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PSD3: The European Union unveils new open banking rules

PSD2 was transformative for fintech in the European Union and beyond, helping to usher in open banking in the UK and around the world. New rules could be just as revolutionary.

Mairead McGuinness

The European Commission

The rules are the rules, that is until they get updated. 

Open banking has been given a potential new set of rules after the European Commission today released its proposals to update the rules governing payments.

The revised Payment Services Directive proposal (which will replace PSD2 with PSD3) comes alongside the new Financial Data Access (FIDA) proposed rules as well as separate Payment Services Regulation (PSR).  

Overall, the new package of measures will have far-reaching consequences for banks and fintechs just as PSD2 has been key to the open banking industry over the past five years or so.

It includes measures aimed at increasing the baseline adoption, functionality and performance of open banking Application Programming Interfaces but is much more ambitious in scope than existing regulation.

“Today we are taking concrete steps to modernise not only the EU’s retail payments industry but the financial service sector as a whole. In doing so, we are putting the best interests of citizens and consumers at the heart of financial services. In the EU’s growing data economy, every interaction in finance creates new data,” said Mairead McGuinness, Commissioner for Financial Services, Financial Stability and Capital Markets Union. 

McGuinness, who yesterday inked a financial services cooperation pact with the UK, says it is, therefore, vital consumers remain in control of their payments and data.

“Today we are proposing a set of measures including enhanced protection for consumers making electronic payments in the EU and improved criteria to prevent and remedy payment fraud. This proposal will ensure customers and businesses benefit from more innovative payment and financial service options, whilst being confident that these are offered in a safe, transparent and secure way,” she added.

New rules, new goals

The EU has set out six major goals in the proposal. 

These are: combating and mitigating payment fraud, improving consumer rights, further levelling the playing field between banks and non-banks in terms of access to payment systems, boosting open banking, improving the availability of cash in shops and via ATMs and making enforcement of the rules more robust.

It comes at a time of increasing digitalisation of financial services in the EU. 

Electronic payments in the EU, for example, have soared in recent years, with the pandemic accelerating a long-term trend. In 2021 the volume of electronic payments hit €240trn, compared with €184.2 rn in 2017). 

Todd Clyde, CEO of Token.io,  an account-to-account payment infrastructure provider, says the publication of the European Commission’s proposals for a revised regulatory framework for payment services is an exciting development for the payments industry. 

This is because, he says, it demonstrates a commitment to creating a stronger foundation and infrastructure for open banking-powered payments solutions across the European market. 

“We are particularly pleased to see the European Commission’s proposal include measures aimed at increasing the baseline adoption, functionality and performance of open banking Application Programming Interfaces (APIs).” 

“API-based interfaces provide the most secure and performant way for Third Party Providers (TPPs) like Token.io to interface with banks, and ultimately support the delivery of innovative services and better outcomes for end users.” 

“Further, we believe formalising the explicit minimum baseline functionality required from banks’ open banking interfaces will help level-up the overall performance of the ecosystem.”

“We also welcome the European Commission’s statement that banks and TPPs are free to establish commercial arrangements for ‘premium’ APIs, through which enhanced functionality and value-added services beyond those required under regulation can be provided.”

“Premium APIs, built on equitable commercial models, have the potential to enable the development of higher-quality and more innovative end-user propositions (such as dynamic recurring payments and payment guarantees) and will support the wider adoption of open-banking based payment propositions.

“Both the PSR/PSD3 and Financial Data Access (FIDA) proposals are setting in motion a future for open finance in Europe by unlocking possibilities for innovation across the financial services and other industries.”

However, not all are happy with the proposals which include the potential for banks to be able to charge for access to data.

The EU says it wants to avoid “radical changes” that could destabilise the open banking market or increase implementation costs but buried deep in the report is the ability for banks to charge for data access, adding an extra layer of friction to adoption.

“PSD2 promised a fairer financial landscape, where consumers could easily switch to better options and banks would compete on quality and value. Yet traditional banks have shamelessly undermined the essence of PSD2, using consumers' own data to lock them into poor-value services,” said a spokesperson for Klarna.

“So the EU's reboot to stop this backsliding and empower consumers is great news. However, the Financial Data Access Proposal's provision allowing banks to charge for accessing consumer data raises serious concerns. Personal data belongs to the consumer and should not be used as an expensive fence to lock them into worse service and higher fees. Data is either free or not; it cannot be free at a price," they added.

There is some further nuance here, the proposals state that data holders i.e banks can ask for “reasonable compensation” from data users for making customer data available to them. 

Although it doesn’t have any guidance on what this but does say where the data user is an SME (e.g. a small FinTech firm),  compensation can’t exceed the costs “directly attributable to the individual data request”.

“It can in no way be considered as a payment for the data itself, but rather as compensation for the costs of building and maintaining the technical infrastructure required for accessing high-quality data that can be used by data users to add further value for the financial sector customers.”

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