Payment Landscape

How PSD3 will impact participation in schemes

Victor Mithouard
September 2023
min read

Clearing and settlement systems (CSMs) are at the core of European payments. Every day, 48 trillion payments are cleared by those systems using the standard language of ISO XML files. However, the requirements to directly participate in the clearing and settlement process is a demanding process from a financial, technical and regulatory perspective.

For example, only 300 financial institutions are direct participants in the SEPA area. All of them are credit institutions (banks), as the regulation currently doesn’t allow PI/EMIs to be direct participants. So, how can PI/EMIs also place payments to CSMs? Through more intermediated participation models, which simplify the complexity of accessing the schemes.

In the article, we will explore the four main participation models. And with the upcoming third payment service directive (PSD3) in 2025/2026, we will also explore what PSD3 might mean for financial innovators looking to build products in the SEPA area.

The different ways to participate in payment systems

Non-participant access

In the non-participant access model, companies will send and receive payments as any individual or corporate customer would, using the services of a payment services provider or a bank. In this model, companies send payment orders to their PSP or bank and receive payments on their account by exchanging customer-grade messages or information with their bank or PSP. They do not have to process payments or exchange information with third-party financial institutions.

Participant access

In this model, companies become participants in payment systems. They send and receive payments as if they were a bank, exchanging bank-grade messaging with third-party financial institutions.

Banks’ indirect access solutions In this model, companies will connect to the SEPA payment systems and settle payments via a “sponsor bank”. The sponsor bank is itself a direct participant and holds settlement accounts with the European Central Bank. The sponsor bank will forward messages from and to the indirect participants to payment systems and settle payments through its own European Central Bank settlement accounts.

Directly connected non-settling participation The directly connected non-settling participant (DCNSP) is restricted in the SEPA area to banks. (while in the UK it is also open to PIs and EMIs). In this model, the company will directly connect to the payment systems for payment instructions, but settle payments via a sponsor bank. The sponsor bank is itself a direct settling participant and holds European Central Bank Settlement accounts. The sponsor bank will settle its DCNSP payments through its own European Central Bank settlement accounts.

Direct participation In the SEPA area, the directly connected non-settling participant (DCNSP) is restricted to banks. (while in the UK it is also open to PIs and EMIs). In this model, the company will directly connect to the payment systems and settle payments via its own European Central Bank settlement accounts.

How to choose between models for financial institutions

Participating in the schemes (indirect, DCNSP, DSP) is usually linked to the financial institution looking to issue their own accounts and associated IBANs - a must for EMIs and banks opening accounts for their clients. Other reasons to participate can be additional control on payment operations and lower cost per payment.

Between the different participation models, the consideration is mostly linked to the annual volume of payments and how the complexity of build/maintenance offsets the higher marginal cost per payment of more indirect models. A direct participation model can also enable the financial institution to onboard other institutions as indirect participants.

The table below summarises a way to think about the different participation models.

Payment system participant model considerations
Indirect participantDirectly connected non-settling participantDirect participant
Indicative number of payments200,000 - 2M per year2M - 20M per year20M+ per year
Relative billed cost per transactionHighMediumLow
Technology build costMediumHighVery high
Operational costMediumHighVery high
Liquidity costLowLowVery high
Indicative scenarios - Growing UK PI/EMI
- Established foreign PI/EMI launching in the UK
- Foreign cross-border payments company for UK collection and payouts
- Launching UK bank
- Established foreign bank launching in the UK
- Market-leading UK PI/EMI
- Market-leading foreign PI/EMI addressing the UK market
- Growing bank
- Established bank
- PI/EMI looking to obtain UK banking licence

What we know of the upcoming PSD3 changes

The third payment services directive (PSD3) aims to modernise the European retail payment systems, increase consumer controls over their data and reduce fraud. The proposal - to be clarified over the coming years - encompasses six main areas of action, one of which aims at democratising access to retail payment systems for financial innovators.

The previous payment service directives already built towards a more open and participative financial system. PSD1 (2009) created the electronic money institution license that financial innovators like Stripe leverage in Europe. PSD2 (2017) introduced open banking and the payment institution license, further increasing the regulatory options for financial innovators.

PSD3 aims to further level the playing field between banks and non-banks by allowing non-bank payment service providers (PIs or EMIs) access to all EU retail payment systems, with appropriate safeguards, and securing those providers’ rights to a bank account. Few details have, however, been shared so far on how this direct participation model will work:

  • Will it be open to both non-settling and settling participants

  • How will CSMs enforce the fraud/screening/liquidity roles that sponsor banks currently have

  • What will the onboarding process look like for PIs and EMIs

Looking at the UK payment systems offering DCNSP and DSP models, elite PI/EMIs have adopted the opportunity of direct participation with 43 participants as of 2023 (around 6% of all PIs/EMIs in the UK) in comparison to 1513 indirect participants. At Numeral, we are looking forward to our PI/EMI partners being able to see the opportunities that this change will bring about.

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