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The European Commission has published its payments, open finance and digital euro legislation to optimism from payments insiders.
“Today we are taking concrete steps to modernise not only the EU’s retail payments industry but the financial service sector as a whole,” said Mairead McGuinness, the EU’s financial services commissioner.
The European Commission has outlined its proposals for a new payment services directive (PSD3), a payment services regulation (PSR), its digital euro proposal and a financial data access framework — which sets out its plans for open finance in the trading bloc.
The proposals, which leaked earlier this month, set out a variety of changes.
For example, as expected, the PSD and its sister directive, the Electronic Money Directive, are being merged into one.
Meanwhile, changes to prevent fraud are being introduced, such as allowing payment service providers to share fraud-related information between themselves.
Further, the EU intends to introduce a system for checking alignment of payees' IBAN numbers with their account name, which will be mandatory for all credit transfers, similar to that of the UK’s Confirmation of Payee (CoP).
Fintech lobbyists in Brussels will also be pleased to see that the EU wants to allow non-bank payment service providers access to all EU payment systems by overhauling the 1998 Settlement Finality Directive (SFD). It also intends to secure providers’ rights to a bank account through more stringent rules to prevent the practice of de-risking issues that some payments institutions have faced.
Overall, the legislation has been welcomed with open arms by payments players.
“Today’s publication of the European Commission’s proposals for a revised regulatory framework for payment services is an exciting development for the payments industry, demonstrating commitment to creating an even stronger foundation and infrastructure for open banking powered Pay By Bank solutions in all European markets,” said Todd Clyde, CEO at Token.io.
Clyde continued that he was 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 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.”
Andrea de Matteis, founder of De Matteis Law, meanwhile told VIXIO that the legislation “is like a piece of art”.
"Good ideas have been endorsed by the European Commission, such as increased data sharing between merchants and issuers,” he said.
De Matteis continued that this will help fight fraud. “Merchants will be required to send much more information. This will provide added security beyond SCA."
Trade associations too have been positive in their responses to the legislation.
“Today’s proposals are a clear step in the right direction,” said Nilixa Devlukia, chair of the Open Finance Association (OFA). “We look forward to working with our partners in EU institutions and in industry to create a digital payments and financial data access framework that will help accelerate investment and innovation and position Europe as a leader in the next generation of open banking and open finance services.”
Devlukia continued that OFA is very encouraged to read the commission’s proposal for PSD3/PSR, which recognises the need to strengthen the free open banking baseline and to allow the industry to collaborate on value-added services which generate a return on investment for all parties.
“This approach, combined with the separate proposal for instant payments, will help open banking to grow into a seamless pan-European payment solution,” said Devlukia.
“Industry and regulators should also continue working together towards harmonising rules and towards better implementation of API standards,” she continued.
Payments Europe, an organisation acting on behalf of the card industry, said that it welcomed the European Commission’s efforts to further optimise the PSD legislative framework.
“PSD2 Strong Customer Authentication rules have contributed to reducing fraud,” a spokesperson said. “As fraud evolves, we welcome that the European Commission is adapting the framework to the current reality, with clarifications around biometric authentication and Merchant Initiated Transactions, for example.”
Wims Mijs, CEO of the European Banking Federation (EBF), meanwhile said that the revision of EU rules on payment services should provide a stable basis for the future development of a successful open banking framework, and rules that enable the fight against the increasing online scams and fraud.
In its response, the EBF echoed many banks and politicians in the UK, by pointing out that scams are becoming hard to detect, as they can happen elsewhere in the ecosystem such as social media.
“Bringing all actors in the relevant areas and in the payments chain such as telecom operators, internet platforms, and parties that participate in the user authentication or payment initiation under adequate and proportionate legal obligations for fraud prevention, detection and mitigation is crucial.”
For some, there is also a feeling that the open finance proposal displays lessons learnt from some of the more flawed elements of PSD2’s implementation.
“With open finance, the EU can draw lessons from open banking and create a framework that helps level the playing field in order to deliver new, innovative financial services products and more choice for consumers,” said Devlukia.
One of the issues, of course, that people have felt with open banking so far is that it has been relatively slow to gather momentum in Europe.
"The EU's push for common standards and the development of schemes in open finance is a massive step forward,” said Lauren Jones, market development director at Open Banking Expo.
Jones told VIXIO that this will help achieve a level of harmonisation that has been a challenge under PSD2.
However, industry preparedness for what is about to happen may be more of a challenge.
"As it stands, many in the industry sectors in scope of open finance will not have a clue what is coming,” she said.
This means that there will have to be a wide educational exercise, and this will take some time.
“Much like in the early days of PSD2, data holders need to understand what is expected of them as well as the potential opportunities,” she said. “This will be a long process and the industry needs to get coordinated."
The digital euro
Released as a separate piece of legislation, the European Commission has brought its digital euro and access to cash work together in what it calls the "Single Currency Package".
These two proposals are intended by the commission to ensure that citizens and businesses can continue to access and pay with euro banknotes and coins across the euro area, and to set out a framework for the possible digital euro (for which the European Central Bank has now launched a LinkedIn page).
“A digital euro would complement cash but not replace it,” insisted Valdis Dombrovskis, the commission’s executive vice president.
“Today’s proposals will also make sure that cash will continue to be fully available, while allowing the European Central Bank to develop, over time, the practical aspects of the digital euro,” he said.
EBF’s Mijs described the proposal as “an essential part of the thorough, democratic and public debate that is necessary for a project of this magnitude, with a potential widespread impact on society and the economy".
Alongside the main features of a digital euro, Mijs said that it is important to discuss the broader questions about its added value, how it can best respond to current and future challenges of the European payments market, and how it can be developed jointly with the market.
Meanwhile, a spokesperson for Payments Europe said it “fully supports” the proposal for a digital euro. “We appreciate the EU’s ambition to build a sovereign payments market.”
“Nevertheless, a digital euro can only be successful if it meets the needs of Europeans and provides benefits to citizens and businesses alike,” the spokesperson continued.
“The legislative framework should allow for appropriate market freedom and ensure a level playing field between the digital euro and other payment means.”
In the coming weeks and months, VIXIO will be exploring various elements of the new legislative proposals. If you are interested in discussing how these proposals will affect your work or business, or want a particular area to be explored, contact jfranklin@vixio.com.
