A lot has been written around the Payment Service Directive 2 (PSD2) and its emerging role in creating a level playing field for banks and non-banking financial technology companies in the European Union. An area of particular interest is the regulation around allowing third party payment service providers (TPPs) access to account information of customers (AISP services) and the ability for such TPPs to allow customers to initiate payments through accounts residing at another payment service provider (PISP services).
To achieve success in delivering PISP services, a TPP would need to offer consumers with good coverage on the number of participating banks. A limited coverage will lead to the risk of consumers being denied the choice of their account servicing PSP when making an ecommerce payment – such experiences could eventually lead to a very fragmented PISP market.
In order for TPPs to be successful in offering a competitive PISP service, they would need an outstanding collaboration between participating banks and TPPs both contractually and technologically.
Here in the Netherlands, luckily, there is a case in point which proves such a successful co-operation: the iDeal e-commerce payment scheme owned and managed by Currence B.V. was founded in 2005 and today has participation from 13 leading Dutch banks (across acquirers and issuers). In the last 5 years, iDeal has emerged as the number 1. e-commerce payment method in the Netherlands – more than 10 billion ecommerce payments in the last one year (as of May, 2016) and a cumulative average annual growth rate of 26.52% in the last 5 years.
iDeal offers consumers with an option to pay directly from their bank accounts during an ecommerce purchase, however, the modus operandi is slightly different from a traditional card based payment or a bank transfer –
- Imagine a case where a consumer wants to make a purchase from an ecommerce merchant’s site. After selecting the iDeal payment scheme, the consumer selects the issuing bank with whom he/she has an account.
- The merchant sends the purchase information to its acquiring bank, the acquiring bank in turn sends this information to the consumer’s issuing bank. This allows the issuing bank to present the payment information to the consumer in the issuing bank’s online environment.
- The consumer authorizes the payment the same way he does for a standard credit transfer out of his bank account.
- If the payment authorization is successful, the issuer passes the confirmation to the acquirer and guarantees the funds to the acquirer.
- The merchant receives an instant confirmation from the acquirer and the consumer is redirected to the merchant page confirming that his payment was successful
- The actual settlement of the payment between the acquirer and the issuer happens in D+1 through bilateral clearing and settlement arrangements, outside the governance of the iDeal scheme.
On closer look, the iDeal scheme is essentially a collection of contractual and technical agreements between participating banks (on the issuing and acquiring side) with Currence (the owner of the iDeal scheme). To participate in this scheme, an acquiring/issuing bank would have to obtain a license with Currence (by paying a one-time entry fee, an annual fixed fee and a variable per transaction fee). The high licensing costs partially explains the high fees participating banks charge to merchants today.
Conceptually speaking, this model is quite similar to a PISP service, the key difference being that this model is backed by a payment scheme (along with the contractual constructs between the participating banks with the scheme) whereas PSD2’s regulations does not necessitate the creation of such schemes. It would be interesting to see if PSD2’s emphasis on PISP services will open up the market to create similar payment schemes in EU.
An interesting question in the Dutch context – given that iDeal already exists as a successful alternative to a PISP service and is backed by a good representation of Dutch issuing and acquiring banks, would PSD2 instigate Dutch banks and payment service providers to explore alternative PISP business models?
Though iDeal is today quite an attractive business propositions for participating banks*, my personal arguments here –
- The iDeal scheme is pretty much a Dutch scheme with limitations on reach and coverage. There has been very limited participation from non-Dutch banks on the scheme (Deutsche bank and BNP Paribas Fortis on the acquiring side and no non-Dutch banks on the issuing side). In today’s European e-commerce ecosystem, there is a trend towards merchants operating in more than one geography more frequently. Payments Service Provider would want to focus on merchants that operate on such a global level and PSPs would be willing to explore payment schemes that are widely accepted across countries. PSD2 should act as the perfect catalyst for the Dutch banking sector to target these global merchants, key here would be to explore different schemes with a wider reach. It will be interesting to see steps taken by iDeal to improve reach to other banks in EU.
- There have been some arguments within the Dutch banking community that the appeal of PSD2 will be more outside the Netherlands where there is a pre-dominance of card or cash payments and where retailers are on the lookout for alternative payment schemes. I think there are two key arguments here – a) given the recent EU implementation of the cap on the cards interchange fee**, Dutch issuers today are on the look-out for alternative schemes for diversifying their revenue bases. And b) PISP services shall introduce the risk of disintermediating the services of a bank away from the customer. If no action is taken in advanced markets, banks will suffer from the risk of losing its customers to a third party service provider. Irrespective of the level of market maturity of e-payments, PSD2 shall pave the way for Dutch banks to take action against such a risk of disintermediation.
- Another interesting market development that will coincide with the PSD2 regulations is due to the active involvement by the BVN (Betaalverenering Nederland) to create an ecosystem of interoperable real time payment infrastructures in the Netherlands (due Q1, 2019) to deliver instant payments – ‘’clearing and settlement of payments instantly’’. Instant payments while not new in EU, will definitely offer the prospect of disrupting existing payment schemes (including iDeal) in the Netherlands. Given the likely chance that instant payments will be priced similar*** to an outgoing SEPA credit transfer, the experience to a merchant for instant credit of an ecommerce transaction at a cheaper cost will possibly threaten the predominance of alternative payment schemes (which are not only expensive but the delayed settlements lead to a much later access to funds for the merchants). The promise of PSD2, the realization of instant payments infrastructure(s) and EPC’s SCTinst payment scheme (to be implemented Nov, 2017) will offer Dutch PSPs with a compelling value proposition to offer PISP services to consumers.
On a concluding note on this topic of PISP services, while the current market dynamics donot have a clear answer yet, it might be worthwhile speculating which Dutch entity would best venture into a PISP service –
Would it be Dutch retail banks? payment service providers (merchant acquirers, issuers, payment infrastructure providers)? financial technology firms? or even existing alternate payments scheme providers (read IDeal, MyBank amongst others)?
*banks typically charge merchants a one-off implementation fee, a fixed monthly subscription fee, and a variable tiered fee structure for transactions where an average fee per transaction is atleast 4-5 times higher than a standard SEPA credit transfer.
**Interchange fees for card schemes in the EU have been capped to 0.3% for credit cards (against 3% in the past) and to 0.2% for debit cards (against 2% in the past).
Source: https://www.linkedin.com/pulse/pisp-services-from-psd2-lessons-dutch-perspective-here-majumdar