It is July 2018 and PSD2 is already 6 months old. The UK’s Open Banking framework has also entered its 2nd Phase. But has anything concrete really happened or is all the hype just going to slowly fade away? What is the status of the open banking dream that is supposed to fundamentally change payments for consumers and businesses alike?
Just as a recap, 2nd Payment Services Directive (PSD2) is the EU’s landmark payments regulation adopted in 2016 and applied from 13th Jan 2018 with all EU member states required to have transposed it into national law by then (although many have yet to do so). At its core, it requires banks to provide authorised third parties with the ability to access customers' accounts and initiate credit transfers - or push payments – and provide other information services (both of course based on prior customer consent).
In parallel, and as mandated by PSD2, the EBA set out more detailed second level text known as Regulatory Technical Standards (RTS). The most important of which are new rules for added security on all remote payment transaction over €30 – including both the new push payments as well as existing card payments. Essentially on all but a few exempted transactions, consumers are required to complete two-factor authentication (2FA) with their bank before a payment can be made. Important exemptions include transactions identified as low risk based on real-time risk analysis.
Meanwhile, in the UK, the Open Banking initiative, set up in 2015, has already entered into its 2nd Phase - now requiring banks to provide open APIs enabling access to customer account data - with a view to supporting fully functioning push payments by early 2019.
Shift to push payments has begun
What does the introduction of push payments actually mean? From a consumer's point of view, besides the stronger security measures, the overall payment experience does not necessarily change enormously. Whether a consumer uses a payment card to make a payment or approves a merchant to initiate a push payment, the consumer ultimately just sees his bank account debited. How this takes place is not really a consideration for the consumer and life goes on with no real dramatic change.
However, below the surface, the shift is for several reasons far more fundamental. Push payments are not processed on card rails or using scheme infrastructure. Instead, with push payments, funds are moved directly from bank account to bank account with no authorisation message nor settlement cycle. The payment is instant and more or less irrevocable. Hence, push payments incur lower costs and are at a basic level a far more efficient way to do payments.
From a merchant's point of view, push payments offer significant benefits first and foremost of which is a very low cost of payments acceptance as well as other cost savings around reduced PCI compliance. There is therefore a significant incentive for merchants to support push payments and encourage consumers to use them. Merchants can then decide if and how to use the cost savings. Obvious options include discounting prices or offering loyalty incentives.
However, to fully realise the benefits of push payments does require a real-time or instant payment system to be available. The general definition of instant payment systems is that they are available 24/7/365 and result in the immediate or close-to-immediate interbank clearing of a transaction and crediting of a payee’s account with confirmation to the payer (within seconds of payment initiation).
Recent announcements provide evidence
So back to the question of whether PSD2 or the UK's OB initiative has delivered anything yet. It is tempting to say no but possibly that would be a too myopic point of view. Rather, PSD2 and other initiatives need to be seen in the context of a wide shift that has been underway for the best part of a decade. The emergence of fintech led innovation in financial services has already delivered considerable change throughout the wider financial services landscape. However, two specific recent announcements speak more directly to a shift to push payments enabled by PSD2.
Mastercard only last week announced the launch of Mastercard Send in the UK. Mastercard Send is an account to account payment service for peer-to-peer (P2P) payments and business-to-consumer (B2C) disbursements that sends real-time payments using the UK’s Faster Payments network (i.e. the UK’s instant payments system). It is important to note that Mastercard (the card scheme) acquired Vocalink (the provider and operator of the technology that Faster Payments runs on) in May 2017. Mastercard Send is the first service made possible by the integration and use of Vocalink’s real-time payments capabilities. Mastercard says it “embodies the Mastercard's vision of a world, not only beyond cash but beyond cards as well.” ...wow! The service also sees Mastercard partner with Starling Bank, one of the UK’s new challenger banks, providing settlement services to manage funds to be disbursed before they are pushed to individual accounts via Faster Payments. The first UK customer for Mastercard's Send service is the Income Group, which is a provider of real-time payroll services offering clear cash flow benefits to businesses.
Meanwhile, Deutsche Bank has recently announced a new payment service in partnership with the International Air Transport Association (IATA), the trade association for the world’s airlines. Deutsche Bank will collect customer payments directly from consumers' accounts via a push payment in line with PSD2. With direct push payments being processed in near-real time, IATA’s member airlines will benefit from the acceleration of their funds generating significant working capital and liquidity benefits. Deutsche Bank stated that combined “these benefits stand to reduce the estimated USD8 billion that IATA members currently incur from payment processing costs and fraudulent activity.”
Key take away
So the shift to push payments has started and whilst the consumer experience may not alter significantly, real fundamental change is taking place below the surface. Push payments not only reduce costs but in the broader fintech context, support new innovative services that create real value. All stakeholders should take note and consider how they might benefit from embracing the shift to push payments.