On October 8th, 2015, the European Parliament adopted the European Commission (EC) proposal of the revised Directive on Payment Services (PSD2). PSD2 must be transposed into national legislature by European (EU) member states no later than January 13th, 2018. The genesis of this regulation is the EC’s green paper, published in 2012, entitled “Towards an integrated European market for card, internet and mobile payments”. Commissioner Margrethe Vestager, responsible for competition policy, said: "We have already used EU competition rules to ensure that new and innovative players can compete for digital payment services alongside banks and other traditional providers... The new Directive will greatly benefit European consumers by making it easier to shop online and enabling new services to enter the market to manage their bank accounts ".
What does it mean?
The key PSD2 regulatory requirements are as follows:
1. Give Third-Party Payment Providers (TPP’s) access to payment accounts. Banks must grant TPP’s access to a consumer’s payment accounts (XS2A). Two new types of TPP’s have been defined:
a) Account Information Service Providers (AISP) – AISP’s offer online services which can provide a consolidated view of a consumer’s payment accounts
b) Payment Initiation Service Providers (PISP) - PISP’s initiate payment transactions at the request of the consumer from an account held by the consumer at another payment service provider
2. Introduce Strong Customer Authentication (SCA). SCA is mandated for electronic payment transactions and requires authentication by two or more factors. The factors are:
a) Knowledge (something only the user knows, i.e. a password)
b) Possession (something only the user possesses, i.e. a token or mobile phone)
c) Inherence (something the user is, i.e. biometrics)
The European Banking Authority (EBA) must define the regulatory technical standards for SCA in January 2017. There are exemptions for Digital Wallet Providers and Pre-authorised Merchants which could provide real competitive advantage for those that qualify.
3. Reduce consumer liability. A consumer’s maximum liability for an unauthorised transaction is reduced from EUR 150 to EUR 50.
4. Prohibit surcharging on card payments. Surcharges must not be applied to any transaction that is accepted in accordance with the European Union’s regulation on interchange fees for card-based payment transactions.
Disruption, transformation, innovation
PSD2 will undoubtedly herald a new era in the EU where the payment account will become even more relevant at the expense of the payment card. The EC want “secure, efficient, competitive and innovative electronic payments” and the prevailing view is that the card payment infrastructure which has been around since the 1950’s is not frictionless enough to achieve this in isolation. PSD2 seeks to drive change by opening payment account access to allow consumers to benefit from more payment options which will undoubtedly reduce costs and friction and enable the provision of new value-added services such as account information consolidation, data analytics, lending and others which have yet to be conceived.
Incumbents and new players
For incumbent members of the payments ecosystem, PSD2 is a call to innovate or run the risk of revenue and market share erosion and disintermediation by incumbents elsewhere in the value chain or new players. The potential impact and opportunities open to each incumbent are identified below:
Banks - face increased competition from AISPs and PISPs and loss in issuing revenue offset by cost reductions. Banks can monetise data made available via open APIs and can offer third-party products and services or become a PISP or AISP.
Card Schemes – face revenue and market share erosion. Card schemes can diversify by becoming PISPs or AISPs. MasterCard’s purchase of Vocalink and its rebranding is very interesting in this context.
Merchants – will have more choice for payments which will mean investment for enablement and potential conversion rate drop-off due to SCA. Merchants can become pre-authorised and thereby exempt from SCA and can also embed bank account payments into their in-app solutions and reduce cost and latency and improve conversion.
Payment Processors – face increased competition from AISPs and PISPs and the cost of enabling bank account payments but can also become AISPs and PISPs.
PSPs and Acquirers – face increased competition from AISPs and PISPs, bear the cost of enabling bank account payments and revenue & market share erosion but can also become AISPs and PISPs.
The potential opportunities open to each new player are identified below:
AISPs – will be able to offer value-added services such as data aggregation, identity verification and data analytics.
PISPs – will be able to initiate payments without using the card network thereby reducing the cost latency and friction.
Through PSD2, the EC is creating an ecosystem for further innovation and open competition of the payments industry in the EU. The introduction of open APIs into the media, travel and technology infrastructure industries led to widespread disruption and the emergence of new players such as Netflix, Expedia and Amazon Web Services, and this will undoubtedly occur in the payments industry also. Innovation by incumbents and new players alike in making payments more seamless for consumers, creating new value-added services and making the process more efficient and cost effective will determine the winners and losers in this brave new world.
About Peter O’Halloran:
Peter O'Halloran joined First Data in 2013 and is Vice President and General Manager, eCommerce, EMEA and Non-Executive Director of First Data Polska S.A. (Poland). Peter is also the Founder and Managing Director of Gestion Consultancy and a Collaborator with Fintech Ireland.