The Payments Service Directive (PSD) came into effect in November 2009 and has three key aims: first, to establish a modern and comprehensive set of rules applicable to all payment services in the EU to make cross-border payments as easy, efficient and secure as ‘national’ payments within a Member State; second, the directive provides the necessary legal platform for the single euro payments area (SEPA); and third, the PSD aims to increase competition in payments by opening up the market to new non-bank players and creating a new category of ‘payment service provider’ (PSP) – the payment institution (PI). In doing so, the PSD aims to foster greater efficiency and reduce costs across the market.
It is the third aspect of the PSD – increasing competition through the introduction of PIs – that will continue to shake up the payments sector. In practice, the PSD means that payments services are no longer the exclusive preserve of banks and that PIs can now compete on an equal footing with banks. While enabling PIs to be in direct competition with banks, it also opens up a significant opportunity for collaboration between these new innovative and niche service providers and the established industry players.
Competition or Collaboration?
The introduction of new banks, such as Tesco Bank, Virgin Money and Metro Bank, and PIs are a direct result of the PSD, and a recent study by Deloitte UK found that 51% of consumers surveyed would be willing to move away from their current bank to the ‘new banks’. With new entrants now aggressively competing for marketshare, established players are being forced to up their game and offer better and more innovative services to retain their customers. However, of the 70-plus PIs formed as a result of the PSD, very few of these are looking to directly compete with banks. Instead, the majority will want to capitalise on their ‘niche’ status by providing innovative solutions to banks and other established players within the existing market.
Co-operation between PIs and banks will come as no surprise to many. According to research carried out by Finextra in 2009, 34% of banks surveyed saw a “marginal or no competitive threat” from new PIs and 38% of banks surveyed viewed the introduction of new PIs as an “opportunity to form partnerships”. Interestingly, the fact that some PIs are now competing head on with banks may in fact contribute to increased cooperation between the other PIs and banks as the latter look to offer more innovative services to retain their customers.
More PIs Equals More Innovation
The introduction of PIs has significantly increased innovation within the industry and this trend is set to continue. Delloitte found that about one-third of financial services professionals across the industry believed that most innovation in payments is created by non-bank PIs. There are a number of areas where PIs are looking to innovate, for example in mobile payment (m-payments) solutions, security and the provision of tailored services to small businesses. While these three areas are all very different, the common ground is a need for improved services that enhance those already on offer by established players.
Today, consumers are demanding a more convenient banking and payment experience and, in the same way that e-commerce revolutionised consumer behaviour in the 2000s, the mobile looks set to change the way in which we shop, bank and pay in this decade. Gartner estimates that there was a 54% rise in UK m-payments from 2009 to 2010 and Ovum predicts that this trend will continue with the value of goods bought using mobile devices set to more than double by 2014 in the UK. The growth of m-payments shows no signs of stopping and there is a significant demand for services that enable m-commerce by both consumers and across the payments industry as a whole. Because of the PSD, PIs are now able to meet this need and help the industry to roll out new m-commerce solutions. This will enable the rapid transformation of the payments landscape over the next few years to one where greater convenience is the order of the day and mobile-based transactions become mainstream.
Security is also a key area where PIs have and will continue to play a central role. To date, banks and card schemes have relied on passwords and log-ins when securing online or mobile transactions. However, passwords are cumbersome, time consuming and easily forgotten and there is a need for an alternative option. The PSD has enabled PIs to become full members of Visa and MasterCard in the EU. This means that PIs no longer require sponsorship by either Master Card or Visa, which often resulted in significant delays, and can now take innovations directly to market. One example of such an innovation is the introduction of voice biometrics to authorise online and mobile payments. Innovations such as this will move the industry beyond the current reliance on passwords and result in increased choice for the end customer.
Because retail banks have traditionally focused on servicing large corporations rather than small businesses, there is a gap in the market where PIs can add significant value. Small businesses are fundamental to economic recovery in the UK, however, since they are not a top priority for most banks, many small businesses have experienced significant problems getting access to credit over the last few years. Furthermore, the services offered by retail banks do not always account for their specific needs. With the introduction of the PSD, PIs now have the opportunity to develop services specifically tailored to small businesses, which will result in increased choice and a higher level of service for small businesses and, ultimately, benefit the economy as a whole.
2010 has seen a significant amount of changes across the payments industry. The introduction of PIs has set the ball rolling for the introduction of new and innovative services designed with consumers in mind and as more and more PIs enter the market, the rate of innovation will continue to escalate. While this will increase competition within payments, it is likely that the introduction of PIs will also result in greater collaboration between banks and service providers. One thing is for sure, the PSD will result in higher levels of service for customers through the introduction of new and innovative solutions tailored to their needs.
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