Payments (R)Evolution - PSD2 and Beyond: The Future of Regulating Europe

By Madhvi Mavadiya | 7 April 2016

The second version of the Payments Services Directive that was passed by the European Council late last year is set to transform legislation and regulation for the payments industry. Madhvi Mavadiya questions what the future holds for Europe according to how this directive is adopted and how it will operate when aligned with SEPA and laws that are specific to each country. 

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The new PSD2 will replace the initial version proposed in 2013 and will aim to standardise card, internet and mobile payments. This will reduce barrier to entry for these electronic payments and having this regulation in place will ensure that there is consistent application across the EU and include newer payments services that are emerging within the regulation. The proposal document that was detailed explains how the electronics payments market in Europe offers great opportunities for innovation. “Consumers have already significantly changed their payment habits in recent years. In addition to the ever growing number of credit and debit card payment, the rise of e-commerce and the increasing popularity of smart phones have paved the way for the emergence of new means of payments. The benefits of better market integration and reduced fragmentation in this field at European level are substantial,” the document underlined.

Paul Thomalla, senior vice president, global corporate relations and business development at payments systems company ACI Worldwide, highlights that regardless of how many regulations emerge, they are made more complicated by how they are implemented. “Although the EU defines each directive and regulation in principle, directives are interpreted and enforced on a country by country basis, while regulation is implemented as stated. This, in terms of directives, can cause inconsistency, with some countries choosing to interpret the legislation in significantly different ways to others depending on local payments practices,” Thomalla explained. In October 2015, the European Parliament adopted the revised PSD and reports had a similar attitude to Thomalla.

It was recognised that the law needs to be officially endorsed by separate EU member states before it can be implemented, as most European countries are still coming to terms with the two previous major regulations. In 2012, the Single Euro Payments Area (SEPA) was introduced which required banks to comply with the SEPA rules so that their clients have the ability to make euro payments on a cross border basis to and from all EU states, as well as Iceland, Liechtenstein, Norway, Switzerland and Monaco. The significance of this regulation is that payments are made faster and there would be no difference between national and cross-border payments. Alongside this, 2014 saw the capping and surcharging of interchange fees for consumer cards under the Multilateral Interchange Fees (MIF) regulation. These caps will come into effect at the end of 2015 and the UK government proposes that businesses will take on the rule in June 2016.

As is expected with all new regulations, it is easier said than done and Peter Howitt, director of the Ramparts European Law Firm, comments upon how the PSD2 will increase costs and complexity of doing business in the regulated payments space. “It further limits many of the exemptions, e.g. limited network and commercial agent exemptions). This will increase the attractiveness and use of unregulated payments such as bitcoin. It will encourage the growth of alternative players in the payments sector who do not manage money but who provide useful financial data tools enabling aggregated data analysis for customers on their spending patterns (third-party payment service providers - TPPPs),” Howitt says. Although, the UK may be in need of alternative players and bitcoin may become more popular as a method of making cross border payments. Another aspect that must be considered is how the EU Payments Regulation network is also working to combat and investigate money laundering and terrorist financing, which is something that other European countries are also applying.

Money laundering can be defined by the exchange of money or assets that were obtained criminally for profit and it is of paramount importance that all money service businesses comply with the requirements. This is part of what the EU Payments Regulation sets out in the instructions that detail how funds can be transferred electronically, using payments services such as SWIFT. Despite money laundering prevention processes put in place, Hannah Nixon, managing director and payments systems regulator at the UK Financial Conduct Authority (FCA) explores how important it is for structure to be in place. “Payment systems are the means by which people and institutions move money. They are vital to the smooth running of the UK economy. They underpin our day-to-day lives from high value payments between firms, to receiving your pension into your bank account,” Nixon states.

As Nixon advises, changes are being made to the regulatory payments structure and a new anti-money laundering (AML) directive took effect in 2015. EU countries have been given up to two years to ensure that laws are created with these rules in mind. Germany is one of the countries that focuses on AML more closely, so in future, this country will see the AML directive being applied to a range of businesses that are involved in making or receiving cash payments for goods that are worth at least €10,000. Christian Bächmann, director at ONPEX S.à r.l, explains what effect SEPA had on their company and this raises the question of whether it would evoke the same reaction when other payments regulations are applied. “As SEPA had the highest possible impact on German customers in Europe and they weren’t really ready and aware of the changes, we saw a lot of confusion within the existing systems. It made things even more complicated when the authorities prolonged the specific last starting date for SEPA,” Bächmann explained.

While Germany concentrates on the immediate risk, Sweden is focused on transforming payment systems so they are more secure. The settlement system that is operated by Riksbank, RIX, which settles payments both in Swedish kronor and euros, works under the national regulation for Sweden, “Rules and Regulations for settlement of payments in RIX”. This regulation requires three agreements between Riksbank and the user, which includes an agreement on credit and deposits and a pledge agreement for credit in RIX. With the electronic payments industry growing, it questions the role of cash and if there is a future for this form of payment as Niklas Arvidsson, a researcher at KTH Royal Institute of Technology in Stockholm, explores when discussing the popularity of mobile payment system Swish. “Cash is still an important means of payment in many countries’ markets, but that no longer applies here in Sweden. Our use of cash is small, and it’s decreasing rapidly,” Arvidsson said.

Like in Sweden, the Dutch payments industry has also been embracing technology and innovation. Since the system was introduced, more than 500 million online payments were made using the iDEAL service and interestingly, this is made up of a collection of technical agreements between banks and transaction processes. These services are regulated in the Netherlands by infrastructures such as the Netherlands Authority for the Financial Markets (AFM) and the Netherlands Bank (DNB). The DNB is responsible for controlling the clearing and settlement services in the payments and securities industries and with its mandate which is based on a combination of national law and EU treaties, it aims to promote smooth transactions.

Moving across to digital payments was easier for Luxembourg, as Bächmann explained that “the Luxembourg regulatory body has a very strong technology and data protection aspect in their guidelines.” A large number of citizens of the country work within the financial industry and banks that are located there have experience dealing with ecommerce as is shown by the fact that Skype, Amazon and PayPal are headquartered there. Luxembourg is known to be the first to define innovative legal framework for payment companies and ensure that they follow the EU’s Payment Services Directive and Electronic Money Directive.

It is yet to be seen how these countries will continue to comply with their existing country laws and EU requirements such as SEPA and soon to be mandatory, PSD2. Needless to say, as payments become more streamlined through EU regulation, anti-money laundering efforts will still be a top priority for all countries.

Read more articles like this in our new Payments (R)evolution magazine here.

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