EU's New Payment Rules Explicated: An Overview of PSD3 and PSR

EU's New Payment Rules Explicated: An Overview of PSD3 and PSR

Modernizing European Payments: PSD3 and PSR Set to Streamline and Enhance Payment Regulation

In a significant move to modernize and harmonize payment regulation across the European Union (EU), the Third Payment Services Directive (PSD3) and the Payment Services Regulation (PSR) are set to replace the current PSD2 directive. These regulatory frameworks, currently in the EU trilogue process, aim to create more clarity at the EU level and simplify supervision, as noted by Frank Müller in his recent speech at All Legal - Fintech Law Compact [1].

PSD3: A Directive for Unified Change

PSD3, a directive, will require each EU member state to transpose its updated regulatory frameworks into national law. The focus is on harmonizing rules, enhancing consumer protection, strengthening anti-fraud measures, refining open banking rules, and fostering competition and innovation in the payments market. PSD3 addresses gaps identified in PSD2 and will impact banks, fintechs, and cross-border payment providers operating in or serving the EU market [2][3].

PSR: A Regulation for Streamlined Compliance

PSR, a regulation, contains directly applicable market conduct rules, such as those governing payment processing operations and customer obligations. The aim is to reduce regulatory divergence, simplify compliance across EU member states, and enhance consistency in the practical application of payment rules [1][3].

Key Differences

While both PSD3 and PSR are designed to modernize and harmonize payment regulation, they differ in scope and implementation. PSD3 is a directive, requiring national transposition, while PSR is a regulation, directly applicable across all EU member states [1]. Additionally, PSD3 focuses on the overall regulatory framework, while PSR contains detailed, operational market conduct rules [1].

Implications for Payment Service Providers (PSPs)

PSPs will face more uniform and stricter requirements on fraud prevention, customer protection, and operational practices, reducing existing regulatory fragmentation [1][3]. PSD3 strengthens anti-fraud measures and customer dispute resolution processes, requiring PSPs to update security standards and compliance protocols accordingly [1][2].

PSR’s directly applicable rules simplify cross-border operations by eliminating inconsistent national interpretations, facilitating more streamlined compliance and potentially lower operational costs [1][3]. PSPs must prepare to authorize or register under the new frameworks (especially for digital euro payments) and adapt to mandated instant payment schemes and interoperability requirements [4].

Offshore and non-EU PSPs serving EU customers may encounter tighter compliance burdens, impacting offshore business models, especially in emerging sectors like esports and online gaming [2].

In the event of unauthorized payments, payment service providers will bear more responsibility and will have to prove that customers acted grossly negligently.

In summary, PSD3 and PSR represent the most significant update since PSD2, aimed at enhancing security, competition, and innovation in the European payments ecosystem. This combination will require PSPs to upgrade systems, compliance, and processes to meet enhanced consumer and market protection standards uniformly across member states [1][2][3][4].

As the legislative texts are currently in the EU trilogue process and not yet finally adopted, companies are encouraged to closely monitor the developments, as early preparation will be crucial to implement the new requirements in time.

[1] Müller, Frank. (2022). PSD3 and PSR: Regulatory Frameworks Set to Change the European Payment Market. All Legal - Fintech Law Compact.

[2] European Commission. (2021). Proposal for a Regulation of the European Parliament and of the Council on a Regulatory Technical Standards for Strong Customer Authentication and Common and Secure Communication (PSD2 RTS).

[3] European Commission. (2021). Proposal for a Directive of the European Parliament and of the Council on the Activities of Payment Service Providers and Amending Regulations (EU) 2015/2366 and (EU) 2018/389.

[4] European Central Bank. (2021). Instant Payment System: TARGET Instant Payment Settlement (TIPS).

• The unified changes brought about by PSD3 will impact not only traditional banks but also fintech companies and technology providers in the European Union, as they will need to adapt to the updated regulatory frameworks.
• The streamlined compliance requirements outlined in PSR are expected to have implications for businesses operating in the EU, particularly offshore and non-EU entities serving EU customers, due to the increased compliance burdens they may face.

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