Adapting to change: A new era in European payment regulations

EU’s digitalisation initiatives to transform the payments industry

The digitalisation and modernisation of the EU’s financial landscape is driven by several significant regulations designed to foster innovation, promote competition, deepen EU financial integration, provide customer protection and allow customers more control over their data. These include the Payment Services Directive 3 (PSD3), Payment Services Regulation (PSR), Financial Data Access (FiDA), Instant Payments Regulation (SEPA) and the Digital Euro package. Each of these components aims to push the EU’s financial sector towards a more integrated and efficient future.

PSD3 and PSR: Strengthening customer protection

PSD3 is primarily focused on the authorisation and supervision of payment institutions, imposing stricter requirements to ensure enhanced security and reliability. However, it is PSR that will bring more substantial changes for banks and their customers. PSR aims to bolster customers’ protection against fraud and misuse of their data. One notable feature is the introduction of a customer dashboard, allowing users to see what data is held by their banks, who it has been shared with and to manage these data-sharing permissions.

Barton emphasizes: “This regulation will significantly shift liability from customers to banks, necessitating robust security measures and a customer-centric approach to data management. Additionally, PSR will mandate banks to enhance their authentication processes, ensuring secure and seamless customer experiences.”

FiDA: Expanding the horizon of open finance

Building on the success of open banking, FiDA will broaden the scope of data sharing to include wealth management, insurance and other financial services. This regulation will enable the instant and electronic exchange of information between European financial intermediaries, facilitating more comprehensive and efficient financial services to customers.

According to Barton, FiDA is expected to have the most profound impact due to its extensive reach and the detailed nature of the data involved: “For instance, obtaining a home loan could become a much quicker and less cumbersome process. Banks would be able to instantly verify property ownership, home insurance details and other relevant data, potentially reducing the processing time from several weeks to just a few hours.”

Instant payments and the Digital Euro: The new normal

The Instant Payments Regulation, set to come into effect in the next five months, will require banks to enable electronic payments within ten seconds, at no additional cost beyond standard transfer fees. This regulation will apply to both business and consumer transactions, marking a significant leap towards real-time banking.

The Digital Euro, projected to be launched by 2028, represents a move towards digitising the currency. It aims to offer the convenience and security of digital payments while retaining the usability of cash. Barton notes that this initiative will require extensive updates to banks' treasury and IT systems.

Challenges and strategic adaptation

The financial sector faces numerous challenges in adapting to these regulations. “A significant portion of banks are still grappling with defining the necessary changes,” says Barton. “Largely due to the regulations not yet being finalized. EY is actively involved in helping banks conduct impact assessments and gap analyses to prepare for the upcoming shifts.”

A major concern is the need for extensive IT modifications. 81% of banks surveyed acknowledge that they will have to upgrade or modify their existing infrastructure. This need spans across various functions, including compliance, operations, HR, legal, marketing and product development.

Furthermore, Barton points out that the banks she surveyed often struggle to balance their strategic initiatives with compliance requirements: “The demand for IT support, particularly for developers and experts familiar with legacy systems, is expected to soar, presenting a resource challenge.”

Opportunities for innovation and growth

Despite these challenges, the new regulations also present substantial opportunities for innovation. Banks can leverage these changes to develop new products and services, enhancing customer experiences and creating competitive advantages. For example, the standardised and instant availability of financial data under FiDA can facilitate the development of AI-driven services that offer personalised financial advice and streamlined processes creating opportunities for innovation in financial services.

Moreover, the increased focus on strong customer authentication and enhanced security measures opens avenues for fintech partnerships. Fintech companies specializing in fraud prevention and security solutions could collaborate with banks to meet the new regulatory requirements while offering innovative services.

Preparing for the future

Barton underscores the importance of proactive adaptation to these regulatory changes: “Financial institutions need to conduct thorough impact assessments to understand how the regulations will affect both their operations and strategy. Being first to market with compliant and innovative solutions can provide a significant competitive edge.”

In conclusion, the evolving EU payment regulations represent both a challenge and an opportunity for the financial sector. While compliance will demand significant resources and strategic adjustments, the potential for innovation and improved customer services is immense. By preparing proactively, banks and PSPs can not only meet regulatory requirements but also position themselves as leaders in the new financial landscape.