How regulation is reshaping the payments landscape


In 2018, there will be increased competition, innovation and transparency across the European payments market as the revised Payment Services Directive (PSD2) brings open banking one step closer. As businesses prepare for its implementation during 2017, we ask what this really means for UK businesses and their customers.

Seamus Smith, CEO, Sage Pay

James McMorrow, Head of Payment Strategy, Global Transaction Banking, Lloyds Banking Group

When the European payments market starts operating in line with PSD2, the promise of more competition, innovation, security and transparency should give UK businesses cause for celebration. Although it could create significant efficiencies and opportunities within the business community, it also raises a number of questions. Through a series of open questions, we invited two subject specialists to share their views on what PSD2 really means for UK businesses and consumers.

How will PSD2 open up the payments landscape and what need does it answer?

Seamus Smith, CEO, Sage Pay (SS): The original PSD opened up access to payments services which had traditionally been dominated by banks and card networks. But as consumers, businesses and technology have evolved, this has inevitably opened up new ways to access and use payment services; the proliferation of mobile devices, for example, created an obvious call in the market. PSD2 meets that need.

In the case of card payments, particularly for smaller businesses, the settlement period can be prolonged and that can be challenging from a cash flow perspective. There are arguments too about the cost of and access to payments services. PSD2 offers a chance to improve choice and access to a wider range of payment mechanisms.

James McMorrow, Head of Payment Strategy, Global Transaction Banking, Lloyds Banking Group (JM): Whilst PSD2 mandates a number of changes, much of the focus is on the access to accounts, which will enable, when authorised by businesses, the sharing of transactions data currently held by financial institutions with regulated third parties. This access to financial data under PSD2 has the potential to change the financial landscape and the ways the business interact with their providers. To bring this to life, any business currently using a digital online banking solution may in the future not only have the choice of proprietary banking digital solutions but also third party solutions to view transactions, balances and initiate payments.

What are the main ramifications of PSD2 for UK businesses?

SS: A lot of applications today, whether Point of Sale devices or payment acceptance terminals, are wholly focused on card payments. The implementation of PSD2 will see a rise in the number and volume of non-card payments made. As non-card payment mechanisms proliferate, systems need to evolve to accommodate them. I suggest that anyone in business involved in decisions around payments technology needs to be asking questions now as to whether their systems are able to deal with the new payment utilities going forward.

JM: Whilst the exact nature of the solutions available under the legislation will depend on the implementation and technical standards, I see three main opportunities for businesses. First is the access to near real-time non-proprietary banking solutions and the provision of aggregated views of multiple accounts to replace the need to use many different providers. Then, using a single provider presents the opportunity to receive a single standardised report rather than combining reports from multiple sources. This gives an obvious operational saving. But it also raises a third opportunity around data analytics and the subsequent provision of timelier insight to businesses, especially for core functions such as working capital management because a better understanding of the business always facilitates the identification of opportunities for increased efficiency.

PSD2 offers choice but does it also risk creating customer confusion?

SS: The legislation is trying to create a framework which can eliminate some of the potential for confusion. It does so by creating clear rules in terms of what’s required of all participants, whether as users or providers of payments systems.

JM: Whilst PSD2 offers potential opportunities for customers and those that supply them, the main focus is to ensure that customers’ data remains secure. Currently, through regulation and collaboration, the industry working to define a set of standards and guidelines which must ensure any confusion is mitigated. One way this can be achieved is to ensure that business and consumers understand which data they are sharing, and with whom, the controls that exist for that data, and the benefits of doing so.

“I suggest that anyone in business involved in decisions around payments technology needs to be asking questions now as to whether their systems are able to deal with the new payment utilities going forward.”

Seamus Smith, Sage Pay

As competition increases, will banking and non-banking payment providers be able to work harmoniously for the benefit of all?

SS: Part of the motivation for driving this legislation forward is the need to give momentum to the digital payments agenda. The recent landmark displacement in the UK of cash as the dominant payment mechanism – it is now about 48% by volume – is an opportunity. Organisations and businesses of all shapes and sizes now have the chance to co-operate in ways that can drive further penetration of digital payments into that cash environment.

