Background: The Evolution of EU Payment Regulations
The EU’s approach to regulating digital payments has evolved over the years in response to technological innovations and emerging security threats. This process began with PSD1, followed by PSD2, and now continues with PSD3 and PSR. Each iteration has sought to refine the balance between fostering innovation and ensuring customer protection and data security.
PSD1: The Foundation
Implemented in 2007, the original Payment Services Directive (PSD1) was the first EU-wide legislation to regulate electronic payments. It established a standardized legal environment for payment service providers and ensured consumer protections across all member states. PSD1 enabled the development of a single market for payments in the EU and aimed to increase competition among payment providers.
PSD2: The Catalyst for Open Banking
Building upon the foundation of PSD1, the second Payment Services Directive (PSD2) was introduced in 2015 and came into effect in 2018. PSD2 made a significant impact by enforcing Strong Customer Authentication (SCA) and introducing open banking. Open banking allowed third-party financial service providers to access bank account information, with customer consent, to develop innovative financial products and services.
The implementation of PSD2 improved security, increased transparency, and drove collaboration between traditional financial institutions and emerging fintech players.
What is PSD3?
PSD3 represents the latest phase in the EU’s effort to refine its digital payments framework. The directive addresses several challenges that have emerged since the implementation of PSD2. These include rising payment fraud, disparities in regulatory interpretation across member states, and barriers for non-bank payment service providers.
PSD3 seeks to improve the safety, accessibility, and efficiency of digital payments while updating regulatory approaches to match technological advancements. The directive also aims to foster greater competition and enhance user trust in financial data sharing.
PSD3 will apply to all businesses, financial institutions, and third-party providers that are involved in processing electronic payments or facilitating access to financial data.
What is PSR?
Introduced alongside PSD3, the Payment Services Regulation (PSR) aims to unify the implementation of payment service rules across the EU. Unlike PSD3, which must be transposed into national laws, PSR is a regulation. This means it will apply directly in all member states without requiring additional legislation.
Together, PSD3 and PSR are intended to replace the existing Electronic Money Directive and provide a more consistent and comprehensive regulatory landscape. The PSR will eliminate discrepancies in national implementation and establish a level playing field across all EU countries.
Goals of PSD3 and PSR
The European Commission has outlined several key objectives for PSD3 and PSR. These goals reflect the changing dynamics of the payments industry and the need for regulations that can address both current and future challenges.
Fostering Innovation in Financial Services
One of the main aims of PSD3 and PSR is to promote innovation through enhanced open banking frameworks. The legislation supports the development of APIs that allow secure data sharing between banks and third-party service providers. This can lead to the creation of more personalized and competitive financial products for consumers and businesses alike.
Additionally, the legislation aims to reduce the dependency on legacy systems and encourage the integration of advanced payment technologies.
Strengthening Security Measures
With the rise of cyber threats and sophisticated fraud tactics, payment security has become a top priority. PSD3 proposes stricter anti-fraud protocols and updates to Strong Customer Authentication standards. These measures are designed to protect both businesses and consumers from emerging types of fraud, such as authorized push payment fraud and spoofing.
Transaction monitoring will be strengthened, and payment service providers will be required to educate their staff and customers about potential fraud risks.
Expanding Consumer Rights
Consumer protection is at the core of the new regulations. PSD3 and PSR aim to enhance transparency in digital transactions, offer clearer fee structures, and ensure the privacy and security of personal financial data.
Consumers will also gain more control over how their data is used and who has access to it. The regulations will mandate clearer consent processes and allow users to easily manage data-sharing permissions.
Ensuring Equitable Market Access
The new regulatory framework seeks to level the playing field between traditional banks and non-bank financial entities. By granting non-bank payment providers the right to access commercial bank accounts, the EU hopes to increase competition and improve consumer choice.
Furthermore, payment service providers will be required to build and maintain the necessary infrastructure for data sharing with fintech firms and other authorized entities.
Streamlining EU-Wide Implementation
PSR’s direct applicability ensures that payment service providers across the EU follow the same rules. This uniformity simplifies compliance for multinational businesses and reduces the administrative complexity caused by fragmented national regulations.
