PSD Part 1: Definition, Mechanism and Scope
The diagram below illustrates the relation between the PSD and other initiatives such as SEPA , EC2560 and UK Faster Payments.
As can be seen it is broader in scope than any of these ideas; indeed it forms the overarching legal framework for virtually all payments activity in Europe, hence its importance to UK banks (by contrast, SEPA is only concerned with euro denominated payments but PSD cares about all currencies).
Definition and Dates
The PSD is a set of European laws which have been framed with the objectives of:
- Enhancing competition between national payment markets by opening up markets and ensuring a level playing field across Europe
- Increasing market transparency for both users and providers of payment systems
- Standardising rights and obligations of providers and users of payments services in the EU with a strong emphasis on a high level of consumer protection
- Promoting modernisation and efficiencies of payment systems
- Provide the legal framework for SEPA (See Single European Payments Areas for more information).
The key dates are:
- 24/04/2007 – the law was passed in the European Parliament
- 01/11/2008 – the latest time for countries to transpose the law into their own legislation
- 01/01/2012 – All payments to comply with value date changes.
Mental Model for Scheme
In constructing the PSD the legislators have a general model of how payments operate. This is illustrated in the diagram below.
The essence of their thinking is that there are five players.
- The Payer – This can be an individual or a company and they instruct their PSP (see PSD Part 2: Impact on Competition and Changes to Pricing for a definition) to move money to the payee such as via a credit transfer. The payer can also give permission to their PSP to allow the other PSP to withdraw money (e.g. via a direct debit, card transaction or an ATM withdrawal).
- Payer’s Payment Services Provider (PSP) – This figure would typically be a credit card issuing company or a bank with whom the payer has an account but could be a company such as Western Union that only provides a payment service.
- Payee – A person or company that is to end up receiving the money.
- Payee’s Payment Services Provider (PSP) – This organisation receives or collects the money on behalf of the payee. The organisation has a contract with the payee about this process. Typical examples would be a Merchant’s credit card acquiring company, collecting credit card payments for a retailer or the bank with which the payee has an account.
Clearing and Settlement Mechanism (CSM) – The regulators want the way the banks co-operate with each other to move money around to be an area of competition and innovation so the PSD makes virtually no rules about the nature, roles, ownership of CSMs. The regulators believe that as long as the interfaces to the consumers from the PSPs is mandated, and the overall timescale is mandated, then how the money moves is up to the industry to sort out.
In a given situation an individual or organisation can be playing more than one role; for example an individual withdrawing cash at an ATM from his bank account is both the payee and payer. In the situation where a person is making a credit transfer from his account to another person who has an account at the same bank; the bank is acting as PSP to both the payer and payee. In both these scenarios, the PSD still requires the existence of two different contracts; one between the payer and his PSP, the other between payee and his PSP.
The aim of the PSD is to standardise the contractual relationship between payee and payer PSP and payee and payee PSP. It also aims to make these contracts more transparent and biased in favour of the consumer. It also places demands on the PSPs in terms of overall elapsed times. The PSD legislators are far less concerned with the Clearing and Settlement mechanisms believing that being proscriptive here would inhibit innovation and competition.
The diagram illustrates the geographical scope of the legislation. Essentially is applies to all the European Economic area countries and Switzerland.
The payment instruments covered are:
- All electronic payments; credit transfers both national/cross border; direct debits both domestic and cross border.
- All payments involving a payment card or similar device (e.g. credit card payments, debit card payments, electronic purses, PayPal account, mobile phone based payments).
- All issuing and/or acquiring of payment instruments (especially including card acquisition services – see What is a Merchant Acquirer for an explanation).
- Money remittance services; e.g. Western Union money transfer services.
- Cash deposits and withdrawals where these involve an account (e.g. ATM withdrawals, cash deposits into or out of an account in a bank branch).
In general a payment transaction is considered inside this geographic area if both the payer’s and payee’s Payments Services Providers (PSP) – see PSD Part 2: Impact on Competition and Changes to Pricing for a definition – are in the PSD area. Thus a payment inside a PSD country or between two PSD countries is covered but one to or from the USA would be outside the PSD legislation.
There is no upper, nor lower limit to the values of payments covered; i.e. whether a payment is for 10 pence or £1Bn it is covered by this legistlation. Individual countries have the option when transposing the PSD into local laws for some aspects to be not imposed for low value transactions (less than EUR30).
The payment instruments that are out of scope are:
- All cheques and paper instruments including travellers cheques and giro credits.
- Cash only transactions; i.e. the purchase of goods with cash (but not where cash is being paid into or out of an account).
- Money exchange transactions; i.e. transactions where cash in one currency is exchanged for cash in another currency.
- Cash transportation services such as Securitas.
- Non general purpose cards such as store cards or loyalty cards.