JM: UK payments industry players have a long history of collaborating to develop solutions which benefit end users. From the advent of Faster Payments to the creation of the current account switching service, industry wide collaborations have benefited end users and utilised technology from non-banking providers. In the same way many existing banking products (e.g. cash, cheque collection solutions & BACs payment solutions) leverage 3rd party expertise to meet the needs of their customers. In this way PSD2 provides an excellent opportunity to expand collaboration between non-traditional partners. An example of where this is happening already is the Open Banking framework where banks and Fintech worked alongside to develop recommendations for the industry. In this way I firmly believe that the aim of providing increased solutions, competition and innovation which meet customer needs can only be achieved through continued collaboration.

Do you see any negatives in creating an open payments market?

SS: Not a negative per se, but tackling the trust and integrity issues around new systems is paramount. The specifications of security and authentication are critical in driving user-confidence. Without that confidence and trust, however good a new product or service may look, if businesses and consumers remain wary, there may not be the mass adoption hoped for. However, there is ample provision for that in PSD2. Having said that, businesses do need seamless mechanisms to interface with the new payments methods and will have to ensure its providers can remain current with new and emerging payments technologies.

JM: The balance between frictionless customer journeys and security is going to be key to the success of PSD2. Too many controls may lead to customers or retailers not adopting them or not using the services at all. Conversely, too little security will lead to customer vulnerability. We are seeing a lot of interest in data sharing but conversations often lead back to the balance between security and customer experience. Businesses may need to invest to adopt new solutions and each will likely have unique challenges. As an example, retailers may need to identify new payment acceptance and reconciliation methods, creating a downstream impact: the majority of internet shopping is paid for using a credit or debit card, and retail systems are geared to that method. In the PSD2 world, where there is an opportunity in the UK to use Faster Payments, retailers will need to tackle how they reconcile real-time versus traditional batch file payments.

“I see the potential for a number of different solutions being made available to benefit businesses.”

James McMorrow, Lloyds Banking Group

What business-specific benefits will there be from services delivered under PSD2?

SS: Generally, an increase in market competition could lower the cost of services. Sage Pay’s latest Payments Landscape Report illustrates how businesses are facing a significant cost of handling cash. PSD2 offers an opportunity for electronic payment products and services to facilitate cash displacement. The increased speed of settlement means cash can be posted to the relevant account more quickly, improving the cash flow position. Whilst the market will decide how to translate any opportunity into a commercial benefit, the foundation of a broader set of new payments services, facilitated by PSD2, will be the catalyst for such benefits to prevail.

JM: I see the potential for a number of different solutions being made available to benefit businesses. The exact nature of these benefits will depend on individual client needs. New payment initiation methods, for example, will enable businesses to move funds between their accounts without using proprietary banking systems, saving time. Coupling this with the aggregation of data into one platform facilitates the opportunity not only to provide standardised reporting but also drive business-specific data insights and analysis. For example through liquidity or working capital analysis, businesses should have an increased awareness of how the business is trading and how to improve operational efficiency, but may also identify future business needs, such as borrowing.

What will the shifting payments landscape mean for committed cash and cheque users? Should their needs be accommodated?

SS: I believe the door should always be open to the choice dynamic. But ultimately, ease of access, choice and identifiable business benefits will denominate the successful mechanisms as demand drives usage. There is a push and a pull element at work in the payments space and it needs the convergence of those two sides to maintain the balance of the full market dynamic.

JM: I see the potential for a number of different solutions being made available to benefit businesses and whilst there is a continual movement towards electronic payments, solutions that provide value-added insight, improvements in efficiency or reductions in cost, are those that are likely to be around longest. We expect the payment mix will continue to shift over time as new competitors, technology, consumer preferences and experiences, and regulation drive advancements in the market place.

What do businesses need to do now to prepare for the coming of PSD2 payments?

SS: All businesses considering investing in payments systems need to talk to their providers, partners and banks. They need to think beyond the traditional card or banking services and start asking questions about what PSD2 means to them. They must apply rigour when asking these questions and must acknowledge that change is coming.

JM: Generally, within their preparations, businesses should start looking for ways to develop new future-proof commercial models and services. They need to talk to their banks and other partners so they fully understand how the regulations will impact them. Those that engage early will be able to influence the shape and scope of the first new services to emerge after the regulations come into force. This will give them a distinct advantage.

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