How PSD2 is replacing the benefits of cards

By Jeremy Bliss | 8 June 2017

The world is now immediate. We’re able to buy things online and have them delivered the same day (sometimes within an hour), our correspondence is sent and reacted to in seconds, and opinions and photos are shared before we can even decide whether it’s a good idea or not. In this instant, digital world, why is making payments still so cumbersome?

PSD2 is about to change all this. PSD2 mandates that customers be offered the option of paying direct from their bank account – which is ideally suited to Instant Payments. For the first time, infrastructure will be in place that enables consumers to move money as quickly and easily as they would send a text message.

Knocking on the door of cards

Instant Payments will have the knock-on effect of making card payments seem like the more expensive, less convenient and less secure option. Interchange fees will be reduced, consumers no longer need to either input card details in a notoriously error-prone process or save these details to an unsecure merchant database or wallet. These factors will encourage consumers to prefer direct account payments over cards (for online payments) and at the same time merchants, enticed by the lower fees, will actively promote the account payment service. In the short term, this could mean a marked increase in consumer-to-business direct account payments, resulting in a decrease in card payments, particularly online.

It’s not just the card schemes that need to pay attention, banks also need to be ready for the potential for disruption. Non-bank entities are likely to step in to offer account-based payment services integrated into existing payment options. For example, users will probably notice very little difference when using a hypothetical account-based Apple Pay compared with the current card-based set up. Similar to London Underground and contactless payments, it’s the low-friction uses like this that will have the biggest impact on adoption and eventual normality.

If not now, when?

So far there’s been little analysis on what the impact of PSD2 and Instant Payments will be on cards. Without this data how can banks plan for this change and what timelines should they be working towards? With this in mind, Icon has commissioned research from Ovum which suggests that there could be a significant impact on cards in less than ten years – the analysis also indicates that the days of the card as the preferred online payment option are numbered.

The research from Ovum is due to be published later this month, you can register for a copy here. It quantifies the size of the shift, potential timescales and what it may mean for banks and card schemes.

By understanding the impact that account payments will have on the way consumers think about payments in general, forward-looking banks will be able to use scale, customer relationships and trust to facilitate the transition to a new payments landscape. Ultimately, PSD2 will create a completely new environment for payments and those banks that position themselves correctly will be able to thrive.

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