PSD2 heralds a new dawn for mobile payments, as the regulatory technical standards around the upcoming European open banking regulations are expected to put mobile devices at the heart of new payment techniques.
Strong customer authentication required by Payment Services Directive 2 (PSD2) is key as well as initiating, and authenticating, transfers directly from bank accounts to payees. However, PSD2 will restrict some mobile payment methods at the same time as serving up innovation across the industry.
“PSD2 will encourage a new wave of innovative and integrated payments services companies that do not need to rely on established card-based infrastructure. As well as this, we are likely to see an acceleration in the use of mobile payments at physical point of sale, not just in ecommerce scenarios,” says Lu Zurawski, practice lead for retail banking and consumer payments at ACI Worldwide.
But despite the regulatory environment nudging markets towards certain payment types, it is not easy to predict exactly how consumers will adopt the technology.
WeChat Pay beats plastic
China’s WeChat Pay highlights the difficulties that lie in predicting how customer demand evolves, for example looking at how uptake of a clunky user experience based on fiddly scanning of QR-codes can eclipse commonly accepted traditional bank cards.
In China, debit card penetration is surprisingly high – over three per person – and yet WeChat Pay and Alipay have become the predominant ways to make a payment, with roughly 600 million payment transactions per day handled by Tencent, the platform of WeChat’s parent company.
“The key lesson of Chinese-style mobile payments is to see how they evolved quickly because of integration within social media and digital commerce platforms”
“The key lesson of Chinese-style mobile payments is to see how they evolved quickly because of integration within social media and digital commerce platforms. This allowed smaller traders and consumers to exchange value in the course of normal ‘conversations’, with payments being treated like simple attachments to a text message exchange. As the network effect took off, bigger retailers rushed to support the new ways to pay,” Zurawski tells GTNews.
While payment methods such as ApplePay and other mobile wallets are expected to skyrocket under the new legislation, this does not mean there isn’t regulatory clamp down in other areas. Direct carrier billing (DCB), where a customer can charge items to their mobile phone bill, is one such mobile payment method that faces stricter requirements.
What does the future hold for direct carrier billing?
PSD2 has tightened the rules on direct carrier billing meaning consumer accustomed to buying digital content via their mobile phone and charging it to their phone bill will see their options curtailed. Under PSD2, single DCB transactions will be capped to a maximum of €50 per transaction with a maximum monthly limit of €300.
However, PSD2 continues to allow Electronic Money Institutions (EMIs) to extend the scope of DCB from digital content to the purchase of physical goods.
Until now, the EU’s initial version of the regulation, PSD1, restricted what goods, such as ringtones, music downloads and eBooks, could be billed to a mobile phone user’s bill after purchase. This regulation was holding back the market for carriers and retailers, so there is plenty of reason for optimism in the DBC market, despite more stringent regulations.
Based on 2016 Juniper Research data, the average transaction value for billing digital content via carrier billing in Western Europe was over €4 in 2016, much higher than the €1.50 achieved in Central Eastern European countries.
“We anticipate that some operators will conclude that the tighter restrictions imposed on them by PSD2 – for example new transaction value limits, above which requires registration and compliance activities that will have been exempted under PSD1 – makes this business line impractical”
Developments in carrier billing solutions now mean that it can be offered as a subscription model as well as for one-off purchases on a multitude of devices and contexts. The potential value of digital content in Europe via carrier billing is predicted to rise from just over €2.6bn in 2015 to nearly €14bn in 2020 according to Juniper Research.
“We anticipate that some operators will conclude that the tighter restrictions imposed on them by PSD2 – for example new transaction value limits, above which requires registration and compliance activities that will have been exempted under PSD1 – makes this business line impractical,” comments Zurawski. “Others may use the clarity of new regulations to double-up on payments and authentication services,” he adds.
Several mobile operator driven payment initiatives have collapsed over the past few years, for example the ‘Weve’ joint venture between EE, O2 and Vodafone ended in late 2014.
On the other hand, operators working in the GSMA (a mobile industry umbrella group) are working hard today with the ‘Mobile Connect’ initiative, launched in 2015, which is aimed at convenient access to secure log-in and authentication services.
While some DCB providers may leave the space, the competition within mobile payments will remain rampant. “We expect to see many variants of “retailer pay” – branded mobile apps and wallets launched by retailers or by digital “platform” providers, where the ability to pay comes from direct access to bank accounts,” predicts Zurawski.
There is also likely to be a greater awareness of faster payments, at least in the UK, or immediate payments more generally, as retailers chase the promise of lower payment service fees enabled by PSD2, according to Zurawski.
The 2017 Ovum retail banking whitepaper also found that one the top areas banks are investing in is mobile payment capabilities, as more forward-thinking banks look to capitalise on “trusted” status combined the opportunity for new mobile services to provide revenue sources.
‘Mobile first’ is obvious
Regardless of new regulatory nudges like PSD2, ‘mobile first’ is an obvious approach for current socio-economic trends.
Mobile wallet adoption is on the rise globally and consumers in the US and Europe are catching up with those in fast-growing economies in Asia and Latin America where mobile wallets have already become the dominant payment platform, according to recent research from the Global Consumer Survey: Consumer Trust and Security Perceptions published by ACI Worldwide.
The study found that 17% of US consumers now regularly use their smartphone to pay, up from 6% in 2014 when the survey was last conducted. In Europe, Spanish consumers are the most active users of mobile wallets, with 25 percent using them regularly, followed by Italy (24%), Sweden (23%) and the UK (14%).
Juniper Research, which predicts that spending worldwide via mobile wallets will rise by nearly one third this year to $1.35trn, says that the implementation of PSD2 in Europe should “spur further competition within the European wallet space, with existing players poised to introduce additional services to complement their payment offerings.”
In the world of payment processing, treasurers and finance managers have benefited significantly from faster, more secure systems that have allowed for leaner and more progressive business processes. However, the waves of regulations in financial markets have led to tighter and stricter procedures.
The first half of 2018 sees the implementation of two major pieces of regulation – the Payment Services Directive (PSD2, which went live in January 2018) and the General Data Protection Regulation (GDPR, going live in May 2018), both laying important foundations to pave the way for a better and brighter digital economy.
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