It also reinforces the enforcement powers of regulatory authorities, allowing for more consistent oversight and stronger deterrents against non-compliance.
Major Changes Introduced by PSD3 and PSR
The proposals for PSD3 and PSR introduce a wide range of regulatory updates. These changes are intended to address current gaps in the legislation, improve the customer experience, and align regulations with technological trends.
Anti-Fraud Enhancements
Key updates in this area include:
- Allowing payment service providers to share fraud-related data with each other while maintaining GDPR compliance
- Mandatory recipient verification by matching IBAN and account names for all credit transfers
- New consumer refund rights for victims of sophisticated fraud tactics such as spoofing
- Expansion and clarification of Strong Customer Authentication requirements
- Enhanced transaction monitoring systems and staff training obligations
Open Banking and Innovation Support
To support the growth of open banking:
- Financial institutions will be required to provide secure API access to third-party providers
- Consumers will retain control over their financial data and how it is used
- A more secure environment for data sharing will be created, encouraging fintech innovation
Improvements to Consumer Experience
Additional protections and enhancements include:
- Greater transparency in cross-border transfers and currency exchange fees
- Improved accessibility for Strong Customer Authentication methods, particularly for users with disabilities
- Easier access to cash in retail locations without the need for a purchase
- Expanded roles for independent ATM providers to improve cash access
Simplification of Legal Frameworks
The legislation consolidates and redefines legal classifications:
- The distinction between payment institutions and e-money institutions will be removed
- All authorized entities will be subject to the same oversight and service capabilities
- Clearer definitions of regulatory breaches and penalties will improve compliance efforts
Who Will Be Affected?
The impact of PSD3 and PSR will be far-reaching, affecting a broad spectrum of stakeholders:
Businesses
Any business that processes electronic payments or operates within the EU’s digital economy will be subject to the new regulations. This includes e-commerce platforms, service providers, subscription businesses, and marketplaces. Companies will need to align their systems with new authentication and data-sharing requirements.
Consumers
Consumers stand to benefit from improved security, transparency, and control over their financial information. They will also enjoy expanded rights in cases of fraud and clearer disclosures related to fees and data usage.
Financial Institutions
Traditional banks and credit institutions will be required to provide equal infrastructure access to third-party providers. They must also upgrade their fraud prevention systems and ensure full compliance with the updated SCA standards.
Third-Party Providers
Fintech companies and other non-bank financial service providers will gain legal rights to access necessary banking infrastructure. With clearer regulatory support and simplified licensing, these entities can more easily innovate and expand their services.
Anticipated Timeline for Implementation
The European Commission published the PSD3 and PSR proposals in mid-2023. Given the typical EU legislative timeline, PSR could come into force by 2026, while PSD3 may follow in 2027. PSR will apply automatically across the EU within 18 months of its publication in the official journal. PSD3, being a directive, will need to be transposed into national law by individual member states within the prescribed timeline.
Businesses should begin preparing now by reviewing existing payment systems, understanding the scope of the changes, and initiating updates to their compliance processes. Early preparation will allow companies to avoid disruptions and stay ahead in a competitive digital marketplace.
In-Depth Analysis of PSD3 and PSR Regulatory Changes
Following the foundation laid in Part 1, this installment focuses on the specific updates introduced under PSD3 and the Payment Services Regulation (PSR). These changes are designed to address current industry gaps, enhance security, and foster a more competitive and transparent payment ecosystem across the European Union. As these regulations aim to be implemented by 2026–2027, businesses and financial entities must familiarize themselves with the new compliance requirements to avoid disruption and maintain customer trust.
Enhancing Anti-Fraud Capabilities
One of the core areas PSD3 targets is fraud prevention. As payment systems evolve, so too do the tactics used by fraudsters. Therefore, regulators are introducing several robust measures to keep digital transactions secure.
Improved Data Sharing on Fraud Incidents
Payment service providers (PSPs) will be required to exchange fraud-related information safely among themselves. This will enhance collective fraud detection capabilities while staying compliant with GDPR. The intention is to allow real-time sharing of threats and emerging patterns without compromising customer privacy.
