On 28 June 2023, the European Commission (the "Commission") put forward two legislative proposals aimed with the objective of modernising the payments industry and broader financial sector, ensuring greater levels of consumer protection and fostering competition in electronic payments.
The payment services market has evolved greatly in recent years, with the value of electronic payments reaching €240 trillion in 2021. This growth was accelerated by the COVID-19 pandemic which saw new providers enter the market, particularly those providing 'open banking' services. However, this expansion also gave rise to more sophisticated fraudulent activities, posing risks to consumers and eroding trust in the financial sector. In light of these developments, the European Commission's new legislative package aims to ensure that the EU's financial industry can effectively embrace the ongoing digital transformation, while also identifying potential risks and opportunities for consumers.
The Commission's two proposals are considered further below.
1) A third Payment Services Directive and Payment Services Regulation
The first proposal seeks to update the current Payment Services Directive (PSD2) and establish an additional Payment Services Regulation ("PSR"). While the former aims to strengthen the Union's framework pertaining to the regulation and supervision of payment and credit institutions, the PSR is a distinct device merging the rules applicable to e-money institutions with those applicable to payment services. The PSR will also tackle transparency and information requirements inter alia. Both sets of legislative proposals consist of measures that seek to:
- combat and mitigate payment fraud by enabling payment service providers to share fraud-related information amongst themselves, increase consumer awareness, strengthen customer authentication rules, extend refund rights, and develop a system that ensures alignment of payee's IBAN numbers with their account names for all credit transfers;
- improve consumer rights in cases where funds are temporarily blocked and improve transparency on consumer account statements and on ATM charges;
- level the playing field between banks and non-banks by granting non-bank payment service providers access to EU payment systems with appropriate safeguards and securing such service providers' rights to a bank account;
- improve the functioning of open banking, by removing obstacles to providing services and improving customers' control over their payment data; and
- strengthen harmonisation and enforcement by enacting most payment rules in a regulation and reinforcing provisions on implementation and penalties.
The proposal set forth by the Commission carries the objective of ensuring robust consumer protection while conducting electronic payments and transactions within the European Union. Moreover, this legislative initiative seeks to cultivate a dynamic and competitive marketplace by encouraging the proliferation of diverse payment service providers. This, in turn, will grant consumers a broader array of options to choose from when it comes to payment services.
2) A legislative framework for Financial Data Access
The Commission's second proposal seeks to establish a clear set of rights and obligations to coordinate consumer data sharing in the financial sector beyond payment accounts, namely:
- the possibility (without obligation) for customers to share their data with data users in secure machine-readable format to attain cheaper and preferable data-driven financial and information products and services;
- the obligation for customer data holders to make data available to data users by applying the requisite technical infrastructure;
- assuring full customer control over who accesses their data and for what purposes, facilitated by requirements for the implementation of permission dashboards and increased protection of customer's personal data in line with the General Data Protection Regulation;
- the standardisation of customer data and the required technical interfaces as part of financial data sharing schemes of which both data holders and data users must become members;
- clear liability regimes for data breaches and dispute resolution mechanisms as part of financial data sharing schemes so that liability risks do not act as a disincentive for data holders to make data available; and
- additional incentives for data holders to put in place high-quality interfaces for data users through reasonable compensation from data users in line with the principles of business-to-business data sharing as per the Data Act proposal.
It is anticipated that the Commission's proposal for a legislative framework for financial data access will lead to an increase in innovative financial products and services for users. Previously burdensome processes such as comparison services and product switching will become more efficient and less costly, including, for example, the automated processing of mortgage applications. Furthermore, Small and Medium Enterprises will be granted admission to a wider range of financial services and products through various facilities including being granted more competitive loans as a result of the increase in visibility of their creditworthiness data.
3) Next Steps
The proposals will undergo formal examination by the European Council and the European Parliament, after which trilogue negotiations will take place for the enforceability of the final texts. The PSR will be directly applicable in all member states following a transitional period. With respect to the revised payment services directive, a timeframe will be established for implementation into each member state's national framework.
The proposed legislative framework is still in its infancy and, as of yet, no exact deadlines for implementation have been announced. Nonetheless, the new rules could take effect as early as 2026. In this regard, banks and financial institutions are encouraged to explore solutions to adapt their systems to comply with these proposals.
Originally published 05 July 2023
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