market for payments, foster competition, and improve consumer protection in the financial sector. PSD sets standards for companies and organizations, such as banks and online payment platforms, offering payment services.
Let us explore PSD in detail!
Why was PSD drafted?
It was created to:
· Harmonize Regulation: To establish rules for payment services across the EU to create a unified market.
· Foster Competition: To encourage fair competition among payment service providers, fostering innovation and better services for consumers.
· Improve Consumer Protection: To implement measures to safeguard consumers in electronic transactions, ensuring transparent information and liability rules.
· Facilitate Cross-Border Payments: To introduce the concept of passporting, allowing licensed payment institutions to operate across EU member states without the need for separate licenses.
· Adapt to Technological Changes: To address the evolving landscape of payment services, incorporating new technologies and services into the regulatory framework.
· Increase Security: To implement security measures, such as Strong Customer Authentication (SCA), to enhance the safety of electronic payment transactions.
· Define Payment Service Provider Roles: To clearly define the roles and responsibilities of Payment Service Providers (PSPs) to ensure clarity and accountability in the industry.
PSD’s Evolution:
To date, PSD 1 (Drafted in 2007) and PSD 2 (Drafted in 2015) have been enacted.
Let’s explore their provisions in detail!
PSD 1:
PSD 1 was the first set of regulations issued by the EU to standardize and regulate payment services across the EEA. It was adopted in 2007 and implemented by EU member states in November 2009.
The primary objectives of PSD 1 were to establish a legal framework for payment services, enhance consumer protection, and promote the development of a single market for payments within the EU.
Key Provisions of PSD 1:
- Payment Service Providers (PSPs): Introduced the concept of Payment Service Providers, categorizing entities such as banks and non-bank institutions that offer payment services.
- Passporting: This allows licensed PSPs to operate and offer their services across EU member states without the need for separate licenses in each jurisdiction.
- Consumer Protection: Included measures aimed at protecting consumers in electronic payment transactions. It outlined the requirements for clear and comprehensive information on payment transactions, as well as rules regarding liability for unauthorized or incorrectly executed transactions.
- Transparency: The directive promoted transparency by clear and easily understandable information on pricing and conditions for payment services. This ensures that consumers are well-informed about the costs and terms associated with different payment methods.
- Scope of Payment Services: It defined and classified various payment services, including credit transfers, direct debits, and payment card transactions.
- Dispute Resolution: The directive established the mechanisms for resolving disputes related to payment services, providing a framework for addressing issues that may arise between consumers and payment service providers.
In short, PSD 1 laid the groundwork for subsequent developments in the regulation of payment services in the EU, including the introduction of Payment Services Directive 2 (PSD 2).
PSD 2:
Before knowing about the objectives of PSD 2, let us know why it was proposed and implemented after PSD 1.
Why was PSD 2 created?
PSD 2 expanded on the regulatory framework to address new challenges and opportunities in the evolving financial landscape.
The European Commission proposed revisions to PSD1 in July 2013 to modernize and accommodate new payment services like payment initiation services to offer more affordable alternatives for internet payments. This expansion increased transparency, innovation, and security in the single market while creating a level playing field among payment service providers.
Key Provisions of PSD 2:
Enforced in January 2018, PSD2 drives innovation, bolsters security, and harmonizes the European payment services market. Revised definitions promoted fairness among providers and strengthened consumer protection in payments, introducing new services like AISP* and PISP* to stimulate innovation.
- Increased Security: PSD 2 introduced Strong Customer Authentication (SCA) requirements to enhance the security of electronic transactions. SCA involves the use of two or more authentication factors to verify the identity of the payer.
- Open Banking and Third-Party Access: One of the central features of PSD 2 is the promotion of open banking, where banks are required to provide access to licensed third-party providers to customer account information.
- Consumer Protection and Enhanced Rights: PSD 2 strengthens consumer protection by introducing measures such as improved refund rights for unauthorized transactions and increased transparency in payment services. It enhances consumer control over their financial data and transactions.
- Transparency and Information Sharing: The directive emphasizes transparency by requiring payment service providers to provide clear and comprehensive information on transaction details, fees, and exchange rates. This helps ensure that consumers are well-informed about the costs associated with payment services.
- Harmonization of Cross-Border Payments: PSD 2 aims to further facilitate cross-border payments within the EU by harmonizing the rules and procedures for such transactions.
- Regulation of New Payment Services: PSD 2 regulates new types of payment services, including Account Information Services (AIS) and Payment Initiation Services (PIS), recognizing, and addressing the evolving landscape of the payment industry.
- Global Competitiveness: By aligning European payment regulations with global standards, PSD 2 enhances the competitiveness of European payment services on a global scale.
Overall, PSD 2 is designed to adapt the regulatory framework to the technological advancements and changes in the payments industry, fostering a more secure, innovative, and competitive landscape for payment services in the EU.
Difference between PSD 1 and PSD 2
The main differences between PSD1 and PSD2 includes:
1. Scope and Coverage:
- PSD1: Covers traditional payment services and providers.
- PSD2: Widens the scope to include new services (open Banking), and players, and extends the coverage to certain payment instruments issued by providers.
2. Access to Payment Accounts:
- PSD1: Does not specifically address access to payment accounts.
- PSD2: Enables access to payment accounts, allowing third-party providers to access user’s account information and initiate payments.
3. Transactions with Third Countries:
- PSD1: Does not explicitly address transactions with third countries.
- PSD2: Includes provisions for “one-leg out transactions” (transactions where one of the payment service providers is outside of the EU ).
4. Central Register:
- PSD1: Does not mandate the creation of a central register.
- PSD2: Requires the European Banking Authority (EBA) to develop a central register of authorized and registered payment institutions.
5. Enhanced Security Measures:
- PSD1: Does not specifically mandate strong customer authentication (SCA).
- PSD2: Introduced SCA as a rule, requiring payment service providers, including banks, to implement enhanced security measures for electronic payment transactions.
Current Landscape of PSD:
On the 28th of June 2023, the EC published its draft proposal of a payment services package that will replace the PSD2 in the future.
The following are key objectives proposed to be implemented in PSD 3:
- Address market fragmentation and ‘Forum shopping’ in the EU through enhanced enforcement rules.
- Enhance protection for Payment Service Users (PSUs) against fraud and foster their confidence in payments.
- Boost competitiveness in the Payment landscape by safeguarding Open Banking Service Providers and reducing their disadvantage against banks.
- Combat economic inefficiencies and discrimination for non-bank Payment Service Providers (PSPs) by improving their access to payment systems and bank accounts.
Conclusion
In conclusion, the Payment Services Directive (PSD) has played a pivotal role in shaping the landscape of financial services, fostering innovation, and enhancing consumer protection. PSD2, with its emphasis on open banking and increased security measures, has undeniably brought several advantages to the industry. The enhanced competition, improved user experience, and heightened security protocols have collectively contributed to a more robust and dynamic financial ecosystem.
However, it’s crucial to acknowledge the challenges that accompany the PSD2 implementation. The concerns regarding data privacy, cybersecurity, and the potential for increased market concentration have sparked debates and raised important questions about the balance between innovation and security. Looking ahead, the anticipated implementation of PSD 3 holds the promise of addressing those concerns and further refining the regulatory framework.
Ahem!
Join us in our upcoming blog as we delve into the realm of Strong Customer Authentication (SCA), a pivotal security aspect implemented in PSD2.
