The Payment Services Directive (PSD) promises much but issues surrounding its implementation continue to trouble the payments industry. In this article, we take a look at the PSD, its relevance to corporates and the concerns overshadowing its delivery by the 1st November deadline.
Why is the PSD needed?
Payment services within the European Union (EU) are notoriously fragmented, with different countries adopting their own rules and procedures for managing and processing payments. For years now, the European Commission (EC) has championed the need for an inexpensive, quick and reliable payments service across the EU as part of its single internal market vision.
The arrival of the euro as currency in 1999 was a critical step towards the single market goal but it did not create uniformity within the payments industry, even within the Eurozone. Since then, various initiatives have continued to prepare the way for harmonisation, for example, Regulation (EC) 2560/2001 regulating cross-border euro payment charges and the EU Financial Services Policy 2005 – 2010 reinforcing the EC’s commitment to a single, open and secure financial services market. Last year, the Single Euro Payments Area (SEPA) was established together with the launch of the SEPA Credit Transfer Scheme and SEPA Cards Framework – projects led by the European Payments Council (EPC).
However, it is the PSD that will remove the legal obstacles that have hitherto prevented a harmonised payments environment. This Directive creates a legal framework within which all electronic domestic and cross-border payment services in the EU must operate – covering all the EU currencies, not just the euro. Every EU member state must transpose the PSD provisions into its own national legislation by 1st November this year and banks conducting payments business within the EU must be ready to comply with these laws. In particular, the Directive’s enactment supports the SEPA initiative by providing the necessary customer protection for the SEPA Direct Debit Scheme due to launch on the same date as the deadline for PSD transposition.
The PSD seeks to achieve a harmonised payments environment by:
Establishing a modern and coherent legal framework with co-ordinated prudential provisions at national level.
Ensuring the rights, protection and obligations of payment services users and providers.
Creating a level playing field for all payment systems.
Enabling accessibility to all markets for all types of payment services providers (as appropriate).
Improving transparency of payment information and charges.
Increasing payment efficiency.
Promoting a competitive market and consumer choice.
Encouraging demand for pan-European payment services.
The PSD has 63 preliminary statements (recitals) introducing 96 Articles, which cover various provisions for the new payments landscape. The Articles are divided into six Titles (sections) and an Annex. Overleaf, we provide a short summary of each section and highlight several aspects of the PSD that may be of interest to corporates.
Contain background information indicating the EC’s intentions when preparing the Directive. These help to clarify the content of the Articles.
Defines the categories of payment services provider and the scope of the Directive. It also establishes a new type of payment services provider called a ‘payment institution’. These are providers that are not involved in deposit taking or issuing electronic money (ie non-banks).
Establishes the necessary regulatory and supervisory issues governing payment institutions eg for authorisation, registration, capital requirements, liability and the safeguarding of funds.
Covers the transparency of conditions and information requirements in relation to single payment transactions and payment transactions covered by framework contracts. It also gives provisions for the derogation of low-value payment instruments and electronic money from certain requirements.
Defines the rights and obligations of payment services providers and payment services users eg with regard to charges, authorised and unauthorised transactions, execution, refunds and out-of-court redress.
Enables the Commission to adopt measures amending certain ‘non-essential’ elements of the Directive and provides for the Commission to be assisted by a Payments Committee.
Defines the responsibility of member states to ensure full harmonisation under the Directive and provides for a review by November 2012 as well as specific transitional and exemption arrangements.
Defines business activities considered to be payment services within the scope of the Directive.
PSD highlights for corporates
Specific information must be given to the user, by the payment services provider (the provider), before a payment contract or offer is binding. Certain information must also be given to the payer after receipt of the payment order and to the payee after execution. This includes the maximum execution time, charges payable by the user and interest and exchange rates (where applicable).
Users must not be charged for any information in connection with the requirements of Title III, although charges may be agreed between the provider and the user where the user requests extra or more frequent information or uses an alternative communication method to the one specified in a framework contract.
The full payment amount must be sent from payer to payee, ie without provider charges being deducted. If the payee agrees, the payee’s provider may deduct charges before the payment is credited to the payee’s account, but this charge must be clearly identifiable in information provided.
Payment transactions are to be credited by the payer’s provider to the payee’s provider’s account no later than the end of the next business day after point of receipt (extendable for paper-initiated payment transactions). Until 1st January 2012, a payer and their provider may agree any time period that is no more than three business days.
For cash placed on a payment account held with a provider, by non-consumers, in the currency of that account, the amount must be value dated and made available no later than on the next business day after the receipt of funds. For consumers, the amount must be value dated and made available immediately after the receipt of funds.
The credit value date for the payee’s payment account must be no later than the same business day on which the amount of the payment transaction is credited to the payee’s provider’s account, and must be immediately available thereafter.
The debit value date for the payer’s payment account must be no earlier than the point at which the amount of the payment transaction is debited to that payment account.
Providers are liable for correct execution of the payment in accordance with the unique identifier provided by the user (with some exceptional circumstances).