Mandatory IBAN and Account Name Verification
A significant update under PSD3 is the requirement to verify that a recipient’s account name matches the associated IBAN in all credit transfers, not just instant payments. This mechanism, known as Confirmation of Payee (CoP), can help prevent misdirected or fraudulent payments by ensuring that transfers are made to intended recipients.
Clarified Strong Customer Authentication Rules
The revised directive redefines what qualifies as Strong Customer Authentication. By making these standards more explicit, PSD3 aims to close existing loopholes and reduce fraudulent activity, especially in e-commerce. It also emphasizes risk-based authentication models that can better differentiate between low-risk and suspicious transactions.
Extended Consumer Refund Rights
A notable expansion in consumer protection includes broader refund rights. In cases of spoofing and authorized push payment (APP) fraud, where users are tricked into initiating a payment, victims will now have a clearer path to refunds. This recognizes the blurred lines between authorized and unauthorized payments in modern fraud scenarios.
Strengthened Transaction Monitoring
PSPs must now implement more advanced transaction monitoring tools that use real-time data and behavioral analytics. This is essential for identifying potentially fraudulent transactions before they are completed, thereby reducing the overall risk profile for businesses and their customers.
Mandatory Education on Payment Fraud
The updated regulations also place responsibility on PSPs to conduct educational initiatives. These must target both internal staff and customers, raising awareness about emerging fraud tactics and how to avoid them. Training will be required to ensure frontline staff can recognize threats quickly and respond appropriately.
Encouraging Innovation and Fair Market Access
PSD3 and PSR are not solely focused on risk reduction. They also seek to encourage innovation in financial services and ensure fair access to the payments market for a diverse range of providers.
Data Sharing and Consumer Control
The revised rules mandate that consumers must explicitly authorize access to their financial data, but they can also revoke access at any time. Businesses and PSPs must implement tools that allow users to manage their data permissions transparently.
This increased control is expected to promote trust in financial service providers and enable customers to share their data with innovative fintech firms offering better services, such as automated financial planning or loan comparison tools.
Infrastructure Access for Fintechs
Traditional financial institutions will be legally obligated to create secure interfaces that allow third-party providers access to financial data, provided customer consent is granted. These interfaces must be reliable and meet stringent technical requirements, ensuring consistent service delivery across the EU.
This mandate removes obstacles previously faced by fintech firms, leveling the playing field and enhancing competition in the payment services market.
Equal Banking Rights for Non-Bank PSPs
A long-standing challenge for non-bank PSPs has been access to bank accounts. Banks have historically been able to deny account services to these institutions without justification. PSD3 will change this by granting non-bank PSPs the right to hold accounts, thereby reducing dependency on traditional institutions and improving operational autonomy.
This will especially benefit newer entrants in the financial services space, which often rely on digital wallets, prepaid cards, or direct account-to-account payment models.
Improving the Consumer Experience
Beyond security and innovation, the updated regulations place a strong emphasis on enhancing the overall customer experience in digital payments. This includes new rules around transparency, accessibility, and usability.
Transparency in Fees and Charges
Cross-border payments, especially those involving currency conversion, can involve hidden fees that are often not disclosed upfront. PSD3 and PSR introduce strict transparency requirements that compel PSPs to inform users of conversion rates and expected fees before the transaction is initiated.
This allows customers to make informed decisions and compare rates more easily, leading to a fairer marketplace.
Accessibility for Strong Customer Authentication
To ensure that SCA requirements are inclusive, PSD3 introduces measures to make authentication methods accessible to users with disabilities and those with limited digital literacy. This includes support for biometric verification, alternative forms of identity verification, and simplified user interfaces.
PSPs will need to invest in inclusive design and technology that accommodates the needs of all users without compromising security.
Easier Access to Cash
While digital payments continue to grow, cash remains important for many users. PSD3 supports easier cash withdrawals by allowing consumers to access cash in retail outlets without making a purchase. It also promotes a more favorable environment for independent ATM operators by removing some regulatory burdens and clarifying their operational roles.
This helps maintain cash accessibility across both urban and rural regions, especially where traditional bank branches are disappearing.
Simplifying and Unifying Legal Structures
PSD3 and PSR aim to create a more coherent legal structure by removing outdated distinctions and improving the clarity of regulatory obligations.
