Regulatory changes are shaping the future of payments. The recent proposals to revise the Payment Services Directive (PSD2) by the European Commission aim to enhance consumer protection and encourage innovation; they also present new challenges that financial institutions must navigate carefully. Early compliance and strategic planning will be key to successfully adapting to this new regulatory environment. This article explores the potential impacts of the PSD2 revisions in the high-risk sector, analysing the proposed changes and their implications for payment services, customer protection, and the competitive landscape.

Understanding PSD2

PSD2, initially enacted in 2015, has been fostering innovation, competition, and consumer protection within the European payments market. The directive aimed to create a level playing field for payment service providers (PSPs), enhance the safety and efficiency of payment services, and provide robust consumer protection. As technology advanced, gaps in the regulation became apparent, leading to the need for a revision. 

This revision should ensure that merchants receive the same protection, regardless of the payment instrument used, where the activity is the same as the acquiring of card transactions. Technical services provided to payment service providers, such as the mere processing and storage of data or the operation of terminals, should not be considered to constitute acquiring. Moreover, some acquiring models do not provide for an actual transfer of funds by the acquirer to the payee because the parties may agree upon other forms of settlement.

The expectation was that Account-to-Account payments based on open banking would challenge card payments due to being cheaper, more secure and offering consumers greater control. However, the market hasn’t matured enough to match the level of customer experience provided by existing (mostly card-based) payments. Nevertheless, it is expected to catch up soon, with banks improving their APIs, established Third Parties managing flows more efficiently, and the UK market leading the way in Open Banking payment volumes. 

Key Objectives of PSD2

The primary objectives of PSD2 included integrating the single euro payments area (SEPA), promoting competition and innovation, enhancing safety in payment services, and providing high-level consumer protection. The directive’s scope extended beyond traditional banks to include third-party providers (TPPs), introducing new players such as payment initiation service providers (PISPs), account information service providers (AISPs), and card-based payment instrument issuers (CBPIIs).

Increased Compliance Requirements

One of the most noteworthy aspects of the PSD2 revisions is the heightened emphasis on compliance and security standards. The directive’s continued commitment to strong customer authentication (SCA) ensures a robust layer of protection for online transactions. While this is a positive move for enhancing overall security, it also places an added burden on high-risk merchants and PSPs to invest in advanced authentication measures, potentially increasing operational costs.

Proposed Revisions

The proposed revisions consist of a directive on payment and electronic money services (PSD3) and a regulation on payment services in the internal market (PSR). These revisions aim to update and clarify the licensing and supervision regime for payment institutions (PIs), address open banking challenges, and rectify supervisory power inconsistencies. Notably, the revisions seek to include both payment services and electronic money services under a unified framework, a departure from the previous separate regulation.

Implications for iGaming

The iGaming industry, heavily reliant on secure and efficient payment transactions, will likely experience notable shifts. Harmonised rules across Member States could streamline payment processes for operators, enhancing the overall user experience. Including electronic money services under a unified framework may open new avenues for innovative payment solutions in the iGaming space.

Impact on Merchant and PSP Dynamics

The revisions bring about a fundamental shift in the dynamics between merchants and PSPs. With the inclusion of electronic money services under a unified framework, PSPs catering to high-risk industries must adapt swiftly to comply with updated licensing and supervision requirements. This may lead to a more standardised approach to providing payment services, potentially altering the competitive landscape and necessitating strategic adjustments for players in the market.

Addressing Risk and Fraud Challenges

High-risk industries are often susceptible to increased instances of fraud. The PSD2 revisions acknowledge the continued risk of fraud in the payments landscape and aim to instil confidence by addressing these challenges. However, merchants operating in sectors with inherently higher fraud risks need a delicate balance between enhanced security measures and ensuring a seamless and user-friendly payment experience.

Enhanced Consumer Protection

The revisions introduce measures to strengthen consumer protection, such as improved liability in cases of unauthorised payments and unconditional refund rights for direct debits. Strong customer authentication (SCA) is required to maintain a secure environment for online transactions.

Towards PSD3

EU institutions aim to fill the main gaps due to a rapid market evolution with a new Directive which could further revolutionise the world of payments. PSD3 could likely lead to further significant changes regarding:

• The regulation of new services, such as Digital Wallet, BNPL solutions, and crypto.
• The standardisation of Open APIs at the European level.
• The simplification of existing rules (i.e., PSD2, GDPR, E-money Directive, etc.).
• The coordination to reduce legal uncertainty due to the tension between supervisory law and data protection law.

The process of revising PSD2 has already begun, with the European Commission promoting a “Call for Consultation” in May 2022. By the end of 2023, the European Commission plans to publish an initial legislative proposal to move beyond PSD2, which is then expected to be amended by the European Parliament and approved by the Council of the European Union between 2024 and 2025.  With the upcoming regulation, the PaymentFinder team aims to adapt our solutions with an innovative touch, equipping our current and future partners with the best tools possible to ensure compliance with PSD3 and PSR.

In conclusion 

As high-risk merchants and PSPs navigate these changes, strategic considerations become imperative. Adapting to the revised PSD2 landscape requires a proactive approach to compliance, technology investment, and risk management. Stakeholders should engage in collaborative efforts to share insights and best practices, fostering an environment of continual improvement and adaptability. 

While the PSD2 revisions introduce challenges for high-risk sectors, they also pave the way for a more secure, transparent, and harmonised payments ecosystem in the EU. Stakeholders in these industries must view these changes not merely as regulatory hurdles but as opportunities to enhance operational efficiency, bolster security measures, and contribute to the evolution of a resilient and thriving high-risk payments landscape in Europe.