Unauthorised transactions must be immediately refunded to the payer by the payer’s provider who must also restore the payer’s account to the state it would have been in had the unauthorised transaction not taken place (as long as the user notified the provider without undue delay and not later than 13 months after the debit date).
Where the payment services user is a non-consumer such as a corporate, the PSD allows for the provider and non-consumer to agree not to apply, in whole or in part, provisions in Title III and some specified provisions in Title IV. These may include some of the highlights mentioned above.
Member state options
The PSD is attempting to standardise a payments environment from 27 different country perspectives and so it was perhaps inevitable that member states would be given some options to help ease them towards a more harmonised approach.
The PSD therefore contains 23 Articles which give member states the opportunity to adapt specific provisions to suit their own country requirements, effectively allowing a certain amount of difference in stringency between the laws applied in different member states. These options cover various issues including the burden of proof being on the provider in relation to information requirements, the non-application of out-of-court redress procedures for corporates, reduced liability on the part of the payer for unauthorised use of a payment instrument and shorter maximum execution times for national payment transactions.
The purpose of an EU directive is to require member states to achieve the provisions it contains but not to stipulate how they are to be absorbed into national legislation. Thus, in addition to the 23 member state options, some of the Articles are open to individual interpretation and may also lead to different standards being applied. For example, whilst Article 81.1 requires member states to apply penalties when PSD provisions within national laws are infringed, it does not clarify the extent or size of such penalties or, indeed, the sort of methods it envisages to compel their use.
The possibility of legislative differences resulting from individual interpretations (or even misinterpretations) of the PSD is worrying the payments industry and particularly the banks. The PSD Expert Group, set-up by the European Credit Sector Federations, supports the PSD activities within the industry by making recommendations and highlighting areas of concern to the EC. In the EPC’s newsletter dated 22nd January 2009, Ruth Wandhöfer, Chairperson of the PSD Expert Group, identified three particular issues which, if not adequately addressed, have the potential to cause problems.
Applying PSD provisions to payments moving between a member state and a country outside the EU single market (known as one leg-out transactions), despite the PSD’s intention to the contrary.
Defining time limits for an ‘immediate’ refund of unauthorised transactions that do not allow sufficient time for a provider to investigate whether or not it is unauthorised, especially where there is suspicion of fraud.
Applying value dating principles for bank holidays (ie when providers are closed) in the same way as for business days.
To help avoid significant disparity between national laws, the EC established the Payment Services Directive Transposition Group (PSDTG). The PSDTG is responsible for monitoring PSD activity and for helping the Member States to understand how the Directive should be interpreted. It includes representatives from the government bodies of all the EU member states.
Progress to date
At the time of writing, all member states have committed to the 1st November deadline. Most member states plan to adopt the PSD by the end of Q2/Q3 but a few are leaving it close to the deadline, thereby delaying the availability of their final legislative text. Although the current economic climate may be contributing to slower progress, some governments are making headway. In the UK, for example, new payment regulations were implemented on 2nd March 2009.
Impact on banks
Most banks, if not all, have already set up PSD compliance teams. As payment services providers, they need to assess how the PSD impacts on all aspects of their operations – systems, procedures, product offerings, client contracts etc. However, whilst the PSD text has been available for over a year, the lack of finalised national legislation means that banks do not yet have a complete understanding of how the different laws will apply the PSD provisions and member state options. For those banks with a presence in more than one EU country, national differences will need to be taken into account and could mean implementing different procedures. The longer it takes for EU governments to finalise their new laws, the tighter it becomes for banks to meet the November deadline.
The PSD represents a significant cost to banks, not only because of the investment necessary to comply with its requirements, but also because of its impact on their revenue and cash flow eg due to the reduction in float and non-deduction of charges from payment transaction amounts. For many banks, the significant investment needed to implement the changes – combined with reduced revenue and a more open and competitive market – is particularly difficult when profit margins are already tight. It is possible that some banks will begin to review the position of payments clearing and settlement within their business and whether or not it is a core strategic function. If not, outsourcing to another bank may become an attractive option for them.
Impact on corporates
The PSD is good news for corporates, bringing considerable benefit in the area of payments and cash management. Banks should already be discussing with their corporate clients the effect the PSD will have on their existing payment arrangements and business. In many cases, terms and conditions will be amended to reflect the new, improved standards. However, corporates should be clear about the non-consumer opt-outs they agree to and may find that different providers may adopt different approaches to applying these. Indeed, corporates should be vigilant in ensuring that the bank services they receive will be in compliance with PSD legislation.
While the PSD is a mandatory directive and an important part of the EC’s single market vision, the payments industry continues to speculate on whether or not the 1st November deadline will be achieved by all Member States as well as on the level of harmonisation the PSD will bring. Ironing out all the legislative wrinkles in one go was always going to be a challenge and it may not be fully achieved by the forthcoming PSD alone. However, the PSD is a significant milestone for the European payments industry – and the EC – bringing it within touching distance of a fully harmonised payments environment.