Europe’s Payment Services Directive 2 (PSD2) is due to come into force in January 2018, once all the national parliaments have passed the required legislation. Some commentators are calling it the biggest change in banking, ever.
The main thrust of the new regulation is to improve competition in payments across the Eurozone by:
- enshrining strong customer authentication and privacy guidelines across the eurozone;
- providing a standard for banking APIs that each bank is required to support; and
- providing a mechanism for consumers to pay for online payments directly via their bank account instead of the usual credit or debit card rails.
PSD2 Is More Than Open Banking APIs
Most of the attention and commentary so far has been around the open banking APIs (also known as XS2A or ‘access to accounts’), and every bank in the Eurozone must implement these open APIs (although the details of the ‘standard’ are yet to be published, so confusion abounds). But changes are also planned in the way that consumers can pay for products and services. If you elect to pay for your purchases via bank account, the Payment Initiation Service Provider (a ‘PISP’ in PSD2 terms) will allow online merchants to ask for permission to securely access your bank account (via the open banking APIs, with constraints such as only receiving a Yes/No response as to whether you have the funds available). The benefit to consumers and merchants is that multiple intermediaries are removed from the payment lifecycle, and this will result in savings. Of course, you can still pay for your purchases via credit card as well, and enjoy the protections that the card schemes and issuers provide. But customers will have a choice, and that is one of the goals of PSD2. If you’re familiar with iDEAL in the Netherlands, then you have a good idea of how this will work. PayPal is also similar (assuming you have a bank account as the funding source), although of course you won’t pay the PayPal fees. And liability for unauthorised purchases is also reportedly capped at €50, similar to credit cards.
Opportunity For Online Merchants
So given that consumers in Europe overwhelmingly prefer using debit to credit, PSD2 will create opportunities for online merchants to provide another mechanism for consumers to pay for goods in a consistent manner across the Eurozone. Studies have also shown that many merchants will elect to pass on the savings to consumers. How big is the opportunity? A recent Accenture study estimated the savings at £1.45bn of card transaction revenues between 2017 and 2020. And that is just in the UK. What should merchants do to capture the opportunity? Online merchants should carefully review their payments strategies to ensure they are well-positioned to take advantage of the change. Those who move quickly will be able to gain a bigger slice of the shift in payments revenues.