PSD2 What Will Really Change?

There has been a lot written about the PSD2 and rightly so, it is important regulation soon to be enacted into legislation that will bring significant innovation and change to electronic payments.

But what will actually change in the day to day lives and businesses of key players in the payments value chain? In this post we attempt to answer this question. We focus on the Payment Initiation Service Provider (PISP) aspect of the PSD2.

PSD2 Impact on Banks

The internet is flooded with opinions on how PISPs will be able to access consumer accounts directly and so disintermediate Banks and schemes in providing payment services.

While it is certainly in the interest of consultants and advisors to talk up the impact of an impending change (some of us remember Y2K), we wonder if the impact will be as great as predicted.

Providers such as Sofort and Trustly are already able to disintermediate banks and schemes by accessing consumer accounts directly (through screen scraping) to process a payment. And while they have had success in the 10+ years they have been operating they have not made any substantial impact on the market share of traditional methods of payments such as cards.

Instead of screen scraping now a PISP will access the account through bank provided APIs. The bank will actually have more control over the information being accessed and the consumer’s account will be more secure as they are not divulging their passwords.

Will a lot of PISPs pop up?

We are not so sure. There are a lot of banks out there and to provide a usable service a PISP will need to connect to a lot if not most of them. Connecting to a bank even via an API will require work and investment.

Will it be worth making the investment to create a Europe wide PISP?

The margins on a PSD2 initiated PISP transaction will need to be substantially lower than an intra credit or debit transaction to gain widespread usage. So it will need to be around or lower than 20bp. However we know from the screen scrapers like Sofort and Trustly that at least the screen scraping model is only profitable when pricing is kept in the high double digit to low triple digit basis points. This is why screen scrapers have gained most of their success in higher risk industries with a propensity to pay higher fees and margins.

The fact is that a perfectly well functioning, and since the interchange caps were introduced, price efficient option exists in the form of card payments. What will be the driver for PISP growth against the backdrop of low margins and hard to change consumer habits? Or can PISPs only hope to capture higher risk and higher priced niches like the screen scrapers have.

PSD2 And Payment Service Providers(PSPs)

Payment service provision is a cut throat highly competitive business at the moment. PSPs are focussed on merchant expansion and aggregation of existing payment methods. We do not see a PSP becoming a PISP, this would take too many resources away from growth functions.

PSD2 And Payment Method Providers (PMPs)

Will more Soforts and Trustlys pop up using bank APIs instead of screen scraping to access accounts. Maybe. Probably a few. For those wanting to dominate this market speed of entry will be critical not only in integrating to bank APIs  to be able to offer a viable product but also rapid targeting of merchants and consumers with correct and rapid branding. With lower margins, volumes will be critical to profitability.

PSD2 And Merchants

We had to smile when we read one article about how merchants could connect to banks directly and become PISPs themselves. Most merchants are struggling to innovate their product to stay competitive. Development resources are scarce and need to be deployed on the core product. Why would a merchant deploy scarce development resources on connecting to the APIs of banks? Especially when some PMP will do this, do it efficiently and on sell to the merchant with only a small 5 to 20 bp margin. It would just not be economically efficient for a merchant to become a PISP.

Will merchants offer or promote PSD2 enabled payment options?

A merchant’s key concern is conversion. A merchant will always add a new method. Every new method will bring at least some incremental conversion. However will a merchant promote a new method? This will depend on whether consumers convert better using it compared to existing methods.

PSD2 And Consumers

Consumers are slow to change their payment habits and they will use a payment product that they know is quick, safe and free. Speed is critical for a consumer especially as more payments move to mobile devices. PSD2 and access to the account via APIs will require serious authentication of the consumer. Unless this speed of authentication piece is effectively solved by the PMP a consumer is not likely to quickly adopt a new method. Safety is definitely accepted to be better with a PSD2 backed method however besides the false conclusion that credit cards are unsafe most consumers assume that if a payment method is offered it is subject to some level of financial regulation and so safe. Free is a hygiene factor for consumers and does not need discussion.

Conclusion

In conclusion we are not sure if the introduction of the PISP element of the PSD2 will change a lot in the day to day lives of players in the payments value chain. Banks will continue to provide access to the consumer account, they do so already to schemes and screen scrapers, they will do it now via an API and have better access and control. PSPs will continue to offer new payment methods to their merchants and will definitely add any new PISP to their stable of methods but a PSP is not likely to go out there and become a PISP themselves. PMPs will emerge on the PSD2 standards and first mover advantage will be important as will branding and rapid capture of volume. Merchants will not become PISPs but will gladly add a PISP to their cashier but will only promote it if helps conversion. Consumers will adopt a PISP if it is quick to use, solving the authentication function for speed will be critical for PISPs.