EMD3 and PSD3: What the EU's New Payment Framework Means for UK EMIs

The European Commission published its proposals for a revised Payment Services Directive (PSD3) and a Payment Services Regulation (PSR) in June 2023, alongside the proposal to merge the Electronic Money Directive (EMD2) into this new framework. This represents the most significant structural change to EU payment regulation since PSD2 entered into force in 2018. For UK-authorised electronic money institutions, the implications are material — particularly for firms with EU customer bases, EU agent networks or aspirations to operate across European markets. This article examines the key changes and their practical impact on UK EMIs.

What Is EMD3 and Why Is It Happening?

The term 'EMD3' is used colloquially to describe the absorption of the Electronic Money Directive into the new PSD3 framework. Strictly speaking, there is no standalone EMD3 — the European Commission's approach is to merge e-money regulation into PSD3 and the accompanying Payment Services Regulation (PSR), eliminating the separate directive entirely. The rationale is that the distinction between payment institutions and electronic money institutions has become increasingly artificial. Many PIs issue stored value that functions identically to e-money, and many EMIs provide payment services that are indistinguishable from PI activities. The Commission concluded that maintaining two separate authorisation regimes for substantially similar activities creates unnecessary complexity, regulatory arbitrage opportunities and consumer confusion.

Under PSD3, the issuance of electronic money becomes a regulated payment service — meaning it can be conducted under a single payment institution authorisation. The separate EMI licence category ceases to exist in the EU. Existing EU-authorised EMIs will transition to the new PI framework during a transitional period, the details of which are still being finalised through the legislative process.

Key Changes Under PSD3/PSR for E-Money

Single authorisation framework. EU firms will no longer need to choose between PI and EMI authorisation. A single licence covers all payment services including e-money issuance. This simplifies the authorisation landscape but requires existing EMIs to transition their permissions.

Enhanced safeguarding requirements. The PSR introduces strengthened safeguarding obligations, including mandatory segregation of funds in accounts at central banks or credit institutions, with more prescriptive requirements around reconciliation frequency and reporting. Notably, the EU's approach to safeguarding reform runs parallel to — but differs from — the UK's PS25/12 safeguarding regime.

Stronger consumer protection. PSD3 introduces enhanced fraud liability provisions, including mandatory reimbursement for certain types of authorised push payment (APP) fraud — aligning with the UK's existing PSR reimbursement requirement. The scope and mechanics differ between the UK and EU approaches.

Open banking evolution. PSD3 strengthens requirements around access to payment account data, addressing the practical barriers that have limited open banking adoption under PSD2. Account servicing payment service providers (ASPSPs) face enhanced obligations to provide reliable API access.

Stricter AML integration. The PSR integrates more directly with the EU's Anti-Money Laundering Regulation (AMLR), which replaces the current directive-based approach with a directly applicable regulation and establishes the Anti-Money Laundering Authority (AMLA) as a centralised supervisory body.

Impact on UK EMIs

The UK is not adopting PSD3 or the PSR. The FCA retains the existing regulatory framework under the Payment Services Regulations 2017 (PSRs 2017) and the Electronic Money Regulations 2011 (EMRs 2011). The UK has confirmed that it will maintain the separate EMI authorisation regime — there are no current proposals to merge PI and EMI licensing in the UK. This means UK and EU payment regulation will diverge further as PSD3 comes into force.

No passporting. Since Brexit, UK EMIs cannot passport into the EU. This position does not change under PSD3. UK firms serving EU customers must either establish an EU-authorised entity (under the new unified PI framework) or partner with an EU-licensed institution. Firms that previously relied on passporting and have not yet restructured their EU operations face an increasingly urgent timeline.

Dual-regime compliance. UK EMIs with EU operations — whether through subsidiaries, agents or direct customer relationships — will need to comply with both the UK's EMRs 2011 framework and the EU's PSD3/PSR framework simultaneously. The divergence in safeguarding requirements, consumer protection obligations and AML standards will increase compliance complexity and cost.

Competitive positioning. The unified EU authorisation may make it simpler for EU-based competitors to offer combined payment and e-money services, while UK EMIs operating in the EU must navigate the new framework from scratch. Conversely, the UK's retention of a distinct EMI regime may offer regulatory clarity for firms operating exclusively in the UK market.

Safeguarding divergence. The UK's PS25/12 safeguarding reforms and the EU's PSR safeguarding provisions are developing on parallel but distinct tracks. UK EMIs operating in both jurisdictions will need to maintain safeguarding arrangements that satisfy both regimes — which may require separate safeguarding accounts, different reconciliation frequencies and dual reporting.

Timeline and Legislative Process

PSD3 and the PSR are progressing through the EU legislative process. The European Parliament and Council reached provisional agreement in early 2024, with formal adoption expected in 2025 and application from 2026–2027. The transitional arrangements for existing EMIs converting to the new PI framework are expected to provide 18–24 months from the date of application. UK EMIs with EU exposure should be planning now rather than waiting for final text.

What Firms Should Do Now

1. Audit your EU exposure — identify all EU customers, agents, distributors and partner relationships that may be affected by PSD3.
2. Assess your EU market strategy — determine whether you need an EU-authorised entity under the new framework or whether partnering arrangements are sufficient.
3. If establishing an EU entity, begin the authorisation planning process now — Lithuanian, Irish and Dutch regulators are the most common choices for UK firms seeking EU payment licences.
4. Map safeguarding divergence — compare your current UK safeguarding arrangements against the emerging PSR requirements to identify where dual compliance will require operational changes.
5. Review AML frameworks — assess whether your AML programme can accommodate both UK MLR requirements and the EU's new AMLR framework.
6. Engage specialist regulatory counsel to navigate dual-regime planning and EU authorisation strategy.

Regulatory Context and Outlook

The divergence between UK and EU payment regulation is accelerating. While both jurisdictions are strengthening safeguarding, consumer protection and AML requirements, they are doing so through different legislative instruments with different timelines and different detailed requirements. For UK EMIs, this creates a compliance environment of increasing complexity — but also opportunity. Firms that plan proactively for dual-regime operation will be better positioned than those that react to legislative deadlines.

Regulatory Counsel advises UK EMIs on PSD3/EMD3 implications, EU market access strategies, dual-regime compliance planning and EU authorisation applications. Contact us for a free initial consultation. See our EMI sector page for more on our EMI advisory services.