EU lays out ambitious plans to open up financial data and reform digital payments
The EU envisages a future where you can control access to your financial data, you are protected from payment fraud and you can make payments in digital euro as easily as cash. This vision is the bedrock of a package of legislative proposals released by the European Commission on 28 June 2023. The proposals will be debated for several months but could start to apply in 2025 or 2026.
What has happened?
The European Commission has published the following draft legislative acts:
- A legislative framework to support the establishment of the digital euro
- A regulation on a framework for financial data access (aka Open Finance)
- A Third Payment Services Directive (PSD3) and a Payment Services Regulation (PSR1)
The European System of Central Banks, which includes the European Central Bank, is exploring issuing a central bank digital currency. No decision has yet been made on whether the digital euro will be created and we are expecting an update on this later in 2023.
In the meantime, the Commission is paving the legislative path for a digital euro should the decision be taken to proceed to development. In its draft regulation it proposes putting the digital euro on the same legal footing as other euro.
For example, the regulation:
- Makes the digital euro legal tender for retail payments
- Clarifies that EU payments and AML regulations apply to digital euro transactions, without any additional licences being required
- Requires general acceptance of the digital euro for goods and services with only limited exceptions such as for non-profit organisations and microenterprises
- Stipulates that, like cash, the digital euro should not bear interest
Several important decisions are left to the Central Banks. For example, whether there is a maximum amount that can be held on a digital euro account, the fees and charges for using the digital euro; and the functionality of the digital euro app.
The Commission is careful to take a technology-neutral approach in its proposed legislative framework. It has not been confirmed yet whether any digital euro would rely on distributed ledger technology (DLT). The draft legislation does stipulate, however, that online and offline digital euro payment transactions must be settled instantaneously.
Alongside the digital euro legislative framework, the Commission has also proposed a regulation specifying how payment firms which are based outside the eurozone may distribute the digital euro.
The sharing of payments account data was enabled by the revised Payment Services Directive (PSD2). The idea behind this “Open Banking” initiative is now being extended to a broader range of financial services data. The new Open Finance rules will impact many more EU financial institutions.
Customers (both firms and individuals) will be given a new access right for financial data held by their financial service providers. To facilitate the exercise of this right, the Commission proposes conditions and requirements for the access, sharing and use of financial data.
For example, the regulation:
- Requires in-scope financial institutions to provide a dashboard allowing customers to grant and withdraw permission for third parties to access their data
- Creates a framework for firms to establish financial data sharing schemes which will work out common standards for data and technical interfaces
- Allows firms to charge a reasonable amount for making data available through technical interfaces
Only financial institutions and a new category of authorised firm – financial information service providers – will be eligible to access and process customer data.
The Commission has concluded its review of PSD2, finding that the EU payments framework is largely successful but could improve in certain areas. Issues include inconsistent application of the rules across the EU, an unlevel playing field between banks and non-bank payment service providers, and the increasing risk of payment fraud.
To tackle these issues, the Commission has proposed restructuring PSD2. Most of the existing direct regulatory obligations on payment service providers will be moved to PSR1 so that they apply directly and consistently across the EU. The Electronic Money Directive will also be repealed and its requirements incorporated into PSD3 and the PSR1.
As well as these structural changes to the regulatory framework, the Commission’s regulation also proposes:
- Enabling payment institutions to participate directly in payment systems rather than indirectly via a bank
- Extending IBAN verification to all credit transfers
- Changes to strong customer authentication rules and Open Banking
- Requiring payment institutions to hold safeguarded funds with more than one bank
What happens next?
The package of proposals will now go through the usual EU legislative process which is expected to take 18 months to complete. This will include so-called trilogue negotiations between the Commission, European Parliament and European Council.
The regulation on the digital euro would come into force shortly after the text is finalised but its effect will depend on progress made in the development of the digital euro by the ESCB.
The Open Finance framework would start to apply 18 months after it enters into force, by which point the expectation is that in-scope financial institutions should have joined financial data sharing schemes.
The changes to the payments framework are also expected to start to apply around the same time. Assuming that the texts are agreed around the end of 2024 and start of 2025, the new regime would take effect during 2026. Transitional provisions apply to existing payment and e-money institutions.