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:
- 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
- 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
- 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: 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;
|1. Credit institutions
|Credit institution such as a Bank can provide all payment services (art.1)
They are authorized to provide services
|Bank Frick & Co AG, LLB AG …|
|2. E-money institutions
|A legal person authorized to store monetary value electronically in a central accounting system. This monetary value can then be used to make payments to other parties.||DOCOMO Digital Payment Services AG, Pintail AG, Swiss Bankers Prepaid Services AG, Treezor, Revolut, transferwise, Wirecard…
|3. Payment institutions
If authorized: AS-PSP
TPP: PISP/ AISP
|Authorized Payment institution: A legal person that has been granted authorisation in accordance to Article 11 to provide and execute payment services throughout the European Union
Third Party Payment (TPP): a generic term for the third-party Account Information Service Providers (AISP) and Third-Party Payment Initiation Service Providers (PISP).
A TPP does not hold a payment account or enter possession of the funds being transferred.
A TPP must register both PISP and AISP to carried out these services
Payment initiation service provider (PISP): a payment service provider (PSP) pursuing business activities as referred as payment initiation services.
PISP is a PSP new business activities that consist to initiate a payment order at the request of a PSU with respect to a payment account held to another AS-PSP
Account information service provider (AISP): a payment service provider (PSP) pursuing business activities as referred as account information services.
AISP is a PSP new business activities that consist to provide consolidated information on one or more payment accounts held by the PSU with either another AS-PSP or with more than one AS-PSP
|Authorized payment institution
|4. Post Office Giro institutions
|Post office, public institution with the aim to manage payment account to account||Post office UK
Banque postal France
Post finance Liechtenstein
|5. European central bank (ECB), European bank authority (EBA) and National Bank
|Public institution and authority when not acting in their capacity as monetary authority or other public authorities;||European Banking Authority (EBA)
European Payments Council (EPC)
|6. Member states, regional or local authorities
|Member States or federal, regional or local authorities when not acting in their capacity as public authorities.
|England: Financial conduct authority (FCA)
France: Autorité de contrôle prudentiel et de résolution (ACPR)
Liechtenstein: Financial Market authority (FMA)
Germany: Federal Financial Supervisory Authority (Bafin)
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)
|Scope||Country/Currency in scope of PSD2|
|European Economic Area (EEA)||Iceland: Icelandic krona (ISK)
Liechtenstein: Swiss Franc (CHF) *
Norway: Norwegian krone (NOK)
|European Union (EU)
|Euro zone: Euro (EUR)
Denmark: Danish krone (DKK)
United Kingdom: British Pound (GBP)
Sweden: Swedish krona (SEK)
Bulgaria: Bulgarian lev (BGN)
Croatia: Croatia koruna (HRK)
Czech Republic: Czech koruna (CZK)
Hungary: Hungarian forint (HUF)
Poland: Polish zloty (PNL)
Romania: Romania leu (RON)
*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)
|Scope||Country/Currency in scope of PSD2|
|If a payment transactions involve only one EU/EEA PSP register, the transaction is within the scope of PSD2.
Note: All transaction between Europe and the Rest of the world
|Switzerland: Swiss franc (CHF)
USA: United States Dollar (USD)
All currencies (…)
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:
- Cash payments directly from payer and payee; with no intermediary intervention
- 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.
- Paper based payment transactions including paper cheques, paper drafts, vouchers, traveller’s cheques; postal money orders etc.
- Payment transactions in a settlement system between payment service providers, settlement agents, clearing houses, central banks and other members
- 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.
- Services provided by technical service providers in managing infrastructure (devices, networks) used for payment services.
- 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.)
- 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
- Payment transactions between undertakings (parent and subsidiaries of the same parent) with no intermediary intervention.
- 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
Now that we have reviewed definitions, clarifications and exclusions we can conclude on the impact on banking business.
|Tow leg principal||All electronic payment must comply with PSD2 excepted the exemptions list.
Promoted by PSD and clarified by PSD2, the tow leg principal oblige company delivering payment services to follow the payment service directive.
All companies within EU/EEA and member states must comply and follow the regulatory technical standards (RTS), the implementing technical standards (ITS) and follow European commission guidelines.
The EBA register provide a list of authorized company that can carried out payment services.
|Foreign currency transactions||PSD2 extend the scope of transactions regulated to all currencies if the transactions are carried out by EU/EEA PSP register
· All transactions in EU and EEA member states currencies, e.g. EUR
Payment services provider will be able to provide new innovative services to customers in all currencies and customers will be assured of the respect of certain regulation as it falls into PSD2 scope.
|One leg principal||PSD2 broaden to the geographical scope to included transactions only where one party is in EU/EEA.
For banks, and spatially Liechtenstein, as an EEA member states, this mean all transactions, in all currencies needs to follow the PSD2 regulation. It will impact banks on:
· Cost of compliance
Liechtenstein bank that provide the best customer journey for retail customer (e.g. buying decision applications) or for corporate (supply chain management application) will have a competitive advantage over the other bank in Liechtenstein market. But as well, banks can become a bridge between European market and the rest of the world.
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.
New market opportunities spun from the second payment directive, to propose customers innovative services that cross banks competitors and others PSP.
|New products and services||New applications||New technology, platform services to PSP and other Banks|
|· Access to account subscriptions
· Payment initiation subscriptions
· Business applications subscriptions
· Sandbox test and DevOps fees
|· Aggregator: Multi-Bank as a service
· Faster payment for European PSU in all currencies
· Business applications integration
· Identity management
· Financial budgeting
· Payment categorization and analytics
|· API access and management
· Payment network aggregator
· Cloud and container technology
· Common and secure standards of communication (CSC) for faster payments transactions and access to account information
· Strong Customer Authentication (SCA) to limit unauthorized payment
|Decrease revenues||Loss market share||Lack of technical innovation|
|Decrease in revenue due to competitive pricing from TPP and fintech and other Banks.
No innovation in revenue model, offers technology services to PSP and other banks (competitor)
Bank will work for the competitors
|Loss of market share to TPP, fintech and other banks: Market is fragmenting
Banks are losing monopole on payment transactions
|Without pragmatic investment in technology:
· Fail to offer digital customer journey
Implications for banks
|New Business models||Bank Strategy|
|Low/medium impact (PSD2 compliance)
PISP and AISP (“TPP and FinTech”) partnering with bank deliver new services for enhanced customer experience.
Fintech and TPP become customers financial managers, but banks keep control of customer data and relationship.
This solution is the riskiest strategy as traditional banking services will be impacted by TPP and FinTech offer.
· Bank retain customer trust and control customer data
|Best positive impact (New added value services)
PISP and AISP (“TPP and FinTech”) offer payment and financial services integrated to the Bank digital platform. Bank can leverage opportunities to improve customer data management and offer new risk pricing and cross selling product and services (beyond payment services).
As payment landscape is reshaping, think out of the box and change the end customer offer.
|Strategy: Modular Digital Platform
· Bank offer new product and services, gain new market share based on investment in technology and added value innovation solving end-customer hurdles
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:
- A mitigation strategy which is mandatory: PSD2 compliance
- 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