Out-Law News | 21 Nov 2016 | 3:53 pm | 3 min. read
A new market for payment initiation services is set to stem from the introduction of reformed EU laws on payment services, PSD2, which was finalised earlier this year and must be written into national laws across EU countries by 13 January 2018.
Under PSD2 banks and other payment service providers (PSPs) must give so-called payment initiation service providers (PISPs) access to their customers' accounts so as to facilitate transactions ordered at the customers' request. However, in return, PISPs must observe a number of data security obligations and takes on certain liabilities in relation to any unauthorised transactions it is responsible for.
New payment initiation services "are potentially highly disruptive" and "will have profound implications for players across the payments industry", the report by management consultancy Oliver Wyman (68-page / 2.60MB PDF) said. Banks and credit and debit card providers in particular risk experiencing competitive pressures as a result of PISPs, it said.
Expert in fintech Luke Scanlon of Pinsent Masons, the law firm behind Out-Law.com, said: "Tech businesses are clearly of the view that any digital shopping experience would be improved if the merchant also carried out the initiation of the payment. Tech businesses are therefore definitely thinking about a world where you have an 'Amazon', 'Google shopping' or similar payment initiation account, press the button and buy."
"Applications in a business-to-business environment are equally as easy to imagine. Banks need to continue to think about how they can perform the service of the payment initiator effectively in a way that incentivises customers to not only trust them to store their money in the future but also to initiate transfers of it. Trust may come from providing a more rounded service that considers customers’ needs in terms of how to maximise their abilities to save and invest," he said.
Banks and other payments market businesses are likely to seek to establish market-leading positions in payment initiation services before the PSD2 reforms are given effect in national legislation, Oliver Wyman said.
"In our view, banks are well placed strategically to perform the PISP role, providing that this is a part of a broader financial services platform, including customers’ credit facilities, savings, and investment portfolios," Oliver Wyman said in its report. "This will, however, require a significant investment in technology and the user interface in order to deliver the desired customer experience."
"Potential PISP competitors include the m-wallet providers and technology giants (such as Apple and Samsung), fintechs, large merchants or merchant consortia, and the banks themselves. We expect to see players launching PISP-like propositions in the medium term in an attempt to establish market position, pre-empting PSD2 implementation and launching additional functionality as its provisions are written into law and regulation," it said.
Oliver Wyman also said that PSD2 might serve as an enabler of the growth of m-wallet services, where m-wallet providers "successfully introduce a PISP proposition". However, mobile payments will only really take-off if they are combined with peer-to-peer instant payments and value-added services, such as "loyalty rewards", it said.
"An 'all-in wallet' proposition like that would offer real additional value to the consumer, in comparison to plastic," Oliver Wyman said. "This change might happen when existing market players, such as the technology giants, launch their upgraded wallet solutions, enabled by regulations, such as PSD2. In this scenario, the banking sector will have to align and launch a competing proposition in order to remain visible in the market. An all-in wallet would also serve to strengthen their consumer relationship and avoid disintermediation."
In its report, Oliver Wyman said the European payments market is currently worth €38 billion in annual revenues. It predicted the market will grow to be worth approximately €55bn in 2020.
Matthew Sebag-Montefiore, partner at Oliver Wyman and lead author of the report, said: "The payments market is dynamic but remains a scale industry. At-scale players participating in all areas will perform well, but many players are not at scale. They either need to have specific value-added services or consider participating in consolidation. Banks where payments serve as a non-core activity, for example, will need to decide either to become more committed or pull out altogether."