We’re at something of an inflection point in the payments landscape. It’s pretty clear that the arrival of PSD2 and Instant Payments will significantly disrupt retail payments, and the media has been awash with the “what ifs”. However, the debate has lacked any concrete data on which to base these thoughts - the size of PSD2’s impact has not been quantified. How big will the change be, which areas will be affected most, and over what time period is the change likely to happen?
It’s all in the numbers
When we speak to our European banking clients, the common theme is the need to fully understand how PSD2 and Instant Payments will affect consumer behaviour. It’s not only essential to customer engagement, but also to the bank’s business model and revenue streams, as any impact on card payment volumes will also impacts issuer interchange revenues. To address this, we commissioned Ovum, to shed much-needed light on the consequences of PSD2 and quantify the likely impact on how consumers will pay in this post PSD2 world.
The resulting research, “Instant Payments in the post-PSD2 Landscape”, finds that PSD2 payment initiation, together with Instant Payments, will offer a compelling alternative to payment cards, especially online. The combination will push consumers towards instant payments, increasing transaction volumes and reducing the growth rate of cards. As a result, Instant Payments will overtake cards for e-commerce transactions by 2025 across Europe; in certain countries this crossover point will be reached even sooner. It’s the first time that the impact of PSD2 and Instant Payments on cards has been concretely identified.
The report goes on to predict that growth in retail card payments will be sluggish, while Instant Payments will experience double-digit growth. The market share of one-time payments using cards will drop markedly from 40% today to just 11% by 2027. In contrast Instant Payments will absorb much of the growth in European e-commerce over the coming decade, reaching 29% of direct, consumer-to-business online expenditure by the end of 2027. In fact, in some European nations Instant Payments will take such a hold that it will be the dominant form. In the Netherlands, for example, 72% of online payments will be instant. Poland and Germany will see a 42% and 37% market share while the UK will hit 29%.
By 2027, Instant Payments will account for €725bn annually, with €338bn coming directly from online payments. The chart below gives an idea of how various forms of payments will rise and fall in market share over the next decade.
Ecommerce spending after PSD2:
Instant Payments will become a top three method for online payments across Europe by 2022, growing to account for 29% of transaction values by 2027
Pre-empting the shift to digital, outmanoeuvring the competition
It’s easy to see how the shift of European commerce to digital channels will put even greater pressure on merchants to take an omni-channel approach. The speed, flexibility and lower costs associated with Instant Payments - and their ability to deliver a more convenient and frictionless experience for the user - will push retailers looking to increase revenues to allow for these types of payments. This retailer demand for instant, account-based payments and the consequent decline of card revenues will, in turn, force banks to provide these services. Those that do not may risk losing revenues, competitive advantage and market share.
The findings of this research present a clear opportunity for banks to steal the lead. Successful banks will reposition themselves ahead of other new market players and financial services providers by preparing for this shift in advance. It’s clear from the Ovum report that a central part of this success will be the early adoption and implementation of Instant Payments infrastructure ahead of PSD2 next January.
Although the strategic imperative is clear, the practicalities of making the transition to Instant Payments can seem daunting. The perception in the industry is that moving to an Instant Payments infrastructure is painful, expensive and time consuming. For example, a poll at EBAday confirmed that most banks think it will cause major impacts to some or many internal systems. However, new technology, such as Icon’s Instant Payments Framework, enables banks to take a targeted approach to Instant Payments systems, allowing them to connect to schemes without the need for the technology equivalent of open heart surgery. Getting to market more quickly and cost-effectively allows banks to exploit the new opportunities to deliver value to customers and derive new revenue streams. The other key benefit it offers is the flexibility to meet the evolving needs of consumers over the next 10 years and beyond as the world of payments continues to change rapidly.
More about the Ovum research
Conducted by Ovum earlier this year, the research covers ten European markets and uses a minimum of three independent sets of economic forecasts; data from Ovum’s ICT Enterprise Insights surveys; and secondary research inputs to model both post-PSD2 and non-PSD2 scenarios of expected customer behaviour online and at the POS.
Find out what how you can prepare for the transformative effect of PSD2 and Instant Payments. Download your copy here.