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The financial landscape is constantly evolving, and as we approach the implementation of PSD3 (Payment Services Directive 3), payment services firms in the UK are gearing up for significant changes.

Building on the foundation laid by its predecessors, PSD3 aims to enhance consumer protection, foster innovation, and streamline payment processes.

In the European Commission’s words’ ‘these rules will further improve consumer protection and competition in electronic payments and will empower consumers to share their data in a secure way so that they can get a wider range of better and cheaper financial products and services.  These proposals place consumers’ interests, competition, security and trust at their centre.’

Due to regime changes, payment and e-money institutions may be required to seek re-authorisation to ensure compliance with the new requirements, aiming to uphold the safety of consumers and businesses.

Here, we delve into the key features of PSD3 and explore its potential impact on payment services firms in the United Kingdom.

Understanding PSD3

PSD3 is the latest iteration of the Payment Services Directive, a regulatory framework established by the European Union to govern payment services and payment service providers. The directive aims to create a level playing field across the EU, ensuring a consistent and secure payment environment.

The finalised version is expected to be ready by late 2024 and might take effect around 2026.

Key Features of PSD3

• Expanded Scope. PSD3 is expected to broaden its scope to cover new types of payment services, reflecting the evolving nature of the financial industry. This could include emerging technologies like blockchain-based payments and virtual currencies.
• Enhanced Security Measures. With the growing concern over cybersecurity, PSD3 is likely to introduce more robust security measures. Payment service providers will need to implement stronger customer authentication (SCA) processes to protect customers from fraud and unauthorised transactions. It will also incorporate stricter rules on how to access payment systems and account information.
• Open Banking Evolution. Building upon the foundation laid by PSD2, PSD3 may further advance the concept of open banking. This could mean increased access to financial data for third-party providers, fostering greater competition and innovation in the financial sector.
• Consumer Rights and Protection. PSD3 is expected to reinforce consumer rights and protection. This could involve clearer terms and conditions, better dispute resolution mechanisms, and increased transparency in payment services.
• Cross-Border Transactions. Allowing for more efficient cross-border transactions is another focal point of PSD3. Payment service providers may benefit from standardised processes, reducing the complexities associated with international payments.

Impact on UK Payment Services Firms:

Although the UK is no longer formally bound to follow the new PSD3, the international nature of the payment industry means that it is likely the UK will be under pressure to review its own rules and align with the PSD3 requirements. We expect the regulators and legislators in the UK to study the European proposals very carefully with a view to considering whether changes are needed in the UK.

Some areas where the PSD3 might impact the UK are listed below:

• Adaptation to Technological Changes. UK payment services firms will need to adapt to the technological changes mandated by PSD3. This may involve updating existing systems and infrastructure to accommodate new payment methods and security measures.
• Compliance Costs. Compliance with the new directive may incur additional costs for payment services firms. Investing in technology, staff training, and regulatory compliance measures will be essential to ensure a smooth transition.
• Innovation Opportunities. On the positive side, PSD3 presents numerous opportunities for innovation. Firms that can embrace new technologies and adapt swiftly to the changing landscape may find themselves at a competitive advantage.
• Collaboration and Partnerships. Collaboration between traditional financial institutions and fintech companies is likely to increase. Payment services firms may seek partnerships to leverage technological advancements and enhance their service offerings.
• Re-authorisation for payment firms. As a result of changes in the regime, payment, and e-money institutions might need to seek re-authorisation to ensure all firms are fit to operate under the new requirements and ultimately to keep consumers and businesses safe.

As PSD3 looms on the horizon, UK payment services firms face both challenges and opportunities. While the directive introduces new compliance requirements and potential costs, it also lays the groundwork for a more secure, transparent, and innovative payment ecosystem. Firms that can navigate these changes effectively and embrace the spirit of PSD3 may find themselves well positioned for success in the evolving world of payments.

Author - Alejandra Gorria

How can we help you? 

We can help you navigate these changes and be sure that you are prepared, Thistle Initiatives has supported payment firms for over 10 years as a trusted compliance and regulatory advisor. In addition to assisting, you as and when, our team of specialists can serve as your right hand in meeting and complying with FCA regulations. We understand the importance of staying up-to-date and compliant and are dedicated to providing the guidance and support needed to do so.

Contact our specialist team now to schedule a free consultation. Get in touch with us by calling 020 7436 0630 or sending an email to info@thistleinitiatives.co.uk.