Navigating new regulation: addressing the impact of PSD3
Navigating new regulation: addressing the impact of PSD3 | Nuvei
The European Commission recently published a draft of the third Payment Services Directive (PSD3) and the accompanying Payment Services Regulation (PSR). PSD3 represents the evolution and unification of the Payment Services Directive 2 (PSD2).
At its core, PSD3 aims to enhance the efficiency and security of electronic payments across the EU and improve upon the key elements of PSD2. As PSD2 was a directive and not strict regulation, the rules were interpreted in different ways across member states, so a large part of PSD3 is delivering more uniformity.
Importantly, PSD3 is expected to reinforce consumer rights and protection. This could involve clearer terms and conditions, better dispute resolution mechanisms, and increased transparency in payment services. Naturally, there will be a knock-on effect on merchants and payment service providers, but with the right partnerships and preparation in place, the impact will be minimal.
At Nuvei, we're committed to guiding our merchants through these transformative changes. Our experts are on hand to discuss regulatory updates and ensure a seamless transition, and we support key aspects of PSD3 like Strong Customer Authentication (SCA), data sharing, and instant transfers.
Here is everything that online merchants need to know about PSD3:
What are the key changes from PSD2 of PSD3?
While PSD2 was praised for certain elements, such as the implementation of SCA for reducing fraud, the European Commission recognizes PSD2’s struggle to achieve a level playing field for all PSPs. Non-bank PSPs often lack direct access to critical payment systems, creating an imbalance between bank and non-bank PSPs.
- Enhanced competition
PSD3 focuses on enhancing competition and innovation in the financial sector, particularly in the payments industry. For merchants, this could mean lower processing fees and better authorization rates due to a more level playing field.
Merchants should benefit from customized payment experiences tailored to their business needs, potentially increasing customer satisfaction and sales.
- Greater consumer protection
The new Directive places strong emphasis on protecting consumer rights and personal information, which should improve trust in online payments and encourage consumer adoption of open banking.
In recent years, the focus on enhancing consumer control and transparency has intensified, with Open Banking payments emerging as a key enabler of this transformation. According to our research with American Express, 41% of UK consumers would use Pay with Bank Transfer payments if they believed they were more secure. Read the full story in our whitepaper, Reaching the tipping point. How to realize the potential of Open Banking payments.
- More extensive SCA
The European Commission’s assessment of PSD2 agreed that SCA has succeeded in reducing fraud. PSD3/PSR, therefore, aims to build on and improve SCA by clarifying key definitions, further specifying exemptions for low-risk transactions and continuing to balance security with the development of user-friendly, innovative, and accessible means of payment.
PSD3 also introduces more extensive SCA regulations to safeguard payment transactions and stricter rules on access to payment systems account information for enhanced security measures. The introduction of the PSR aims to directly improve consumer protection.
This, however, could have a negative impact on conversion rate if poorly considered. It’s advised that merchants work directly with their payments provider to ensure they are authenticating only where necessary and are maximizing user experience throughout the payments journey.
There is still ongoing debate as to whether SCA should be applied to refunds. The view is that refunds initiated by merchants are separate payment transactions in which the merchant is the payer and SCA must be applied. For merchants, however, this could just add additional friction to an inherently slow payouts process, impacting relationships with consumers.
- Improved APIs and experiences
As mentioned, open banking is an area of focus in PSD3. The proposed changes show that the European Commission understands the practical challenges that open banking is facing, and how to solve them.
PSD3 focuses on further levelling the playing field by improving APIs and setting out minimum open banking functionality requirements. This aspect of PSD3 is focused on consumers: it improves the customer experience and encourages the adoption of bank transfers and real time payments. Ultimately, encouraging real time payments to become a credible alternative to the Schemes.
Earlier in 2024, meanwhile, the European Council has adopted regulation that will make instant payments fully available in euros to consumers and businesses in the EU and in EEA countries.
The instant payments regulation will allow people to transfer money within ten seconds at any time of the day, including outside business hours, not only within the same country but also to another EU member state.
- Enhanced inclusivity
Finally, PSD3 aims to be more inclusive, considering authentication methods for the elderly, those living with disabilities, and individuals lacking digital skills. The directive requires PSPs to create access for these demographics, ensuring universal SCA methods.
At its core, this largely means providing authentication methods that don’t rely solely on smartphones.
What is the implementation timeline for PSD3?
The European Commission proposed PSD3 on June 28, 2023, to modernize and amend PSD2, introducing PSR. As of mid 2024, there’s no detailed or specific timeline for implementation.
However, a finalized version of the plan may be accessible by late 2024. After this, there is anticipated to be an 18-month transition period for member states, suggesting potential implementation of PSD3 in or around 2026.
How will PSD3 impact merchants?
After a huge spike in electronic payments and the introduction of new open banking service providers, PSD2 was seen as an important addition to EU payment services. Now, PSD3 is aimed at creating a level playing field between existing and new providers in card, internet, and mobile payments.
PSD3 is aimed at consumers — it aims to protect consumers' rights and personal information. Whilst merchants are concerned about sacrificing experience for authentication, it doesn’t necessarily mean the knock-on effects will come at the cost of profitability for businesses.
