At Payments International 2016 in London, I was part of a great panel where we discussed what the new Payments World will look like. Below I am sharing my thoughts on this and particularly post-PSD2. Furthermore, I will share my thoughts on whether the European Commission will be able to keep PSD2’s promise to boost transparency, innovation and security in the single market and create a level playing field between different payment service providers. The driving force behind PSD2 is the harmonisation of the payments landscape, with the end goal of increasing competitiveness and thereby giving the consumer better value.
When I think about the world post-PSD2, it is very hard to predict and it has been much fun to contemplate and discuss this with other market experts. I (as many others) envision that PSD2 would very much be of interest not for companies interested to offer payment initiation or account information services only (which you can claim was the intended target group by the legislator), but for existing non-payment companies with a certain client base, looking to expand their access to data to fulfil customers’ needs even more. That is the real opportunity driven by PSD2. It is all about (Big-) data and increasing the customer value proposition!
Verifone’s CEO Paul Galant recently said in an interview at Sibos that it is no longer just about paying for something: “Payments is now able to inform the entire consumer experience.” With this, the future landscape will be unknown but exciting. Isn’t it all about convenience in today’s world and the future? The more data you have of/for your customers, the more functionalities you can offer, the more likely they are to stay and the more likely to attract customers. And it gets even more interesting as more data becomes readily available by companies that are transforming traditional offline payments (for which still so many credit slips are being sent and cash is being used) to the online world. Competitors, both old and new, will battle and try to differentiate themselves in order to call the users their customers. This battle of customer ownership is not new to the payment world where there are many different pawns in the chain, but is likely to become more severe with the payment chain becoming even more layered.
New (TPP) Payment Services Becoming Threat to Today’s Ways of Paying?The landscape is truly uncertain. Not only are companies from unexpected corners entering the market, also other threats to the world as we know it are lurking around the corner. There is a real possibility that payment initiation services (and instant payments) become a threat to existing payment methods, more specifically alternative payment methods. If you have access to a bank account, why still open an account with a Paypal or other alternative payment provider and link it to your bank account to make payments? An authorization for a transfer would suffice. With the customer’s consent the payment initiator can immediately debit the customer’s bank account. Further, this option, together with the Payment Accounts Directive (offering more bank account access with credit facility to consumers), could be of even more threat to the credit card market. Does this mean the end of the payment ecosystem as we know it? It truly depends upon why a customer picks a certain payment method. Alternative payment methods will remain attractive for the non-banked. Credit cards will remain attractive for consumers preferring the possibility to execute their chargeback right. We can only wait and see (and try to predict for the fun of it).
Yes PSD2 is very much an opportunity for innovation, and these changes are very exciting. It will for sure enable customers’ access to much richer, more customer-friendly and more interesting interfaces, experiences and services offered by FinTechs. It also pressures banks to re-assess their position and re-invent the way they have been doing business for years. But it does not stop there, many companies are already today fully embracing the new API driven and open platform world and the opportunities associated with that. PSD2 can be seen as a catalyst (quoted from Paul Rohan, author of the book “PSD2 in Plain English”) for the new payment ecosystem.
But What About the Failed Promise Then?But there is also another side to PSD2 that many people tend to forget in their excitement around XS2A. There are 117 articles and 113 considerations and only a few of these stipulate the rules around XS2A. For existing non-banking players that are either licensed (or currently fall under an exception) a lot is changing as well, which revisions might not result in a more open market and more opportunities for these parties. Exclusions are tightened, passporting becomes more difficult, obtaining a license becomes harder, picking a home country will be more restricted, exempt payment institutions might no longer be able to apply exemptions, new processes must be implemented and so on (see my other posts providing more details here per topic:https://www.linkedin.com/pulse/psd2-beyond-xs2a-nadja-van-der-veer?trk=mp-author-card.
Therefore, yes, PSD2 will re-shape the industry in the sense that many non-traditional payment companies will probably enter the field and banks and other incumbents need to rethink the way they have been providing services (and some of them are and see PSD2 as stimulus to keep up and stay innovative). However, on the other hand less disruption opportunity is given to the payment companies that are already part of the ecosystem. They will not be able to proceed as is and will have less room to expand their market share and to innovate.
EBA Not Fit For The Job?
It is also yet to see if the EBA has been the proper designated authority to set further standards. The EBA is an authority for the banking sector and part of the established world. Would they really be able to further define the much-needed disruption and the future of the payments world (a very different world than banking overall)? The achievement of PSD2 is to change the mindset of the established world and to drive the market should by innovation. The EBA’s first drafts of regulatory standards could lead to the conclusion that the EBA might not be the appropriate body. Not only was there a lot of push-back from the market on the EBA’s draft regulatory standards for SCA (230 responses!), the just issued draft rules around registration/license requirements seem excessive and overreaching and the barriers to enter the market are getting higher. Does the EBA have the right mindset to change the mindset? Do they understand all these developments the market is faced with and what real impact they will have? Perhaps not. How is the EBA supposed to set the standards in a space that it has been supervising to ensure banks built the necessary intricate processes and systems to foster consumer protection and to ensure history would not repeat itself?
By way of example, a frequently discussed risk (by traditional banks, regulators and supervisors, including the EBA) is the pro-claimed risks to the integrity of the financial sector by non-banking parties (FinTechs) entering the market. However, the G20 watchdog recently announced that FinTech firms pose no risk to the financial system. It is as the secretary-general of the Financial Stability Board says: “Much hype surrounds fintech and it is essential for regulators to understand what developments will actually change the way financial markets operate….In our judgment, most fintech at this stage, have not come to a point where systematic financial system risk are posed.”
An Endless Chase?
With PSD2 trying to keep up with the market and the EBA failing to understand, you may question whether payment regulation will ever be able to keep up. In a space that is constantly changing, how can anyone really keep up? And it is even worse for legislators considering the years involved in making legislation. What the legislator has been contemplating with PSD2 when it first prepared a new draft legislative text (already in July 2013!), is already not the world where we live in. The then emanating technology and infrastructures that were transforming the landscape are certainly only a small part of the innovative technologies introduced in today’s reality.
There is much more going on (than payment initiation and account aggregation), more layers are being added in the payment chain, more and more customer-focused concepts proliferate. Many different models are being tried (which will certainly not all succeed) and it is interesting to note that the core thing they rely upon is data.
The listed payment services, together with the ambiguous and broad definitions given to important terminology (payment account, payment instrument, execution of payment transactions…) or the lack of definitions (entering into possession of funds…) makes it hard to apply on new and innovative FinTech business models. The shape of the payment ecosystem will therefore become (like it is now) mostly dependent upon local interpretations and implementations. It is the constant struggle between rule-based and principle-based legislation. While you do not want to overregulate, a harmonized European market might not be reached if legislation is too much principle-based. With the many options of national discretion given under PSD2, the intended full harmonization of the European financial services sector will certainly not be achieved. Even worse, the desired levelled playing field for payment service providers on a pan-European level and between countries will be more unlevelled.
Nevertheless, competitiveness will for sure increase and consumers will be provided better value. But let’s not forget the other promises of PSD2. You may ask yourself whether PSD2 is going to break its promise on harmonisation in the single market and creating a level playing field between different payment service providers and countries. We will have to await further national implementation, but the European text does not look promising in that regard.