On June 28th, I spoke at EPA’s Pay360 Digital Payments event on the impact and opportunities of PSD2 for payment processing companies. This first post is part of a 3-series blog on this topic.

What is the impact of PSD2? With the help of PSD2, new players acting as Third Party Provider (TPP) are given a powerful position (or an equal playing field in the words of the European Commission). For the incumbent market players, the word is that the world is ending with PSD2. Banks will need to invest extensively, while on the other hand their existing revenue streams will be reduced because of the whole new wave of competitors.

A few quotes from impact assessment reports: “Banks could lose 60% of retail profit to fintech startups” (McKinsey). “95% of respondents believe that at least some of their business will be taken by fintech players” (PwC). “Established financial players who will put in minimal effort to comply with PSD2 will lose the most revenue in the end” (Accenture).

All news, articles and reviews about the upcoming PSD2 so far are mostly about two camps: Fintech vs Banks…but what does PSD2 mean for payment processors, a market player that should not be forgotten?

Rather than looking at PSD2 as another compliance project, what more can it bring for payment processors?

Reach of PSD2: Do We Even Know?

First and foremost, it is important to get an understanding of PSD2’s reach. Only after that can we rightfully look at impact and opportunities. However, the reach of PSD2 is still not fully known. And with that the impact. Let’s clarify this statement with an example. PSD2 refers to payment accounts, and this word is even mentioned nearly 90 times. But what is a payment account? The directive’s definition is vague: “an account held by payment service user used for payment transactions execution”. What does that mean? Yes we can safely state that a payment account is a bank account. But would a credit card account, a virtual account held at payment processors or an e-money account also constitute a payment account? The PSD (both 1 and 2) do not give much guidance. However, an Impact Study of PSD(1) already in 2013 reveals that it is expected that this ambiguity will be a key area where a negative impact is to be expected over the coming years. “What constitutes a “payment account” from the perspective of non-bank providers could result in those providers being faced with greater regulatory obligations when providing payment accounts along with other payment services.” This has not been resolved with PSD2. Has the EC itself given us some guidance? The EC clarifies in its Q&A that the definition of a payment account covers all accounts where the holder can place and withdraw funds without any additional intervention or agreement of his payment service provider such as current accounts. This does not give much more clarity than the definition provided under the Directive.

Local Interpretation: Strict or Broad?

While in the Netherlands, both the regulator and the industry seem to have a strict definition (payment accounts are limited to bank accounts), the FCA in the UK takes a broader view. The FCA finds the following factors relevant for the determination what constitutes a payment account:

• the purpose for which the account is designed and held out;
• the functionality of the account (the greater the scope for carrying out payment transactions on the account, the more likely it is to be a payment account);
• restrictive features relating to the account (for example, an account that has notice periods for withdrawals, or reduced interest rates if withdrawals are made, may be less likely to be a payment account);
• a limited ability to place and withdraw funds unless there is additional intervention or agreement from the payment service provider (this will tend to point more towards the account not being a payment account); and
• the extent to which customers use an account’s payment service functionality in practice.

Accordingly, in the FCA’s view, ‘payment accounts’ can include: e-money accounts, flexible savings accounts and credit card accounts. The FCA also states that only the features of the account used for the purpose of making transactions, to which the regulations apply, fall within scope. For example, in the case of a current account mortgage, the mortgage element of the account would be out of scope, albeit that a mortgage payment from the current account would be subject to the regulations.

It is all still very confusing. There is a definite need for a list of examples from the regulators at an EU level. Without this, there is a great risk of different interpretations at domestic levels in different countries, which will do the industry more harm than good. But think about it: what would consumers what the payment account definition to encompass? For them the broadest scope might be best. It is interesting to see that already the definition of such an important word will have tremendous impact to the post-PSD2 world.

Payment Processors Will See Increased Competition from Unexpected Corners

To conclude, the full impact is still unknown but for sure PSD2 will have tremendous impact. Competition in the payment industry is already severe – but it can even get worse. Payment processors see continuous pressure on their turnover due to increasing competition and decreasing margins. The market is already very fragmented. The future is not much brighter. Payment processing can come from unexpected corners! Not only the TPPs, but also merchants are allowed to initiate a payment order if the consumers authorizes him. What about the card schemes? Visa has been required to split its issuing operations from its processing. Non-EU companies are announcing their launch in Europe more and more. Who else might come? Competition will only become more severe.

So what should payment processors do? They need to re-think how they can break free of their traditional model. Tomorrow, in part 2 of 3 of this PSD series, I will discuss specific opportunities payment processors may potentially have under PSD2.

Read part 2 here and part 3 here.