What are PSD2’s direct impacts on banking business? | PSD2 series #116 min read

Administered by the European Commission to regulate all payment service providers, the 2018 Payment Service Directive 2 serves new providers increasing pan-European competition, regulating their participation and harmonizing consumer protection. Liechtenstein therefore has a role to play to enhance transparency and traceability of payment transactions – both as a bridge between EU/EEA/Switzerland thus becoming the clearing hub for EU/EEA CHF currency.

Why was the revised Payment Services Directive (PSD2) created?

The PSD2 infographic, designed by the European payment council (EPC), explains:

1. The PSD was adopted in 2007. It created a single market for payments (credit transfers, direct debits, cards) in the European Union. It provided the legal foundation for a Single Euro Payments Area (SEPA).
   • PSD2 Goal is to extend PSD to all electronic payment, in all currency within EU/EEA
2. Since the PSD, the digitalisation of the European economy has steadily progressed. New services, provided by new players, have appeared for online payments. Problem: they were outside the scope of PSD, and therefore not regulated at EU level. An update of PSD was needed.
   • PSD2 Goal is to avoid screen scrapping practice and provide more secure and effective payment information access and management
3. The objectives of PSD2 are to make payments safer, increase the consumers’ protection, foster innovation and competition while ensuring a level playing field for all players, including new ones.
   • PSD2 Goal is to promote innovation and increase integrated EU single market

PSD2: state of the art for electronic payment for Europe

The revised payment services directive (PSD2, 2015/2366), follow the steps of the Payment service Directive, (PSD, 2007/64/EC), it is a new step toward the single euro payment area (SEPA). PSD2 is the legal framework for SEPA, within which all actors of the payment services industry must operate.

The SEPA (Single Euro Payments Area) is a self-regulatory initiative by the European banking sector represented in the European Payments Council, which defines the harmonization of payment products, infrastructures and technical standards (Rulebooks for credit transfer/direct debit, BIC, IBAN, ISO 20022 XML message format, EMV chip cards/terminals, RTS, ITS and PSD2 Guidelines)

This first article focuses on the impact of the extended scope of payment services directive (PSD) on banking business. This is highlighted in title I of PSD2:

• Clarification of payment service providers categories
• Broaden geographical scope
  • Tow leg principal
  • One leg principal
• Extend currency scope with all transactions in foreign currencies
• Extension of exemptions
• Clarification of new definitions

Categories of payment services providers (PSP)

A payment service provider is a body referred into article 1 as a natural or legal person providing payment services and other financial services authorized and regulated by member state under PSD2.

Figure 1 – Payment service provider (PSP) landscape

(*) account servicing payment service provider (AS-PSP) is a payment service provider providing and maintaining a payment account for a payer
(**) payment service user (PSU) is a natural or legal person making use of a payment service in the capacity of payer, payee, or both;

This Directive establish transparency of conditions and information requirements for payment services. PSD2 define rights and obligations of payment service users (PSU) and payment service providers (PSP) in relation to the provision of payment services as a regular occupation or business activity.

The European banking authority (EBA) is mandated to develop the definition and supervisory of payment standards

• Implementing Technical Standards (ITS)
• Regulatory Technical Standards (RTS)
• Guidelines of PSD2
• EBA register
• Incidents reporting (art 96.3)

Figure 2 – Deloitte progress of implementation PSD2

Geographical and Currency Scope

Figure 3 – European Bank Federation: Map guidance for the implementation of PSD2

The first payment services directive (PSD) applies to

• All EU/EEA PSP register that carried out payment transactions in EU/EEA
• Only EU/EEA member states currencies
• “Tow leg principal transactions”: Payment transactions between two EU/EEA PSP register

The second payment services directive (PSD2) extend the scope to

• “Foreign currency transactions”: All foreign currency transactions carried out in EU/EEA
• “One leg principal”: All payment transactions between one EU/EEA PSP register and another PSP outside EU/EEA (Switzerland for example)

PSD2 impact the geographical and currency scope as it applies to all payment transactions in EU/EEA in all currencies carried out by an EU/EEA PSP register for all PSU.

