25th May 2016

PSD2: move with the times or get out of the race

Heads up guys, PSD2 is coming to a payment screen near you.

For those who aren’t already familiar with PSD2, here’s a quick trailer:

Anish Kapoor, CEO at AccessPay outlines the tech and business trends impacting corporates, and the ways they can respond to challenges that arise | Video by Finextra

So what is PSD2?

In essence, PSD2 is an overhaul of PSD1 (the Payment Services Directive), which was launched by the European Commission in 2007 as a way of modernising and standardising payments system operations across the EU.

The aim was to make cross-border payments as safe as national payments and encourage further transparency.

PSD1 achieved some success, but is often described as a rocky road to navigate. With some ambiguous guidelines leading to legal uncertainty around how institutions and providers should operate.

And with prolific innovation and changes to consumer purchasing since launch, a revised version really was needed.

What’s the big idea?

The commission says it ‘will help the payments framework better serve the needs of an effective European payments market, fully contributing to a payments environment which nurtures competition, innovation and security’.

Cutting through the jargon, this has implications for both industry and the general populace.

For the general public, this means quicker, more transparent services. Access to money and digital apps offering a global view of their finance and more help to manage funds.  More secure purchases on mobile devices, with better options to retrieve funds in the event of fraud.

For the industry, this will result in a much more competitive, innovative & regulated environment; where each player needs to move with the times or get out of the race.

Unregulated third party service providers (TPPs) have been operating successfully for some time in a number of member states. But now, they fall under the PSD2. Forcing compliance with certain security and insurance measures whilst equally removing barriers from entering more of the market. Crucially, new providers can emerge.

Payment Initiation Services will offer an alternative to cards by ‘pushing’ money from the buyer’s account straight to the merchant. This will undoubtedly decrease revenue streams for banks and card companies, giving merchants better visibility of payments.

Data shows that banks could be poised to lose 43% of retail payment revenue streams by 2020. That is, if they don’t act towards making themselves more appealing to both merchants and customers.

Card fees will also be capped under PSD2. This is good for consumers; who will save on products as merchants will no longer have to pass card fees on to them.

For the traditional players, it looks a bit gloomier. Banks can be reassured though, because – after the initial negative financial implications – this could mean that smaller merchants are willing to accept cards. Thus making it a volume play.

Time to turn the juggernaut

Most banks are currently struggling with outdated legacy systems, once efficient at dealing with their core products.

Now, dismally unequipped to support new functions, services and products that 24/7 consumers are demanding. In fact,  research shows only 14% are ready for PSD2.

There is a dire need for them to embrace developers, who can quickly build scalable solutions to deal with their new competitors.

What banks do already have, however, is customer loyalty. They can build on customer trust by creating intuitive and easy-to-use application suites so that businesses and consumers know what’s on offer.

Both merchants and consumers, particularly businesses, will be unsure how they can benefit and change under PSD2. Banks should be leading the way in showing them.

If the commission wants to create a level playing field, they’ve pretty much achieved it. Whilst new TPPs have the upper hand with innovations, they will have to jump through regulatory hoops that they are perhaps not used to.

Banks, on the other hand, are seasoned at dealing with regulatory bodies. If they see this as an opportunity rather than a red tape, compliance-based task, they can use PSD2 as a launch pad to truly flourish, so everyone benefits.