The European Commission's proposal for the Payment Services Regulation (PSR) aims to bring payments and the wider financial sector into the digital age, addressing shortcomings identified in the current Payment Services Directive 2 (PSD2) . The proposed regulation seeks to strengthen user protection and confidence in payments, improve the competitiveness of open banking services, level the playing field between banks and non-bank payment service providers (PSPs), and improve enforcement and implementation in EU Member States. The regulation is set to be adopted after the summer 2024 EC elections, with a implementation timeline 18 months after (or end 2025 / early 2026).

One of the key areas of focus in the PSR proposal is the improvement of Strong Customer Authentication (SCA) requirements. While SCA under PSD2 contributed to reducing certain types of fraud, the prescriptive nature of the SCA rules created significant hurdles for customers and innovation. The PSR proposal aims to address these shortcomings by adopting a more outcome-focused approach and emphasising the uptake of new technological developments to enhance the customer experience while combating fraud .

What changes can we expect and how will they potentially impact retail payment acceptance by Merchants?

As with PSD2, the EC has chosen to delegate authority to the EBA to develop the detailed technical requirements for SCA within a Regulatory Technical Standard (RTS). Consequently, we do not yet have clarity on the precise changes, although the PSR text does give an indication of the areas we can expect change.

For their part, the EBA are required to provide the RTS within 12 months of the entry into force of the PSR. If, as expected, the PSR enters into force in late 2024, then the RTS will be published by the Commission around late 2025, with PSPs required to comply with the PSR in middle 2026.

Whilst extensive changes and clarifications are expected to existing SCA requirements, the following are most likely to impact retail payments;

• PSPs must provide all customers (including elderly, low digital skills, disabled) with accessible means of performing SCA which is not reliant on the exclusive or implicit use of a SMART phone.
• SCA is required where a payer sets up a Direct Debit remotely (i.e. online)
• Merchant Initiated Transactions must be authenticated on the set up of recurring payments and not required thereafter unless the payer is involved in the initiation of the payment transaction.
• The conditions for exempting the application of the procedure of SCA are likely to be amended.
• Technical requirements for transaction monitoring performed by PSPs are to be amended
• The methodologies, models and methods for Transactional Risk Analysis and the criteria for calculating fraud rates are likely to be amended.
• Security measures for protecting the confidentiality of authentication credentials and data between all parties is to be revised.
• Clarifications and amendments to the standards for open banking and authentication of transactions initiated through a PISP will be revised.

The benefits of the proposed SCA changes are significant for both point of sale and online payment acceptance. By adopting a more outcome-focused approach and leveraging new technological developments, the PSR aims to reduce checkout abandonment, minimise declines, and provide a more seamless customer experience . The enhanced security measures will also improve fraud prevention and protection for consumers, creating a more trustworthy payment environment. Furthermore, the changes will create conditions for Account-to-Account (A2A) payments to thrive, as separate open banking issues are addressed .

The separate introduction of the European Digital Identity Wallet (EDIW) in 2027 will also play a crucial role in improving SCA and payment checkout experiences. The digital identity wallet, containing government-verified identity information, can be used to perform SCA for payments, resulting in a consistent and standardised experience for customers . This development will streamline the authentication process, reduce friction at checkout, and enhance trust in the payment ecosystem.

Merchants must stay informed, engaged, and be proactive in preparing for the upcoming changes to ensure they can capitalise on the opportunities presented by the evolving regulatory landscape and maintain a competitive edge in the single digital market.

Our team of payment experts at Nua Léargas, can help your business navigate the implications of the evolving payments landscape. We can help your business develop effective strategies to respond to the upcoming changes. By proactively addressing the impact of SCA and fraud requirements under the PSR, merchants can position themselves to thrive in the evolving European payments ecosystem, enhancing customer experience, reducing fraud, and driving growth in the years to come.