PSD2 – should banks be worried?
9 August 2017
Why is European legislation gaining the attention of the global payments market?
The Payment Service Directive 2 aka PSD2– is the revised European payment legislation which comes into effect next year superseding the original PSD and it has everyone talking.
According to PCN Associate, Peter Goldfinch, the bank monopoly on customer account information and payment services is about to end. He explores the impact PSD2 will have on global payments.
Why is this interesting to the rest of the world? Europe is simply providing leadership in the development of more efficient and open payment services. As an example, the Australian government recently commissioned an independent review to look at the best way to implement an open banking regime.*
PSD2 in a nutshell
The hype associated with PSD2 is the fact it allows third party processors to access customer account details through a standard API. By all expert accounts, it is going to open up a rich seam of opportunity for the FinTech sector. I am not convinced this will happen.
Further, new regulations normally increase barriers to entry and additional compliance demands on participants, simply translating into higher costs and therefore leading to industry consolidation. Third party payment providers will need to be registered, meet capital requirements and hold professional indemnity insurance. Security will need to be strengthened, customer dispute procedures up-graded with more favourable refund rights for customers. Surcharging, including those relating to card based transactions, is being outlawed. Increased transparency over fees is being strongly promoted.
What is this all really about?
EMV has addressed fraud on card present transactions. Fraud on card not present transactions is (I would suggest) driving the PSD2 initiative. The card not present transaction processes need to be re-engineered or simply replaced. PSD2’s end game, I suggest, will be to achieve this with near real-time payment services, where merchant accounts are credited based on an authenticated transaction initiated by the purchaser.
How this new payment service will be developed or delivered is a question yet to be answered. PSD2 introduces a new or extended set of players which could be viewed as new names for existing players; these being Account Information Service Providers, Account Servicing Payment Service Providers and Payment Initiation Service Providers alongside the existing Payment Service Providers. Obviously, these players depending on their role will require to be networked unless single providers provide multiple services, which is likely.
Impact on near real-time
A few countries have already introduced near real-time payment hubs with capability of fitting into the PSP2 regulatory framework. These hubs generally have been set up by the existing entrenched players who will deliver competition to the card schemes. MasterCard’s purchase of Vocalink, announced in July 2016, is possibly recognition of this potential competitive threat and is a smart strategic move.
Customer in control
As far as the FinTech sector accessing customer account information, PSD2 is supporting customer ownership of the information and their right to determine who may have access to it. In an environment where citizens have heightened awareness regarding privacy, I would perhaps suggest this is not a regulation that will be a game changer. High net worth customers, subscribers to multiple financial services, delivered by multiple institutions, may find this change to be beneficial along with businesses that bank with multiple institutions, but for the masses little will change.
The biggest impact is most likely to be to the card not present payment segment. This covers bill payment services and e-commerce. EMV cards are still likely to dominate the card present segment, at least in the near term. Within country and economic zones such as Europe we can expect that near-time or faster payment services will:
1. Enable immediate web based (mobile. PC or tablet) person to person payments
2. Enable bill and other payments (C2B, B2B and B2C) in near-real-time reducing the load on ACH systems
3. Become the primary payment method for e-commerce transactions replacing card payments
4. Small business not only will pay their bills in near-real time but also their staff.
In the medium term, we can expect cross border real-time payment services.
The way we think about banking is going to change especially from a customer’s point of view. There will still be licences and the banks are a central player. However, with PSD2 we hope the winner will be innovation but it is likely to make for more regulation which is advantageous to the established players.
Peter Goldfinch - Associate, Wellington