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Welcoming a new phase of Everyday Payments in Europe

Payment Services Directive (PSD2) enables Everyday Payments in Europe to move to the next level.

Overview

In Europe, Everyday Banking and Everyday Payments have arrived. Everyday Payments is founded on the concept of an Everyday Bank—trusted, indispensable and central to consumers’ everyday activities.

Recent regulatory changes in Europe such as the Payment Services Directive (PSD2) are now set to accelerate payments innovation and progress Everyday Payments to a new phase of development.

Formulated in response to the changes in the payments landscape since the introduction of the original directive in 2007, PSD2 will bring about vital changes to the Everyday Payments scenario, and banks must be ready for:

  • Extension of the scope of the original PSD regulations beyond Europe and in the definition of a “Payment Institution”

  • Regulation of new types of payment service providers (PSPs)

  • New competitive threats and opportunities in the form of third-party payment initiation and account access services

  • Prohibition of card surcharges

  • Security of online payments and account access

We have identified six components that are vital to banks’ success as Everyday Payments providers in the post-PSD2 regulatory environment:

  1. Polymorphic payments

  2. Cards innovation

  3. Digital commerce

  4. Digital corporate payments and transactions

  5. Immediate payments

  6. Payments transformation for digital

To gain a competitive edge and progress to this next phase of Everyday Payments, banks should not treat PSD2 and other emerging European regulations simply as a compliance exercise, but recognize these changes as catalysts for accelerating their own digital payment programs.

Financial Institutions must, therefore, ensure they have a clearly defined Payments Strategy and must position themselves as an Everyday Payments provider.

Background

The Payment Services Directive (PSD) was first adopted by the European Union (EU) in 2007. The directive provided a legal framework for all payments made in Europe, with the aim of increasing the speed, efficiency and ease-of-use of European payment services.

A revised PSD (PSD2) was proposed as a way to respond to changes in the payments landscape, and to drive further improvements in payment services across Europe. The revision will include a number of changes and enhancements to the original PSD, with the goal of providing legal clarity and a level playing field for competition between traditional and new-age PSPs.

The PSD2 is a data and technology-driven directive which aims to drive increased competition, innovation and transparency across the European payments market—while enhancing the security of Internet payments and account access.

Analysis

PSD2 will bring about key changes to the Everyday Payments environment, including:

  1. Extension of scope beyond Europe and in the definition of a “Payment Institution.” While the original PSD applied only to transactions occurring within the EU, the PSD2 will extend this scope to “one leg out” transactions. The directive will also extend the 2007 PSD definition of “Payment Institution” to include new categories of third-party payment providers.

  2. Third-party payment initiation. PSD2 will encourage competition in European payments by regulating payment initiation service providers (PISPs). These services operate using a “push” payments process unlike the traditional, card-based “pull” payments flow.

  3. Third-party account access. PSD2 will also regulate account information service providers (AISPs). These providers act as aggregators of customer payment account information.

  4. Prohibition of card surcharges. PSD2 seeks to standardize the different approaches to surcharges on card-based transactions which are currently applied across EU.

  5. Security of online payments and account access. PSD2 will introduce new security requirements for electronic payments and account access, along with new security challenges relating to AISPs and PISPs.

Recommendations

Banks must revise their Payments Strategy and adopt six components to be successful as an Everyday Payments provider in the new regulatory environment:

  1. Polymorphic payments, facilitating universal merchant acceptance of any consumer payment method, currency and channel

  2. Cards innovation, enabling cards to become smart devices, enhancing security through encryption, tokenization and biometrics

  3. Digital commerce, connecting content and service providers through an integrated ecosystem

  4. Digital corporate payments and transactions, providing corporate users with digital payment, cash management and trade services through smart devices

  5. Immediate payments, increasing competitiveness and efficiencies of modern economies through reliable, efficient, immediate transfers and real-time data flow

  6. Payments transformation for digital, prompting providers to enhance transaction engines to power digital channels and multiple business units