How Will PSD3 Impact PSPs’ KYC Strategies?
As the European Commission published its proposal for PSD3 on June 28th, examining the potential changes and their implications becomes crucial. In this blog, we dive deeper into the possible effects the legislation will have on the know-your-customer (KYC) strategies employed by Payment Service Providers (PSPs).
The PSD2 Framework: Fostering Competition and Innovation in Payment Services
Before delving into the possible changes of PSD3, let’s recap the existing PSD2 framework. PSD2, implemented in September 2019, is a European regulation primarily focused on consumer and business payments. The aspirations of PSD2 included promoting fair competition, facilitating cross-border payment services, nurturing an innovative payment ecosystem, enhancing payment instrument efficiency, and ensuring robust user protection standards across EU member states1. However, one of its fundamental goals was to foster competition within the payment industry by granting authorized firms, apart from banks, access to payment data2.
The Path to PSD3: European Commission’s Plans and Stakeholder Consultations
The European Commission revealed its legislative proposal3 for PSD3 on June 28th 2023. This proposal followed a series of consultations, gathering insights from industry stakeholders including PSPs, regulators, EU authorities and experts. These consultations were aimed to refine and improve the regulatory framework governing payment services within the European Union4. The date that PSD3 will come into effect is yet to be determined as the proposed legislation will first need to pass and every European country will be given time to implement it.
How is PSD3 likely going to affect legislation concerning PSPs’ KYC strategies?
In the most recent European Commission consultation, experts highlighted several KYC challenges PSPs face under the current PSD2 legislation, as follows
Inconsistent AML and KYC Requirements Across Member States
Under PSD2, inconsistent anti-money laundering (AML) and know-your-customer (KYC) requirements across member states emerged as significant hurdles. Moreover, the stakeholders emphasized that complying with these regulations is challenging, particularly for smaller PSPs operating across borders.
National Variations in the Implementation of the Licensing Regime
Insights gathered during the consultations shed light on national variations in the implementation of the licensing regime. Stakeholders shared anecdotal evidence of discrepancies in interpretation among supervisors regarding registration requirements.
Some member states, such as Lithuania or Luxembourg, were identified as having more lenient and streamlined licensing approaches. Consequently, many companies sought licenses in these countries and leveraged passporting arrangements to operate across borders. PSPs registered in these jurisdictions reportedly benefited from simplified customer onboarding and KYC processes compared to countries with stricter regimes, such as Portugal or Poland.
Lack of Coherence with Other EU legislations
Another area of concern pertains to the coherence of PSD2 with other EU legislations, mainly anti-money laundering and countering the financing of terrorism (AML/CFT) regulations. Stakeholders highlighted potential overlaps and conflicts between PSD2 and AML/CFT regulations across different jurisdictions5. In response to these concerns, the European Banking Authority (EBA) suggested merging PSD2 with the Electronic Money Directive, thus promoting coherence and harmonization within the regulatory landscape6.
What Does the Proposal for PSD3 Say About These Challenges?
In its proposal for the Payment Services Directive 3 (PSD3)3, the European Commission emphasizes that one of the reasons for developing the proposal has been to strive for consistency with existing policy provisions. The Commission states, “Care has been taken in preparing this proposal to ensure coherence with those provisions.” One of the relevant financial service legislations mentioned is the Anti-Money Laundering (AML) Directive.
The European Commission also addresses in the proposal that PSD2 is a directive implemented by translating laws into the Member States. However, the Commission mentions that in certain areas of EU financial services legislation, it has been found beneficial to establish rules directly applicable to financial institutions through Regulation. This approach aims to improve consistency in implementation across the Member States. The review of PSD2 has concluded that a similar approach should be taken in payments legislation.
In summary, the proposed amendments to PSD2 are divided into two separate legislative acts: (i) a directive that includes rules related to licensing and supervision of payment institutions and (ii) regulation that contains rules for PSPs, including Payment Institutions (PIs) and some other categories of PSPs, offering payment and electronic money services. The Commission states that “A directive is appropriate in the present case, given that licensing and supervision of financial institutions in general (including PIs and other categories of PSPs, such as credit institutions) remains a national competence of the Member States, and no EU-level licensing or supervision is proposed.”
Want to know how Owlin helps PSPs navigate PSD3 and the Evolving Regulatory Landscape?
Check out our blog Navigating PSD3: Owlin’s Solutions for KYC & Compliance.
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- European Commission, 2023, A study on the application and impact of Directive (EU) 2015/2366 on Payment Services (PSD2)
- DNB, https://www.dnb.nl/en/innovations-in-payments-and-banking/fintech-ai-and-innovation/everything-you-should-know-about-psd2/
- European Commission, 2023, DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on payment services and electronic money services in the Internal Market amending Directive 98/26/EC and repealing Directives 2015/2366/EU and 2009/110/EC
- European Commission, ND, Payment Services
- Banking Circle, 2022, What is PSD3 and is it set to replace PSD2?
- Finextra, 2022, EBA calls for PSD2 and E-Money Directive to be merged