Payment monitoring in the EU: regulatory requirements and opportunities for business

The European Union (EU) has established a comprehensive regulatory framework for payment services aimed at ensuring the security, transparency, and efficiency of financial transactions. These rules are mandatory for all payment services operating within the EU, including banks, fintech companies, and other financial institutions.

For businesses that are already operating or planning to enter the EU market, understanding and complying with these regulatory requirements is critical to ensuring compliance, mitigating risks, and optimizing operations.

1. Payment Services Directive 2 (PSD2)

EU Directive 2015/2366, known as PSD2, sets rules for payment services in the EU. It aims to increase competition, security, and consumer protection in the field of electronic payments.

Key provisions of PSD2:

• Strong Customer Authentication (SCA): requires multi-factor authentication for most electronic payments, which increases transaction security.
• Open banking: requires banks to provide third parties with access to customers' payment accounts (with the customer's consent), which promotes the development of innovative financial services.
• Regulatory Technical Standards (RTS): establish requirements for secure authentication and communication between payment services.

However, PSD3 was released to replace PSD2 for more effective regulation and protection. You can read more about the differences ➡️ at the link.

2. Anti-Money Laundering Directives (AMLD)

The EU has adopted a series of directives aimed at preventing money laundering and terrorist financing. The latest of these, the Sixth Directive (6AMLD), expands the list of criminal offenses and increases the liability of legal entities for involvement in money laundering.

Key aspects of 6AMLD:

• Expansion of the list of crimes: includes new offenses such as cybercrimes and environmental crimes.
• Criminal liability of legal entities: companies may be held liable for participating in money laundering.
• Tougher penalties: Minimum prison terms and other penalties are set for violations.

3. Central Electronic Payment System (CESOP)

From January 1, 2024, the EU will introduce the CESOP system, which requires payment service providers to report cross-border payments in order to combat VAT fraud.

Key provisions of CESOP:

• Reporting on cross-border payments: payment providers must provide information on transactions exceeding a certain threshold.
• Information exchange between EU member states: helps detect and prevent fraud.

You can find out more about CESOP on the European Commission website ➡️ taxation-customs.ec.europa.eu.

To ensure compliance with EU regulatory requirements, businesses must implement effective payment monitoring systems that include:

• Customer identification and verification (KYC): collecting and verifying customer information to prevent fraud.
• Transaction monitoring: identifying suspicious transactions and reporting them to the relevant authorities.
• Record retention: keeping transaction and customer information for a set period of time.

Staff training: regular training of employees on AML requirements and other regulatory standards.

Payment monitoring in the EU is critical to ensuring the security of financial transactions and compliance with regulatory requirements. Businesses seeking to operate in the EU market must implement effective monitoring systems and adhere to established standards to avoid sanctions and ensure customer trust.