A new era for payment providers

Payments innovation has led to significantly greater convenience and choice for customers in many European markets, but the benefits have been unevenly spread. Whether facilitated by national schemes, such as Sweden’s Swish or the UK’s Faster Payments, or driven by new products and services introduced by innovative payment institutions to address the needs of a particular market segment, payments are becoming faster, cheaper, more flexible, and more transparent. Indeed, the pace of change has outstripped the 2007 Payment Services Directive that opened the door to much of the recent payments innovation in Europe.

As such, a new directive, PSD2, has been drafted to update Europe’s regulatory framework for payments from 2018. PSD2 will introduce two new categories of third-party payment provider (TPP) – account information service providers (AISPs) and payment initiation service providers (PISPs) – as well as detailed rules governing how they interact with existing payment institutions and their customers. PSD2 also includes rules on card surcharges, transparency and security. Alongside other pan-European initiatives on interchange fees for card payments and security for internet-based payments, PSD2 represents a new region-wide effort to improve the payment service user experience through innovation and competition.

What will the post-2018 European payments market look like? Merchants will be attracted by the services of PISPs, which should make online payments simpler and cheaper, while multi-banked customers – individuals, corporates or institutions – are offered the opportunity for greater visibility and control of their account balances by AISPs. But with many of the details still being drafted by the European Banking Authority (EBA), which has been mandated to deliver five sets of guidelines and six regulatory technical standards (RTSs), the rules of engagement have not been finalised. As such it is hard to say what kind of payment institutions will thrive.

Easier entry?

Tuomas Toivonen, co-founder of Holvi, a payment services provider serving SMEs in Finland, Germany and Austria, suggests PSD2 will stimulate competition and give both new entrants and incumbents a clear, common basis for new relationships and services. “Once PSD2 comes in, new entrants will find it easier to establish the relationships with banks to underpin new payment aggregation and initiation services. Although such firms will be able access and extract the information required to deliver new services, the underlying banks will still be visible within the payment chain, which prevents them from offering services on a white label basis,” he explains.

Should banks engage with new service providers or compete with them? According to Toivonen, both options are on the table, and they’re not mutually exclusive. Persisting with traditional models, however, may be more challenging. “PSD2 will force banks to reconsider their core strengths. The directive makes it easier for smaller firms to leverage infrastructure to meet the needs of niche markets with highly targeted services. In this era of micro-customisation, it will be much harder for banks to preserve their existing universal models,” he adds. “Instead, they may be better off choosing in which niches they want to compete, or focus on infrastructure services, becoming a service provider to a range of customer facing firms rather than end users.”

A number of established payments banks are investing in the development of new services to existing customers, as well as forging links with a new customer base. Damian Richardson, head of innovation and strategic initiatives for payments services at the Royal Bank of Scotland, expects an incremental shift in customer behaviour rather than an overnight overhaul in the payments market in 2018, but he suggests banks should be positioning themselves now.

“Already, we have begun to see the emergence of app-based services that embed the tools and capabilities of other offerings. This could be the future model for banks, which can provide the payment functionality within a range of niche retail apps. To do this, banks must adjust to serving a new kind of client: working with developers is very different to serving retail, corporate or institutional clients,” says Richardson. “In the short term, however, there may be a mixed approach, with banks providing payment tools and services to the end-user, whilst also collaborating with developers. For us, the aim is to put in place the capabilities that will enable us to have strategic options in the future.”

The Royal Bank of Scotland has been establishing links with the developer community while also supporting the creation of new services via a series of ‘hackathons’. The bank has also gained valuable experience of linking to third parties via API connectivity with FXmicropay, its multi-currency FX pricing service. Moreover, Richardson believes the fruits of innovation will not be confined to the consumer market.

“For many corporates, the key to improved cashflow management and visibility is real-time availability of data, which is one of the aims of PSD2. Consumer payments services have leveraged digital technologies more quickly, and now corporate treasurers will benefit too,” he says.

Regulatory scrutiny

As banks and TPPs position themselves for the post-PSD2 market, many will be paying close attention to regulatory developments. As part of its efforts to deliver RTSs by January 2017, the EBA issued a discussion paper on strong customer authentication and secure commission in December 2015, and is due to publish a follow-up consultation paper over the summer, outlining its response to industry feedback and proposals for the final standards. The ensuing RTS – which is directly applicable once adopted by the Commission, without further national legislation – will define how payment institutions communicate, collaborate and compete.

“In the Eurozone, the Single Euro Payments Area already provides a common technical standard for payments, but for firms looking to offer services in the UK, Nordics or other non-euro markets, which run separate payment schemes, the details of the EBA’s RTS for PSD2 will be important in harmonising payment initiation mechanisms,” says Holvi’s Toivonen. “If the RTS allows a certain degree of flexibility at the national level, firms that want to offer services across European borders may have to navigate variation across local markets or rely on payment initiation aggregators. On the other hand, initiatives such as the UK’s Open Banking Working Group could provide the framework for developing standards to meet specific needs within national markets.”

Having received more than a 100 responses to the initial discussion paper, Dr Dirk Haubrich, head of consumer protection, financial innovation and payments at the EBA, acknowledges the difficulties the regulator faces in meeting competing priorities.

“The RTS on strong customer authentication and common and secure communication, which PSD2 specifies will apply from October 2018 at the very earliest, requires us to strike a balance between competing demands. On the one hand, providing standards that enable common and highly secure communication between banks and TPPs would imply a great level of detail and prescription in the RTS. On the other, allowing scope for the possible use of innovative and improved technologies in the future would imply a much less detailed RTS,” says Haubrich. “A further consideration is that insufficiently detailed standards for interfaces between banks and TPPs could lead to a scenario whereby industry develops numerous technical solutions, all of which would be compliant with the EBA’s high-level RTS. However, this could lead to high levels of fragmentation – perhaps geographical, but also by sector – which could be used by incumbents to thwart access by new entrants, thus limiting innovation and competition.”

By Sibos 2016, the EBA will have released its consultation paper, which will undoubtedly further fuel debate among payments experts in Geneva. With PSD2 due for phased introduction in 2018, there is still time for banks and other payments providers to finalise their strategies for an even more competitive European payments market – but the countdown has begun.

Find out more from industry experts at ‘ PSD2 – The opportunity to reinvent the online payment and banking experience ’, which takes place on Thursday 29 September at Sibos 2016 Geneva.