The Promise of PSD3: Modernising Open Banking with API access at the forefront

To meet the challenges and opportunities of ongoing digital transformation, the European Commission has proposed a groundbreaking package of measures. In this blog post, we'll delve into the exciting developments of the payment services directive, now known as PSD3, and the introduction of the Payment Services Regulation (PSR), which the industry has eagerly awaited since 2021. We also highlight an expected structural change that a successful European digital ecosystem can’t do without - an enhanced API first approach. 

Modernising Payment Services in the EU

PSD3 and the new Payment Services Regulation aim to tackle payment fraud, enhance consumer rights, level the playing field for banks and non-banks, and improve the functioning of open banking through three interventions:

1. Promoting an API-First Landscape

The most exciting aspect of this legislation is its commitment to further promoting an API-first landscape. APIs (Application Programming Interfaces) play a crucial role in facilitating data sharing and fostering innovation in the financial sector. They are also fundamental to digital transformation–a ubiquitous tool in the modern tech economy that is still in the early stages of being incorporated into and transforming financial services. 

But wait, what do you mean early stages? APIs were already mandatory! We hear you say - and that’s correct from a regulatory perspective. However, the reality in the market is different. Screen scraping (the “modified customer interface” is still heavily relied on as a contingency mechanism for ‘inadequate’ API connections. Many of the security and efficiency benefits contemplated by PSD2 simply haven’t come to fruition. Article 45 of the proposed PSRs resolves this by firmly mandating API usage for access, and Article 38 provides for a much more narrow set of exceptions - something that will help drive the market to APIs, which remain the safest method for data exchange and messaging between TPPs and ASPSPs and the easiest way to scale the adoption of digital financial services. 

By sharpening the mandate of data access in secure machine-readable formats, the framework opens the door for more innovative and user-friendly financial products and services. This API-first approach will revolutionise personal finance, simplifying processes like product comparisons and loan applications, benefiting consumers and small businesses alike.

2. Optimising Open Banking

Remaining obstacles hindering the adoption of open banking services will be removed in the new Payment Services Regulation. Our hope is this will lead to increased customer control over payment data and will facilitate  the entry of innovative services into the market. Article 44 of the PSRs lists 12 such obstacles, such as a double redirect when authenticating in an app - which Plaid is very happy to see as they were seriously hampering the growth of open banking in the EU. 

3. Combatting Payment Fraud

PSD3 empowers payment service providers to share fraud-related information, such as IBAN and name matching, enabling a united front against fraudsters. Moreover, consumers will benefit from increased awareness, stronger authentication rules, extended refund rights for fraud victims, and mandatory verification of payees' IBAN numbers against their account names for credit transfers.

Conclusion

The proposed payment services revision marks a significant step towards a more dynamic, secure, and customer-centric financial ecosystem in the European Union. The comprehensive measures introduced in PSD3 and PSR will combat fraud, strengthen consumer rights, and encourage healthy competition among traditional banks and agile fintech firms.

Moreover, the solidified embrace of an API-first landscape promises to unlock possibilities for innovation and convenience in financial services. As we move towards a more interconnected digital world, consumers can continue to look forward to an ever growing offering of personalised financial products and more seamless experiences.

Plaid welcomes this legislation with open arms, as it paves the way for a brighter, tech-driven future, where customers are empowered, data is secure, and the financial sector thrives in the digital age.