PSD2 has promised to bring some rather radical changes to the payments landscape but since it’s been brought into force at the beginning of this year little real change has occurred to date - on the surface at least. What’s happening in the background, however, has the potential to drastically alter how people choose to pay and be paid within the EU.
How PSD2 will open up the EU market to new services and providers
The payment landscape has changed significantly since the original Payment Service Directive (PSD1) and many new, innovative players have emerged that offer a genuine alternative to the traditional banking and card payment providers. If you make use of the Global Payments Alternative Payment Method offering you may already be familiar with the likes of Sofort, Trustly or iDeal, which are defined in PSD2 as Payment Initiation Service Providers (PISPs), offering consumers the option to pay using their online banking tool rather than with a credit or debit card.
PISPs provide the ability to initiate a payment directly from a customer’s bank to the specified merchant by making use of the bank’s payment initiation APIs.
The issue with these PISPs, and the other new branch of service providers defined in PSD2, the Account Information Service Providers (AISPs), had been the lack of regulation prior to PSD2s enforcement. For example, many of these services rely on a technique defined as screen-scraping. As a result, some organisations, including the European Banking Authority, has objected to this technique due to inherent risks with customers needing to present a third party with login information and passwords. While this is still a contentious debate, one of PSD2s core goals has been to set standards around privacy and security for these new players and impose a consistent regulatory framework. The benefit for businesses is clear; safer, more secure payment options that their customers can trust.
AISPs provide aggregation services which allow a customer to have a comprehensive view of their transaction and balance information across all the accounts they have authorised the AISP to retrieve data from.
PISPs and AISPs may now have additional requirements to comply with these new EU regulations but there’s plenty of positives for them too. PSD2 effectively breaks the banks’ monopoly over customer account information and payment services - forcing them to open up their data to the AISPs and PISPs via a dedicated interface (i.e. an API). This offers new entrants a viable, potentially superior alternative to the screen scraping techniques relied upon until now. The lack of a unified API standard for Europe is a potential issue but initiatives such as Open Banking in the UK aim to unify the approach, at least on a national level.
Screen Scraping is the automated, programmatic use of a website, impersonating a web browser, to extract data or perform actions that users would usually perform manually on the website. Screen scraping in the world of financial services requires a user to handover their login credentials so that a third party can take action on their behalf.
What does it mean for the industry and how will it challenge the established order.
A point we stress to businesses looking to trade cross border has always been to tailor their payment experience to consumers’ payment preferences in the region or market they are trying to reach. If that is Germany then that means offering payment methods such as Sofort or Giropay, in the Netherlands iDeal is a must have, and if it’s the UK then cards are king.
Understanding consumer payment preferences and meeting their needs should always be the goal. Consumers will tend to have one, potentially two, preferred payment methods and are unlikely to want to change these behavior patterns, so the question of how these new entrants are going to gain traction and break these habits is definitely one worth asking.
For those consumers that are already accustomed to paying online from their bank account, the PISP model will not present any significant change to their current payment experience. What we will likely see is these existing players, and the new entrants that aim to challenge them, begin to push out of the existing regions and into new EU markets to challenge the payment card industry head-on.
For those regions that are card dominated, it will be a significantly larger challenge to break existing consumer habits. The card industry itself is working overtime to focus on streamlining the payment flow and ensuring that payment is as pain free as possible. Solutions such as tokenisation and the e-wallets (such as ApplePay, GooglePay) are designed to ensure a quick, easy and secure payment experience via credit or debit card, reducing the likelihood of customers looking for alternative payment experiences.
PSD2 isn’t just about bank transfers either, the card payments industry is also bound by PSD2 rules around Strong Customer Authentication. This regulatory requirement will be addressed by the card industry via a revamped 3D Secure protocol (such as Verified By Visa, MasterCard SecureCode) that will aim to keep card payments as frictionless as possible while offering a level of security for consumers and businesses alike that’s on par with even the best alternative payment methods.
The success of PISPs in these card dominated regions will likely be a slow burn (at best), as consumers become aware of the new options that become available. The real question is whether PISPs can offer a sufficiently superior payment experience to win over card paying consumers and incentivise them to change their payment habits. For businesses, the opportunity to avail of lower processing fees is an obvious incentive to encourage adoption but meeting consumers’ demands will always come first. What’s more, the recent regulation around interchange charges has driven down the cost of card acceptance in the EU anyway.
While PSD2 is undoubtedly a major milestone in the evolution of payments in the EU and has the potential to be game changing in its disruption of the payment industry, consumer behaviours will ultimately dictate the way that businesses accept payments. At Global Payments, we believe that we will see an industry shift to accommodate a broader range of payment options, but that we’ll have to wait a little longer to see how that takes shape.
How Global Payments can keep you ahead of the pack
Global Payments is perfectly positioned to continue to support your card processing needs, help grow your business and create a friction-free payment experience for your customers, while granting access to more than 140 alternative payment methods worldwide including the major European payment solutions.
We are passionate about payments and innovation, and we continually enhance our solutions to help you stay one step ahead of your customers demands.
For more information on our Payment Methods offering and ways that you can improve payment acceptance for your business, you can talk to a member of our team, simply fill out your contact details and we’ll be in touch shortly.