The Payment Services Directive (PSD) came into European law in December 2007 to regulate payment services and service providers throughout the EU, with the aim to create a single market for payments across the eurozone. The main objectives of this directive are to create a common platform across participating nations for legislating payment service providers (PSPs) and reduce entry barriers to allow new, non-bank players into the payments industry.
With the aforementioned objectives in sight, the benefits that can be achieved upon implementation of PSD are the following:
- New players can enter into the market with ease. The PSD defines a new class of providers called payment institutions (PIs), which has a broader scope than just banks, credit institutions and electronic money institutions.
- The directive facilitates hassle-free entry for non-EU payment providers into the region, increasing the scale of the market. Cross-border services will be more easily available.
- The customer choice increases, and as a result competition will drive the market to deliver a higher standard of products and services.
- The development of the common platform eases the regulators’ duties, and there will be standards, common across the eurozone, to protect customers.
- Greater competition will trigger innovation and product development and increase efficiency.
Increased Scope of Regulation
Until now, the broader area surrounding payments had little regulation. Also, with rapid technological advancements, new types of institutions are actively entering this sector. Only the banking and credit sectors came under the regulatory purview. The PSD aims to increase this scope in order to cover every aspect of payments. The newly-defined PI category will include organisations such as money remitters, retailers and mobile operators. The PSD will cover all electronic and non-cash payments, but does not cover cash and cheque payments.
The PSD has brought in improved supervision and controls in the sector. It has allowed institutions other than banks to participate and thus increased the competition. The well-defined rules for running the business and standardised service assessments will ensure that there is a level playing field in the market.
With the new regulation in place, a company need not apply for separate licences in each of the EU Member States. An organisation can apply for authorisation with the competent authorities of their home Member State and then apply for passports in all other states without a great deal of additional information.
Authorisation will be provided to a legal entity in a home Member State, with its registered and head offices in the same Member State. Once authorised, the organisation can apply for licenses to operate in other host Member States. Competent authorities of the home and host Member States will carry out the necessary steps in order to facilitate this.
This is a strong incentive for corporate players, big and small, to enter the European market. Also, for an existing player in a European nation, this will be an easy opportunity to spread its reach across the continent. Earlier, there were different national laws in each of the countries, which created much legal complication. After the introduction of the PSD, a firm will be able to provide payment services throughout the EU without having to apply for a new licence each time: a one time licensing by the authority in any of the home countries is sufficient.
The directive mandates that an end user of the payment services be provided with all the relevant information, including that pertaining to the provider and the service being offered. This includes the charges, processing time, spending limits, refund rules, etc. Detailed terms and conditions have to be given to the customer and any changes to them must be properly communicated. The PSD clearly states that all this information has to be provided in a manner that is easily accessible and understandable.
Therefore, customers stand to gain a lot with this increased transparency. The power of complete information gives them the option of choosing their PSPs wisely. As a direct consequence, firms in the market will have to be extremely competent to survive in this standardised environment. They will have to invest in technology and productive manpower in order to provide payment services efficiently, quickly and safely.
The PSD will be crucial in providing a basis for the implementation of the single euro payments area (SEPA). SEPA, which is a banking initiative, aims to create a single market across Europe for the payment industry, in which all electronic payments across the continent will be considered to bedomestic. There will be no separate national markets and the unification will result in increased efficiency and cost reduction.
The transposition into national law of the PSD is seen as a milestone in the implementation of SEPA. It will serve as a pilot project and the lessons learnt from PSD will help in making the SEPA initiative a successful one.
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