Unified Licensing for PSPs
Under the new framework, the distinction between electronic money institutions and payment institutions will be merged. All such entities will fall under a unified licensing regime, reducing administrative complexity and ensuring consistent supervision.
This change reflects the convergence of services in modern payment platforms, which often provide overlapping functionalities, such as account management, transfers, and e-wallets.
Enhanced Supervision and Enforcement
PSR strengthens the power of national and EU authorities to investigate and penalize non-compliant entities. It introduces uniform enforcement guidelines and reporting obligations, ensuring that regulatory infractions are treated consistently across all EU member states.
These measures improve the accountability of PSPs and provide greater assurance to users regarding the quality and legality of financial services offered within the single market.
Clarity in Rule Application
One of the criticisms of PSD2 was its vague interpretation in certain areas, which led to inconsistent implementation. PSD3 seeks to resolve this by providing more precise definitions and guidelines, especially regarding the classification of services, scope of exemptions, and the rights of consumers.
This precision reduces legal ambiguity and allows businesses to design compliance programs that are more effective and easier to manage.
Operational Impacts for Businesses
The revised regulations will have significant implications for the operational models of businesses operating within or interacting with the EU payment ecosystem.
Technology and Infrastructure Investments
To comply with PSD3 and PSR, companies will need to invest in updated authentication systems, fraud monitoring tools, and customer data portals. These upgrades must meet the technical standards set out in the legislation, particularly in areas like secure communication, real-time monitoring, and data access logs.
Organizations may also need to work with compliance consultants or legal advisors to audit their existing systems and identify gaps in readiness.
Vendor and Partner Evaluation
Businesses that rely on third-party payment processors or technology vendors should assess these partners’ readiness for PSD3 and PSR. Service-level agreements should be updated to reflect the new requirements, particularly those related to SCA, fraud reporting, and customer data transparency.
Ensuring that partners are aligned with new compliance standards is essential to avoid liabilities and reputational damage.
Employee Training and Customer Communication
Internal teams, especially those in customer service, fraud prevention, and IT, must receive training on the new regulations. Understanding the updated SCA protocols, fraud response procedures, and consumer rights is essential for smooth implementation.
Additionally, businesses must update customer communication channels to explain the changes. Clear notices about new authentication methods, fee structures, and refund rights can help manage user expectations and enhance trust.
Strategic Planning for Fintech Expansion
Fintech firms will find the new environment more conducive to growth. With guaranteed infrastructure access, legal recognition, and simplified licensing, there will be new opportunities to launch services across the EU.
Firms with scalable digital models should consider cross-border expansion strategies, supported by the consistent legal landscape introduced by PSR.
Who Needs to Take Action?
Given the sweeping nature of the reforms, action is required from a broad range of stakeholders, including:
- E-commerce businesses
- Online marketplaces and platforms
- Subscription-based services
- Digital banks and traditional financial institutions
- Payment processors and gateway providers
- Fintech startups and developers
Each of these groups must assess the impact of the legislation on their specific operational processes, customer base, and geographic footprint. Proactive planning will be critical to ensure timely compliance.
Assessing Current Systems and Processes
Before implementing changes, businesses must begin by thoroughly auditing their existing payments infrastructure, authentication protocols, data handling procedures, and compliance controls.
Conduct a Compliance Audit
Start with a detailed audit of current payment workflows. Identify how your business handles Strong Customer Authentication (SCA), fraud detection, data access requests, and user consent management. Compare these systems against the new requirements set out in PSD3 and PSR.
This audit should include collaboration across departments—legal, IT, finance, customer service, and operations—to ensure a complete view of compliance readiness.
Identify System Gaps
Once the audit is complete, create a gap analysis that identifies areas where current systems do not meet future requirements. These gaps could include the inability to match account names to IBANs, lack of multi-factor authentication, insufficient customer consent tracking, or inadequate transaction monitoring.
This assessment forms the foundation of the implementation roadmap and should prioritize updates based on potential risk, implementation complexity, and regulatory deadlines.
Updating Technology Infrastructure
With a clear understanding of system deficiencies, businesses should begin updating their technology infrastructure to support the requirements of PSD3 and PSR.
