The revised Payment Services Directive, or PSD2, has been the catalyst for much of that discussion. Although its scope is broad - it covers licensing, authentication, cybersecurity and much more - its attempt to break open a bank-dominated payment sector to outside competition has been its most eye-catching manoeuvre.
Once PSD2 takes effect in January 2018, banks in all EU member states are required to let newly authorised third party providers (TPPs) gain access to customers’ account data. Providing they have consumer consent, those TPPs will be able to initiate a credit transfer directly from one account to another.
Based on the relative success of companies already doing that on the continent, there are clear incentives for online retailers to steer shoppers away from cards and towards payment initiation. Those services undercut the fees retailers pay to merchant acquirers and eliminate the risk of fraudulent charge backs.
They also avoid the kind of processor outages that have plagued Monzo, Revolut, Curve and others using app-based prepaid cards. And once an EU-wide shift towards real-time settlement for credit transfers, even on cross-border payments, retailers will benefit from having immediate access to funds they receive.
Researchers so far have forecasted a bright future for TPPs. A report by Ovum, published in in June this year, that the volume of non-card instant payments would overtake that of cards by around 2024. Ten years from now, Ovum predicted that the total value of non-card e-commerce payments will stand at around €338bn, compared with €260bn for cards.
Dave Birch, director of innovation at Consult Hyperion, suggested a month later that “could be an underestimate”.
“There are various stakeholders — merchants in particular — who I think will heavily incentivise consumers to move over to instant payments and away from existing card infrastructures,” Birch said. “It’s not crazy to think that might happen a little bit quicker than you think, because so much of this stuff will be in-app.”
At the same time, European Union legislators have worked hard to eliminate potential barriers facing TPPs. Security standards accompanying PSD2 will force banks to develop highly functioning technological interfaces that third parties will use as a mechanism for account access.
That reform has a long history; existing TPPs complained that banks were deliberately building interfaces that would limit what data they receive, garnering sympathy from some corners of the EU.
The European Commission has since moved to ensure there is as little wriggle-room for banks as possible. Those security standards are yet to be finalised at EU level, and will not take effect until mid-2019 at the earliest, but appear likely to introduce stringent performance targets that banks’ application programming interfaces, or APIs, must meet.
Some questions remain, however. In many European markets, consumers are granted considerable protections if they use their cards to shop online. Many may associate that protection with their bank, rather than the card scheme, and so could be surprised to learn they are more exposed when using payment initiation services.
Murmurs that a consumer-friendly framework or rulebook for third parties have gathered pace in London and Brussels. PaymentsCompliance revealed this summer that Lloyds Banking Group suggested the UK’s Open Banking Implementation Entity could set up and manage a “scheme” for third parties under PSD2, with similar liability arrangements to those in the Visa and Mastercard systems.
Although that did not come to fruition, Payments UK and other trade associations within the EU have resurrected the idea in recent months.
However, if the current appeal of TPP services is that they are cheaper for the retailer, would the added legitimacy come at the cost of higher fees and lower margins? If savings are no longer deliverable to merchants then the incentive to push consumers away from cards start to disappear.
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