Since the introduction of PSD2 in January 2018, a few key legislative changes have come into effect that enabled an improved online payment experience through PISPs (Payment Initiation Service Providers). The outcome of PSD2 is expected to result in enormous change within the payments industry: it effectively allows new market entrants and innovative technologies to disrupt traditional payment models and customer propositions.
A PISP is an online service that allows payments to be done from a user’s bank account, with the user’s consent and authentication, to a merchant’s account. Amongst other benefits, this bank-to-bank infrastructure makes online payments faster and simpler for the payee, and cheaper for the merchant.
An example of a PISP is Trustly, currently available across 29 European countries. Trustly is a simple payment solution which allows consumers to buy online in three steps. At checkout, consumers are prompted to select their bank, login with their usual codes securely, choose the bank account from which to pay and verify the purchase. Consumers need not register with Trustly to use it as merchants work with Trustly to allow for seamless check-out in their online shops.
PSD2 helps PISPs to facilitate a different method of online payment, promising to lower fees incurred by merchants. In addition, PSD2 ameliorates interoperability between merchants, PISPs and incumbent banks, the latter who would have historically withheld customer information; the new law allows users to confirm they are happy with a third party (in this case, the PISP) to access their information to complete payments.
For consumers, PISPs offer a range of improved payment services, including increased speed and ease of bank to bank transfers, meaning those online shopping sprees are simpler, offering a likely improvement to customer experience. Furthermore, this ease of payment gives consumers a reason to prefer one site to another; for example, sites which offer one-click payment.
Instant satisfaction through one-click payments is not the only way PISPs improve the payment experience. Another layer to the PISP offering to consumers is less client-facing, but potentially more important: security. PSD2 aims to increase regulation and requirements for PISPs, thus reducing the potential of data breaches, by improving transaction security through stronger customer authentication and more robust end-to-end encryption.
Now, we also need to discuss ‘trust’ which is probably the most important factor concerning the potential for PISPs. Sharing information has, in recent years, become common, what with the incredible data collected from users’ time online. Nevertheless, sharing bank details with third party providers who would initiate payments on your behalf incurs concern for the larger part of consumers. Consumer education on PSD2 and PISPs, superior customer service and confirmation of the levels of security provided, particularly following frauds on sites such as Ticketmaster and TSB, are paramount for the long-term success of PISPs.
What are the opportunities/threats to incumbents, FinTechs and retailers?
For incumbent banks, a move away from from online card payments means a loss of revenue from fees, both on the card issuing as well as the card acquiring side. Poor exchange rates previously offered by banks will now be put in the spotlight as PSD2 aims to prohibit non-transparent pricing, which enables PISPs with better fees to compete.
However, this does not mean incumbents are missing the mark; on June 4th, Citi became the first corporate bank to get a PISP license, which will enable Citi to pilot new payment and collection services.
PSD2 and PISPs coming to market will engender a change in payment services available to merchants and consumers. For merchants, aligning themselves with the best PISP solution for their customers, either as a branded or white label solution, will be important to maintain customer satisfaction and decrease costs associated with payment acceptance. Consumers will be offered a wider range of online payment services; this comes with increased security, potentially linked to a recognised and trusted brand. For incumbent banks, partnerships or in-house incubated FinTechs will be required to provide cheaper, more transparent payment offerings to merchants. Existing FinTechs may find a new wave of competition or clients, such as those mentioned in the Global Citizens series, through the passporting potential for FinTechs, both home and abroad, and for their more mobile clients.