Revised Payment Services Directive would bring more businesses within scope of the regime, says expert

Technology and payments expert Angus McFadyen of Pinsent Masons, the law firm behind Out-Law.com, said that the draft revised Payment Services Directive (PSD II) (102-page / 2MB PDF) contains "significant change" to the existing scope of the directive.

Rules, including those on transparency and the provision of information, will apply to "one leg out" transactions, where money is being sent out of or into the EU, if the changes are implemented as proposed. McFadyen said that this will not be welcomed by many financial institutions but it is much more proportionate than suggestions to bring one leg out fully into scope as that wouldn't fit the existing rules on execution time, charging and provider liability.

The draft also extends the scope of PSD II to cover new services and service providers enabling access to consumer accounts. Proposals would require third party payment initiation services and account information platforms to be licensed or regulated and supervised as payment institutions. This is targeted at bringing the legislation up to speed with developments in mobile payment applications, and payment methods such as bank to bank transfers like the Dutch iDEAL system, McFadyen said.

The 'limited network exemption', which is intended to free up instruments used within a limited network of service providers or in exchange for a limited range of goods and services, has also been tightened in efforts to harmonise its use across Europe. "The European Commission points out that this exemption was being used increasingly by 'large networks involving high payment volumes and ranges of products and services', for example gift cards issued by shopping centres or high street cards," McFadyen said.

Existing PSD transparency and information requirements would also be extended to cover "all currencies", rather than just EU currencies as is the case at present, and would also apply in relation to the parts of payment transactions involving third countries that occur in the EU. McFadyen said that it remains to be seen whether the reference to "all currencies" is intended to cover, or somehow control, the growth of virtual currencies such as Bitcoin.

The original PSD, introduced in 2007, sets rules governing electronic means of payment. Its purpose has been to enhance efficiency, competition and innovation in the European payments market by integrating national payment markets. The rules affect banks, e-money issuers, payment service providers, mobile operators and merchants, among others. The PSD was implemented into UK law by the Payment Services Regulations in 2009.

In its foreword to the draft PSD II, the Commission said that although there had been "significant innovation pace" in the retail payments sector over the past few years, important areas of the market remained "fragmented along borders". This was particularly true in relation to newer methods of payment, such as internet and mobile payments, it said.

"The latest developments in these markets have also highlighted certain gaps in the current legal framework for payments and market failures in the markets for card, internet and mobile payments to be addressed in this initiative," it said.

"The review of the European framework and notably the Payment Services Directive ... [has] led to the conclusion that further measures and regulatory updates, including adjustments to the PSD, are required so that the payments framework can better serve the needs of an effective European payments market, fully contributing to a payments environment which nurtures competition, innovation and security," it said.

A harmonised payment security and authentication regime is also proposed, with the European Banking Authority (EBA) made responsible for developing "concrete security standards applicable to all payment service providers". These standards would be based on those laid out by the European Central Bank (ECB) and the European Forum on the Security of Retail Payments (SecuRe Pay) earlier this year, which payment service providers have until 1 February 2015 to implement. McFadyen said that the new standards would be relevant throughout the payment chain, from banks to individual retailers, and would necessitate contractual and technical changes for many.

The draft also proposes further controlling payment surcharges, taking account of last year's Consumer Rights Directive and proposed new measures on interchange fees for card-based payment transactions. Payment service providers will be prevented from applying surcharges that "exceed the costs borne by the payee for the use of the specific payment instrument"; however PSD II will prevent charging for the use of credit cards and other instruments regulated by the forthcoming interchange fees regulation.

"Today, the payment market in the EU is fragmented and expensive with a cost of more than 1% of EU GDP or €130 billion a year," said Internal Market and Services Commissioner Michel Barnier. "These are costs our economy cannot afford. Our proposal will promote the digital single market by making internet payments cheaper and safer, both for retailers and consumers."

The proposals will now be debated by the European Parliament's Economic and Monetary Affairs Committee (ECON) before passing to the European Parliament and member states for approval. The Commission said that it hoped work would begin "as soon as possible after the summer" due to the importance of the proposals.