Payment Services Directive 2 (PSD2)
The Directive on Payment Services (PSD) was developed with the aim of legally creating and regulating a single payment services market, applicable EU-wide. The intention is to further improve competition, greater efficiency and higher cost reductions. Traditional financial institutions generally see PSD2 as a threat, but opportunities await those who are open for it.
Notwithstanding a noticeable progress in incorporating retail payments in the EU into the current legislative framework, the revised version of the PSD1 is an important step forward in contributing to a further integrated and efficient European payments market, by including new elements and improvements.
On the 8th of October 2015, The European Parliament adopted the revised Directive on Payment Services. PSD2 will be formally adopted accordingly by the EU Council of Ministers in the near future. The Directive must first be published in the Official Journal of the EU and from that date, Member States will have two years translate the necessary changes for compliance into their national laws.
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Third Party Payment Service Providers (TPPs)
Under PSD2, traditional financial institutions are classified as ‘Account Servicing Payment Service Providers’ (ASPSP) whereas those without a banking license are the so called ‘Third Party Payment Service Providers’. The latter category, arguably the most significant amendment introduced by PSD2, encompasses two types of services; Third Party Account Information Service Providers (AISP, also called Account Information Aggregators) and Third Party Payment Initiation Service Providers (PISP). A TPP does not hold a payment account and does not enter into possession of the funds being transferred. According to the proposed directives, AISPs have to be given access to account information – provided permission is granted by the account holder. Subsequent to banks releasing this information, it can be used for AISPs innovative services. PISPs, on the other hand, will be allowed to initiate payments commissioned by the account owner and thus facilitate the use of online banking to make internet payments.
Multilateral Interchange Fees (MIFs)
Despite previous regulations, the European cards market remains fragmented and interchange fees are widely varying. On the 24th of July, the Commission adopted a legislative package proposing PSD2 and a Regulation on Multilateral Interchange Fees. In order to establish a level playing field, an interbank fee cap was included in the MIFs proposal – the so called Multilateral Interchange Fee. These can be defined as the fees agreed between the acquiring payment service provider and the issuing payment service provider, for each sales transaction made. According to this regulation, the charge can be a maximum amount of 0,2% and 0,3% for a debit- and credit card-transaction respectively.
Opportunity or Threat for Banks?
Cooperation is the Answer
One could argue that traditional banks will suffer from regulations due to losses related to the cap on interchange fees – but that would be taking a blinkered view of the matter. The capped fees are likely to result in an increased card payment usage by customers and acceptance by retailers. Consequently, the losses can be partially counterbalanced by an expanded volume of transactions and savings on cash handling. Since there will be less cash circulating, fewer costs will result from ATM withdrawals and more interchange fees will appear in return. With TPP services on the rise and their inclusion in PSD2 – a fortiori – banks run the risk of being increasingly disintermediated and losing transactions to these parties. Fundamental here is that banks should regard the PSD2 regulations as an opportunity rather than a threat; collaboration with TPPs, FinTech companies and customers to create an app store can avoid the wedge between customer and bank to be driven any further. It comes together with the advantages of customer loyalty without the disadvantages of development and innovative maintenance. Another way to deal with the issue is to establish TPP services themselves. Those banks that see the business opportunities behind the regulations and compliance measures, are most likely to succeed and keep up with the customer experience needs.
The new payments regulation is all about opening up the bank with technology and consequently, will have a huge impact on the business model. PSD2 has a crucial role to play in the increase of transaction volumes and the maximization of customer value. The moral of the story here is that every party affected by it – and traditional banks in particular, should be open to the wealth of business opportunities it brings along. More specifically, collaboration is key to enlarge the benefits of each party and to secure financial institutions’ position and relevance to customers. There should be no winning or losing but all stakeholders should work on a partnership-based model and mindset – and if banks need to open up in the light of PSD2 then a timely act of doing so could guarantee a strong position in payments in the future. The banking sector needs to adapt and change its mindset – Sia Partners can help organizations rethink customer relationships and revenue models, as well as provide a pertinent understanding of the new regulations and its plausible implications. Moreover, it can reassess business processes, product development and competitive threats of new entrants.