PSD1, PSD2, PSD3: 15 years of EU legislation in a nutshell

Issue 541 | 1 November 2023

PSD1, PSD2, PSD3: 15 years of EU legislation in a nutshell

Who, at the beginning of the 2000s, could offer payment services in the European Union?

At that time, it was extremely difficult to answer the question. Companies which provide payment services could fall under extremely different legal requirements from one Member State to another.

In some countries, one company needed to require authorisation. In others, the same activity would require to become a credit institution, obtain an electronic money institution (EMI) license, a dedicated license… or no authorisation at all.

In 2007, the EU ended this and harmonised the law across the continent with the first Payment Services Directive (PSD1).

The choice of a directive

In EU laws, two key terms often appear: “directives” and “regulations.” These are important tools that the EU uses to make and enforce laws, but they work in slightly different ways.

Directives are like guidelines that the EU gives to its member countries. When the EU issues a directive, it tells each country what the end goal or result should be.

However, it leaves the specific details of how to achieve that goal up to each country’s own laws and government. So, member countries have some flexibility in implementing these rules, as long as they achieve the intended outcome.

On the other hand, regulations are more like strict, one-size-fits-all rules. When the EU passes a regulation, it becomes the law in every member country, and each country has to apply it exactly as written. There is less room for individual interpretation or adjustment.

One of the main advantages of the directive is that the European legislator does not have to think about every single payment institution that may be affected by the new text. Each country can adapt the legislation to its own specific payment landscape.

On the flip side, the lack of standardisation of the rules on the day-to-day retail payments scope can be challenging. We will come back to this below.

PSD1: the foundation for a single European retail payments market

PSD1, or the first Payment Services Directive, was introduced in 2007 and enforced in 2009 with the primary objective of laying the groundwork for a unified European retail payments market.

This legislative framework was designed to serve as the legal basis for establishing a single European payments market, enhancing the safety and innovation of payment services throughout the European Union. Its core aim was to make cross-border payments as seamless, efficient, and secure as domestic payments within any EU Member State.

Another significant aim of PSD1 was to foster competition and diversity in the payment services sector, thereby reducing the exclusivity of traditional banks in this domain. This directive opened the door for new players to enter the market and introduce price competitiveness, beyond the traditional world of banking institutions.

An important consequence of PSD1 was the introduction of electronic money institution licenses, which paved the way for non-traditional entities like Ayden to thrive in the European market. The landscape of payment service providers expanded as a result, with thousands of them settling in the EU.

PSD2: open banking and strong customer authentication for groundbreaking legal innovations

The Commission quickly proposed to revise PSD1 in July 2013. It was adopted in 2015.

PSD2 widened the scope of PSD1 by covering new services and players as well as by extending the scope of existing services, enabling their access to payment accounts.