Either way, the implementation requirements and impact of PSD3 will be felt by online merchants and players in the payments industry.
- Reduced fraud but potentially more false declines
The EU PSR introduces a set of measures designed to prevent or reduce payments fraud, including verification of payee details for credit transfers. Where the relevant details do not match, the payer’s PSP must notify the payer of such discrepancy prior to finalizing the payment.
Meanwhile, businesses will need to share more data with issuers, allowing them to monitor environmental and behavioral characteristics such as user location, transaction time, devices used, spending habits, transaction history, session data, and device IP. As a result, they can increase approval rates by better determining which transactions to approve and which to decline.
While it’s positioned that merchants will benefit from these changes, it's possible many will experience more false declines if not carefully managed. Merchants often classify false declines as an inherent cost of fraud prevention, which generally stands as their primary concern. However, applying some subtle payments optimization rules could help offset the damage.
While preventing fraud is important from both a cost and a reputational perspective, our latest research shows that merchants may be overvaluing it compared to dollars lost to false declines. To maximize profitability, merchants could make payments optimization decisions based on the contribution margin (that is, the revenue remaining after subtracting the variable costs that go into producing a product) of the incremental sales that are likely to result.
Read more about payment optimization in our whitepaper, Accelerating Revenue Growth.
- More seamless recurring payments and subscriptions
Whilst PSD3 largely sees the addition of more rigorous SCA, there are some exemptions which can benefit certain businesses. Merchant-initiated transactions (MIT), such as subscriptions, are now excluded from SCA. Only the first transaction requires SCA.
At the same time, card-based mail orders and telephone orders (MOTO transactions) no longer require authentication via SCA. This exemption will greatly benefit merchants in sectors such as the travel industry.
- Promoting choice (and fairer pricing)
PSD3 is expected to promote innovation in the payments industry. This could lead to the development of new payment services and business models, which could benefit merchants by increasing competition and providing more payment options.
More choice generally means fairer competition when it comes to fees and pricing models for merchants.
- A SCA liability shift to increase cooperation
Ultimately, the SCA changes will contribute to safer buying experiences and data sharing enhancements for better transaction monitoring. There is a liability shift in fraud cases which emphasizes accountability; the new proposals also suggest that the schemes, technical service providers (such as wallet providers), and payment gateways will be liable for fraud if they fail to apply SCA. This is to ensure increased cooperation among all players involved in performing SCA.
The new SCA rules are likely to improve the experience of customers at the point of payment. These rules give more clarity to financial institutions, card networks, and payment providers to apply SCA exemptions for transactions with lower risk, or for recurring transactions.
Overcoming merchants’ concerns about PSD3
Merchants’ primary concern around PSD3 is that it could have an impact on their customer relationships. If the new security measures are too complicated, it could lead to frustration and dissatisfaction among customers, resulting in reduced conversions and revenue.
Merchants are also considering the potential cost of implementing the changes; PSD2 compliance was expensive for merchants to roll out due to the heavy SCA requirements, and it is unclear whether the new security measures under PSD3 will be any more cost effective.
However, it is worth noting again, that PSD3 is widely about enforcing PSD2 regulations more uniformly across member states, so will be a smaller step change rather than PSD2. At Nuvei we're already supporting key changes such as data sharing, SCA, and instant credit transfers.
Successfully navigating these challenges, therefore, requires a partnership or defined strategy, operational changes, risk assessment, and meticulous execution.
Ultimately, merchants want to increase conversions while minimizing the risk of fraud. Working closely with their payment service providers will be critical throughout the roll out. The Nuvei Payments Optimization suite, for example, applies functionality and features at every stage; pre-transaction, during transaction routing, and post-transaction to achieve the highest approval rates possible.
Nuvei and Rank case study – optimization during PSD2
Rank has been entertaining Britain since 1937 and now serves over 2.7 million customers per year. Rank Interactive, its digital channel, offers online bingo, casino, slot gaming, poker and sportsbook.
The implementation of PDS2 legislation posed a significant challenge to both operators and customers within the iGaming sector due to new authentication requirements.
Through PSD2, Nuvei worked closely with Rank to optimize payments performance, qualifying large volumes of low-risk transactions for frictionless flow whilst managing high risk deposits with authentication step-ups, delivering a single view of data across markets.
Friction at payment was mitigated while customer experience, deposit values and revenues were protected. Rank experienced steady approval rates after PSD2 was implemented.
In the last four years alone, Rank transaction volumes have seen an average 17% year-on-year growth, despite the major regulatory change posed by PSD2.
What should merchants do next?
It’s essential that merchants stay informed about PSD3 and PSR developments to prepare for compliance requirements, payment processes, and consumer rights.
As a human-led payment provider, we have dedicated teams and real experts supporting your shift to PSD3. We are committed to navigating the evolving regulatory landscape of PSD3 and PSR, ensuring compliance and optimal service for our partners and merchants. We actively collaborate with regulators and card schemes for PSD3 readiness. If merchants have any questions or concerns, we have experts ready to help. Existing customers should contact their relationship managers.
Please note that the information provided is based on available knowledge up to January 2024, and stakeholders are advised to check official documents for the latest details.
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