PSD2 paves the way for a new way to pay online across Europe. Instead of using a card, consumers will soon be able to pay directly from their bank accounts. Similar schemes have been extremely successful in other countries – in the Netherlands the iDeal scheme accounts for more than half of e-commerce payments – but PSD2 will open up a pan-European market.
Payment from a bank account has several benefits over a card payment. It is more secure - the customer interacts directly with their own bank, rather than passing information via a merchant where card details and other sensitive information may be leaked or hacked. It potentially costs less than cards because one of the parties in the value chain – the acquirer – is not required, eliminating their processing costs. There is also no card scheme to be funded, and no interchange fees to be paid. Payment service providers should be able to offer merchants a more attractive deal for bank account payments than for card payments.
While PSD2 presents a cheaper, and safer way of paying, is it any faster? When using normal SEPA payments, faster is an area of weakness for PSD2. At the instant the transaction happens, all the bank can provide is a guarantee that the payment will be made the next day. However, a bank using instant payments (via the SCTInst scheme) has a far stronger offering, because they can transfer funds into the merchant’s account instantly. This gives account payments three strikes against cards – cheaper, safer, faster.
Meeting the (already) high expectations of customers
So far so good, but there are some difficulties to be overcome. The first is friction in the customer journey. A traditional e-commerce card payment requires you to fill in your name, address, card number, expiry date and security code. It’s not difficult to improve on that, but other payment methods that use card “rails” provide a very slick user experience – think of Amazon One-Click or Apple Pay. The “Strong Customer Authentication” (SCA) requirements of PSD2 could make it difficult for banks to match the best of today’s customer journeys - though the latest Regulator Technical Standards have made a big step in the right direction by allowing SCA exemptions based on risk analysis. Also, SCA requirements apply to card payments as well as bank account payments, so will require modifications to some current card payment journeys.
Another obstacle to overcome is ubiquity. The “faster” benefit only occurs if both the customer’s bank and the merchant’s bank are using SCT Inst. At the moment, the SCT Inst scheme is voluntary, so European account coverage will be patchy on day one. If it is sufficiently widespread that customers and merchants see the benefits immediately, growth will be rapid and quickly reach the tipping point where banks see membership not just as a benefit, but as essential for survival. The list of banks that are planning to participate in SCT Inst includes most of the major players in Europe, so there is a good chance that the critical mass will be achieved soon after the scheme is launched.
Money will talk
There is a consideration on the receiving side of the equation concerning fees. In the cards world, a merchant normally receives a single settlement payment from the acquirer, backed by a statement providing the breakdown of the credit into its component transactions. Instant payments are different; each transaction results in a separate credit to the merchant’s account. Many banks would charge the merchant for each of these credits, offsetting the savings compared with card processing. There is a commercial opportunity here for banks to win merchant business by offering an attractive deal in this area.
Practical considerations aside, there is a key commercial issue to be addressed. Card schemes operate the controversial “interchange” scheme which incentivises card issuers by awarding them a per-transaction fee. These fees are paid by the merchant (and ultimately by the consumer) and have been the subject of battles in the US and Europe, where a regulation was passed in 2015 capping the value of the interchange fees. Bank account payments have no interchange, so the consumer’s bank only receives revenue from those payments if they directly charge their customers. UK banks operate free in-credit banking, while banks in other countries apply a fixed monthly fee. In both cases there is a commercial disincentive to move from card payments to bank account payments.
Who will be the winners and losers?
Given that merchants benefit from bank account payments, while consumers’ banks benefit from card payments, it is possible that we will see competing promotional campaigns operated by the different interest groups. Cards also benefit from the strong branding provided by the card schemes, which is lacking from bank account payments. Certainly individual payment processors will promote their own bank account payment services, and it’s possible that they will see the benefit of coming together to promote a common acceptance mark.
As for the card schemes, Mastercard has staked its claim in the world of bank account payments by its acquisition of VocaLink, a leading player in the instant payment and bank account payment space. Visa has yet to make an equally dramatic move, but it’s safe to assume that they also have strategic plans.
Bank account payments will take their place alongside card payments and both will compete for market share, but what do PSD2 and instant payments really mean for the future of cards in terms of volumes over the next three, five or even ten years? Icon has commissioned research to understand just this and will shed some light on those forecasts and how they could transform the e-commerce payments landscape over the coming years. This research will be available in June, but you are very welcome to request an early copy by sending an email to email@example.com.