Upgrade Authentication Mechanisms
Strong Customer Authentication will be more strictly enforced under PSD3. Companies must ensure that their authentication solutions include multiple factors—something the user knows, has, or is—and that these mechanisms are adaptable across different devices and use cases.
The solution should be accessible to all users, including those with disabilities. Integrating biometric authentication, one-time passcodes, and app-based verification can help meet these goals.
Implement Real-Time Transaction Monitoring
To enhance fraud prevention, businesses will need to invest in real-time analytics platforms that flag suspicious behavior. These systems should be capable of evaluating transaction data using criteria such as transaction history, customer location, device identifiers, and behavioral patterns.
Risk scoring models and AI-driven tools can help prioritize alerts and reduce false positives, enabling smoother user experiences while maintaining strong security controls.
Ensure GDPR-Compliant Data Sharing
PSD3 promotes secure data sharing with third-party providers, but this must be done in compliance with GDPR. Businesses need to implement APIs and data access portals that give customers control over their financial data. These tools must support permission management, consent tracking, and revocation capabilities.
Security measures such as encryption, access control, and audit trails are essential to ensure the protection of shared data.
Training and Capacity Building
A successful compliance strategy depends on the knowledge and preparedness of internal teams. As regulations evolve, so too must employee understanding of new protocols and expectations.
Staff Training Programs
Develop role-specific training modules for teams in fraud prevention, IT security, compliance, customer support, and product development. These should include:
- An overview of PSD3 and PSR objectives
- Specific departmental responsibilities
- Procedures for identifying and reporting fraud
- Data handling protocols and customer rights
Interactive workshops and simulations can help staff practice their responses to regulatory scenarios in real time.
Customer Education
Transparent communication with customers is critical. Businesses must inform users of the upcoming changes and how their experience may be affected, especially regarding authentication processes and data sharing.
Update user agreements, terms of service, and privacy policies to reflect the new legal environment. Offer FAQs, tutorials, and live support to address customer concerns and maintain trust.
Revising Policies and Documentation
Legal teams should begin reviewing internal policies and external-facing documentation to ensure alignment with PSD3 and PSR.
Revise Data Access and Consent Policies
All systems that handle customer data must be updated to reflect the new consent requirements. This includes:
- Documenting how consent is obtained and stored
- Ensuring that customers can view and manage consent in real time
- Enabling users to revoke consent easily without affecting core services
These updates are essential for both regulatory compliance and customer satisfaction.
Update Terms and Conditions
Public-facing legal documents, including terms and conditions, privacy notices, and payment disclosures, must clearly outline:
- The rights of users under PSD3 and PSR
- Transparency around fees, especially for cross-border and currency conversion transactions
- Refund procedures for fraudulent or unauthorized transactions
- Consumer rights regarding data access and sharing
Ensure these documents are easy to understand and available in multiple languages where applicable.
Choosing the Right Partners and Vendors
Businesses that rely on third-party platforms for payment processing or infrastructure must evaluate whether their partners are compliant with the upcoming regulations.
Perform Vendor Due Diligence
Ask your payment providers and vendors for documentation on their PSD3 and PSR readiness. Key areas of assessment include:
- SCA capabilities
- Real-time fraud detection
- API readiness for open banking
- Compliance reporting and audit support
Ensure your service-level agreements reflect shared responsibility for compliance and data protection.
Plan for Contingencies
If your current provider is not aligned with PSD3 standards or is slow to adapt, begin evaluating alternative vendors. Select partners with a strong track record of regulatory compliance, secure architecture, and responsive customer service.
Leveraging PSD3 and PSR for Competitive Advantage
While the primary goal of compliance is to meet legal obligations, there are also strategic opportunities embedded in PSD3 and PSR. Businesses that embrace the changes can enhance user experience, build trust, and drive long-term growth.
Improve User Experience
Enhanced authentication methods, better fraud protection, and greater transparency all contribute to a more reliable and user-friendly payment experience. When customers feel secure and in control, they are more likely to remain loyal to the platform.
Optimized payment processes can also reduce friction during checkout, improving conversion rates for e-commerce businesses and subscription models.
Build Brand Trust
Proactively educating customers about data protection, fraud prevention, and their rights under PSD3 demonstrates corporate responsibility. It also positions your brand as a secure and customer-first company in a highly competitive landscape.
