Payments Intelligence extract: PSD2, the countdown is on: are you ready?12th November 2017
The PSD2 directive is targeted at increasing competition within the payments industry, as well as enhancing the protection of consumers. It could have a dramatic impact on technology, security and the market framework of the traditional acquirer and card scheme environment.
Key elements of the EU’s Second Payment Services Directive (PSD2) come into force in January 2018, but very little is known in the merchant community about what this means and the opportunities it presents.
Building on the foundations of the First Payment Services Directive (PSD), PSD2 incorporates technological innovation and additional clarifications to keep up with the changing needs of the payments industry. Merchants need to be aware of how PSD2 will affect their businesses – especially changes to surcharging – and, in some cases, should be ready to take advantage of opportunities that will arise.
Access to bank accounts
One of these changes is the requirement of an open application programming interface (API), to enable third parties to access shared banking data. An open API will create new competitive opportunities for customers, smaller banks, and other payment providers. This all means that payment initiation service providers (PISPs), who currently send customer payment requests to issuing banks and pay merchants straight from customer accounts will now have complete access to bank account details of consenting customers. They will then
be able to provide competition for the traditional acquirer and card scheme route. Customers will have a choice to pay with their card or directly via a bank account. Merchants will be able to benefit from lower fees if PISPs, as is the intention, charge less than acquirers and card schemes.
Figure 1: Current vs future PISPs
With so many technical details still need unresolved, it is very possible that PISPs won’t take off as intended and may fall short of revolutionising the market. Until regulation comes into force and the new market opportunities are exploited we don’t know the extent to which PISPs will compete with card schemes, however, there is still a very real possibility that the entire payments market could be irreparably disrupted. Card schemes could be forgiven for being a little nervous.Visa and Mastercard have highlighted PSD2 as a threat, with both citing that competition generated from the open API could impact their volumes as “bilateral agreements” between entities that prefer not to use the card networks become more prevalent. The sections devoted to PSD2 are not extensive, however, and share prices have not reflected any perceived increase in future competition, which suggests that the industry does not particularly see PISPs as a threat. Indeed, there are still many unanswered questions surrounding PISPs, including how much information banks are obligated to share, whether they can charge for certain features, and how the level of fees charged could be decided.
Interestingly, large merchants may wish to consider the possibility of becoming a PISP themselves: in cutting out acquirers and card schemes, merchants could deal with banks directly and only face those direct fees. If the merchant is large enough then this becomes a viable proposition and they can, in effect, become their own acquirer. Merchants should approach this opportunity very seriously, but also with a degree of caution: creating an inefficient or insecure system could be costly in many ways, however, a well thought out and maintained system could result in lucrative cost savings.
The biggest problem with getting consumers to use PISPs, rather than the familiar card networks, is trust. A recent survey by Accenture suggested that half of all consumers will use a PISP product that is secure, but that 76% of them would choose traditional banks over third-party PISPs. It is likely that, in this very new market, the firms that establish trust early will be the PISPs that consumers choose to stick with. With a third of debit card payments and a tenth of credit card payments expected to move to PISP by 2020, it will be vitally important that new PISPs build trust quickly to fully enjoy this expected boom.
Importantly, in a market previously dominated by card networks, merchants will soon have the power of choice – and thus the ability to put downward pressure on scheme fees. In response to this competition, schemes have a number of possible options available to them.
- Gain a foothold in the PISP market themselves,
- Improve their product offering, or
- Make network fees more competitive, which would have the greatest impact on merchants.
Over €740 billion of card tansactions in Europe are expected to be processed through Payment Initiation Service Providers (PISPs) by 2020.
Another important change is the implementation of strong consumer authentication (SCA) as a standard. SCA requires that at least two independent elements of knowledge, possession or inherence be presented for a transaction to be authenticated. A payment service provider must apply SCA when the consumer accesses a payment account online, initiates an electronic payment transaction, or carries out an action through a remote channel that may imply a risk of fraud. Contactless payments up to €50 are exempt, provided that the cumulative amount since the last SCA is under €150 or five consecutive transactions, as well as parking fares, standing orders, low-value transactions below €305, and transactions
identified as low risk based on a number of requirements.
If this standard is not adhered to, then merchants could be liable for any fraudulent payments made, and this could be costly. However, fraud can be combated using other tools such as tokenisation and encryption of customer data, as well as having robust fraud management processes with an effective chargeback-dispute team. That being said, SCA compliance could also be costly. Terminals unable to comply will need to be updated and merchants will need to revisit agreements with acquirers to ensure that their payment processes are compliant. Acceptance rates could also be negatively impacted by SCA, especially online. If a transaction cannot be authenticated to the required level, then that transaction cannot proceed. And if security measures are deemed excessive by consumers, then merchants may experience customer drop-outs. For online merchants unable to use inherence for authentication – because the customer is not physically present – their options are already limited, and a strategy must be developed to avoid falling acceptance.
Figure 2 : Payment authentication methods
Linked primarily to the protection of the consumer and improving the visibility of payments, PSD2 will prohibit surcharging on any form of card payment that is covered by the Interchange Fee Regulation (IFR) caps introduced on the 9th December 2015 in the EU. Member states have the right to extend the scope of the ban, which the UK has already done by banning surcharging on all consumer payment instruments, thus including American Express, PayPal, Apple Pay and others.
Surcharging is often used by merchants as a way of recouping some of the costs of accepting cards, and especially more expensive card types. Without this revenue, they will need to devise an effective strategy or absorb the costs. Many consumers are currently discouraged from spending by credit card due to surcharging, but merchants will no longer be able to use this steering mechanism. If consumers prefer to spend via credit card because of card rewards, then merchants could see a shift towards credit card spend. It will be important for merchants to understand the true cost of the ban, including the movement from debit to credit spend, as well as assessing other possible areas of cost mitigation.
They may need to consider increasing the price of their goods and services. Knowing what the rest of the industry is doing is crucial, as customers may react poorly to a new booking fee if you are the only merchant to implement such a change. See our Surcharging white paper, Surcharging, the countdown is on – CMSPI white paper
PSD2 is now only a few months from being implemented, so merchants must understand how it will affect them and how best to respond. PSD2 will be beneficial for merchants that take full advantage of competition in payments processes from PISPs, but could represent a challenge in terms of navigating surcharging bans and SCA compliance. Optimising current deals,
devising strategies for compensating the lack of surcharging revenue, and preparing for accepting payments via PISPs should be at the top of merchants’ immediate payments priorities. The clock is ticking.