The extension of the scope objective is to

• Create a better traceability, security, anti-money laundering within EU/EEA
• Enable a faster and secure payment transaction for payment services users (PSU)

“Tow leg principal transactions”: Payment transactions between two EU/EEA PSP register (sample)

*Liechtenstein is an EEA member with swiss franc as official national currency. De facto, Swiss Franc (CHF) is consider as an EU/EEA currency even so Switzerland is not an EU/EEA member. Liechtenstein therefore have a role to play to enhance transparency and traceability of payment transactions and be the bridge between EU/EEA and Switzerland and become an EU/EEA CHF currency clearing platform.

“One leg principal”: All payment transactions between one EU/EEA PSP register and an outside EU/EEA PSP for “Foreign currency transactions” (sample)

The first requirement that apply to theses payment transactions engage PSP to deliver Faster payment

• Outgoing transactions: PSU value date and booking date are the same date as payment initiation if same currency: NO Time Lag (does not apply to currency conversion)
• Incoming transactions: Once reaching a AS-PSP payment account, the credit note, value date and availability will be given to the PSUs account the same day if same currency (for a currency conversion next business day latest)
• Account information and payment initiation services regulated by PSD2, apply to Liechtenstein for all currency account (detailed coming in the next article)

List of exempted payment activities

PSD2 exemptions are more detailed and the definition of the legal framework of payment services industry, and explain what payment services is not impacted by the PSD2 regulation:

The directive does not apply to the following types of payments transactions:

1. Cash payments directly from payer and payee; with no intermediary intervention
2. Certain types of cash payments, including cash to currency exchange where funds not held in a payment account, transport of bank notes and coins, cash collection by non-profit organisations, etc.
3. Paper based payment transactions including paper cheques, paper drafts, vouchers, traveller’s cheques; postal money orders etc.
4. Payment transactions in a settlement system between payment service providers, settlement agents, clearing houses, central banks and other members
5. Payment transactions related to securities asset servicing such as distribution of dividends, income, redemption or sale of securities carried out by investment services firms, asset management firms, credit institutions etc.
6. Services provided by technical service providers in managing infrastructure (devices, networks) used for payment services.
7. Services based on specific payment instruments used only in a limited way to acquire a limit range of goods or services (Store Cards, Fuel Cards, Meal Vouchers, Social Security Benefit cards, etc.)
8. Payment transactions by a provider of electronic communication networks or services for purchase of digital content and voice-based services, voice-based activity and purchase of tickets; where the value of a single payment transaction does not exceed EUR 50 and the cumulative value of the payment transactions does not exceed EUR 300 per month
9. Payment transactions between undertakings (parent and subsidiaries of the same parent) with no intermediary intervention.
10. Cash withdrawal services in ATMs by providers acting on behalf of card issuers; which are not party to the framework contract with the customer withdrawing money from the payment account. However, the transparency rules relating to information on charges applicable for such cash withdrawal

Takeaways

Now that we have reviewed definitions, clarifications and exclusions we can conclude on the impact on banking business.

PSD2 bank strategy impact

Bank struggle to generate new revenues. This is due to lower margin product offering (interest rate on credit) and increasing complexity of risk and regulatory compliance requirements.

Moreover, PSD2 thrive to enhance innovation and competition driving banks toward a more customer centric business model. In the following we will assert the opportunities and the implications for banks and review the potential risks.

Opportunities

New market opportunities spun from the second payment directive, to propose customers innovative services that cross banks competitors and others PSP.

Risks

Implications for banks

Conclusion part 1: What are PSD2 direct impacts on banking business?

Electronic payment services are now regulated with the inception of new participants. This will in one hand get a more secure service for PSU, but in another hand will transform the payment business for banks.

Banks can apply two strategies:

1. A mitigation strategy which is mandatory: PSD2 compliance
2. An innovative strategy providing new value-added services differentiated by customer segments changing the bank business model beyond pure payment transactions

The second strategy is more demanding but, is the mandatory journey to develop the bank as the first strategy might see decrease of revenue due to payment market fragmentation.

In the next articles we will cover the following topics:

• Introducing new actors “Third Party Providers” allowing them to provide certain types of financial services – as well as licence process and audit trial
• Introducing “Strong customer authentication” (SCA) requirement for initiation, and processing of electronic payment and protection of financial data access to limit unauthorized payment
• Introducing “Common and secure standards of communication” (CSC) to enable payment initiation and processing of electronic payment and protection of financial data access for faster payments transactions and access to account information