Use the rollout of PSD3 to re-engage with users through content, webinars, and email campaigns that highlight how you are protecting their interests.
Expand Market Reach
With PSR providing consistent rules across all EU countries, businesses will find it easier to scale across borders. A unified regulatory environment reduces the cost and complexity of international expansion.
Fintech firms, e-commerce platforms, and marketplaces can capitalize on this consistency to launch products and services in new regions without the need to navigate country-specific variations.
Monitoring and Ongoing Compliance
Compliance is not a one-time project but an ongoing commitment. Once PSD3 and PSR are in effect, businesses must maintain vigilance to stay ahead of regulatory changes and emerging threats.
Establish a Compliance Management System
Appoint a dedicated compliance officer or team responsible for monitoring regulation updates, conducting internal audits, and managing relationships with regulators. Implement automated tools for tracking compliance metrics and generating reports.
Use dashboards to monitor transaction trends, fraud incidents, consent logs, and customer feedback, allowing for rapid response to issues.
Stay Engaged with Regulatory Developments
PSD3 and PSR may evolve during the legislative process or after implementation. Join industry groups, attend regulatory briefings, and maintain open communication with relevant authorities to stay informed.
Feedback provided by businesses during the transition period can also influence future amendments and clarifications.
Periodic Reviews and Updates
Schedule regular reviews of policies, systems, and vendor relationships to ensure ongoing alignment with legal obligations. As technology and threats evolve, so too should your compliance strategy.
Conduct refresher training for staff and update customer communications as needed to reflect new practices or tools.
Business Types That Need Immediate Attention
While PSD3 and PSR affect all businesses dealing with electronic payments in the EU, some sectors will face greater urgency to adapt.
E-Commerce and Online Retailers
These businesses must prioritize secure authentication during checkout, fraud detection, and transparent pricing for cross-border buyers.
Financial Technology Firms
Fintech companies must upgrade APIs, secure data-sharing practices, and obtain the correct licensing under the revised rules.
Marketplaces and Aggregators
Platforms that connect multiple buyers and sellers need to review payment flows, dispute resolution mechanisms, and partner policies to ensure system-wide compliance.
Subscription-Based Models
Recurring payments must be managed in accordance with SCA requirements, customer consent tracking, and refund eligibility rules.
Travel and Hospitality Providers
This sector, often dealing with international customers and currencies, must ensure fee transparency, fraud protection, and flexible refund processes.
Telecommunications and Utility Services
These companies need to maintain real-time visibility into billing systems, enforce strong authentication, and simplify user access to account data.
Conclusion
The introduction of PSD3 and the Payment Services Regulation marks a pivotal moment in the evolution of the European payments landscape. These regulatory updates are not just compliance checkboxes—they represent a comprehensive shift in how electronic payments, data access, and consumer rights are governed across the EU. Businesses that accept, process, or support digital payments will need to make substantial adjustments to their operations to remain compliant and competitive.
At their core, PSD3 and PSR aim to foster a more secure, transparent, and innovative financial ecosystem. From strengthening anti-fraud protocols and expanding consumer protections to promoting open banking and ensuring consistency across member states, these regulations are designed to modernize the digital payments infrastructure for the years ahead.
The impact of these changes will be far-reaching. Traditional financial institutions must share infrastructure with fintech newcomers under clear rules, while businesses of all sizes must adapt to more stringent authentication and data-sharing standards. Consumers, in turn, will benefit from greater control over their financial data, more transparent pricing, and stronger protections against fraud.
While adapting to PSD3 and PSR will require investment, planning, and training, these efforts can unlock significant benefits. Enhanced customer trust, operational efficiencies, and cross-border scalability are among the many opportunities available to businesses that approach compliance as a strategic priority rather than a regulatory burden.
The time to act is now. By assessing current systems, educating stakeholders, partnering with compliant service providers, and investing in modern infrastructure, businesses can not only meet the coming requirements but also thrive in a payments ecosystem built on innovation, security, and consumer empowerment. In the rapidly evolving world of digital finance, PSD3 and PSR offer both a challenge and a chance to lead. Businesses that prepare today will be best positioned to grow tomorrow.