The premise of PSD2 is that the current European payments system, which is dominated by the large banks, is sub-optimal. While in the past the conflation of payments and traditional banking (account management, lending etc.) made sense, because the processes of moving money were, at best, rudimentary; credit, customer knowledge and slow transfers were the rules.
The decline in cash transfers and the massive increase in the speed, security and ease of electronic transfers have created an opportunity to uncouple payments from banking. Such a de-coupling is usually presented as a way of reducing costs by increasing competition and efficiency, and this is indeed true, however, there is also another reason that the regulators have been so keen on PSD2 – one which is only whispered about. The events of 2007/8 are fading from the memory of many people, but not from the minds of governments and regulators. At that time many economies came close to an economic crash – not just a ‘credit crunch’; the main difference being that, unlike the great Wall Street Crash, the banks did not close en masse: the payments system continued to function. Salaries could (in most cases) be accessed, debit card payments were processed and mortgages were paid. Without the emergency state funding that occurred, large banks might well have closed their doors – and the central position these banks held in payments would have created the conditions for a massive economic collapse. A large bank going bust is a tragedy; a payments system collapsing is an apocalypse.
Moving large banks from the centre of the payments system to a less pivotal position, therefore became a major impetus behind the PSD2 move to separate two critical elements of current banking: payment services and lending services. Let us look a little more closely at some examples of these payment services. The ubiquitous bank account debit card, that has become such a part of our financial lives in the last 30 years, is just one example of a payment services facility. These cards allow us to do much more than draw money from our accounts – we use them to pay for goods at product providers – or we think we do. In fact, the transfer of cash in return for goods is not instantaneous in most cases – what is instantaneous is the checking of the buyer’s account balance and the ‘blocking’ of the pending amount. The actual payment may be hours or days later. In this role the bank is acting as an agent of the customer, guaranteeing, on his or her behalf, the payment to the vendor and subsequently making the payment. Under PSD2 all banks must provide facilities that enable third parties to provide this service. So, for example, customers need not bother using their bank debit cards, but ask a PISP (see the previous article for jargon guide) – perhaps ApplePay to become their agent. ApplePay is then given access to the users’ accounts through the standard API that all banks must provide. Using this they can send debit and credit instructions to the bank and instruct the bank to pay product providers. Existing banks will naturally remain as payment processors for many customers – but the expectation of the regulators and other observers is their share of that market (and the vendor fees associated with it) will decline steeply. Not only will banks be challenged in this space by existing, and newly regulated electronic payments operations like PayPal, they will also see the growth of new financial service providers building new models based on payments and customer relations.
It is at this point that a number of bank users quite rightly ask the question, “So what is different? Whether it is Apple, Amazon or UBS that is providing the payment service, is irrelevant to me; the money is still in my bank and, upon my instruction, it is transferred (by a magical system which I do not need to understand), to product providers.” Such a view is understandable – but let us note the three reasons we have already adduced: Firstly the mainstream banks provision of payment services is primarily a way to tie-in customers; as such the incentive for competition, development and expansion is small. Secondly, the current system does not encourage the easy movement of money and assets; indeed mainstream banks have a vested interest in making transfers to competitors difficult. Thirdly, the central role of banks in payments infrastructure is not necessarily consistent with their core lending businesses, which are acknowledged to be risky. Payments systems should therefore be, where possible, insulated from their failures. Banks will always play a role in payments – after all, as Jesse James once said when asked why he robbed banks, “because that is where all the money is.” However, by creating payment pathways around the banks, PSD2 provides both competition and increased security. Customers may continue to use only large banks as their chosen payment provider, or they can use the new payment services episodically, or they can embrace the new service providers and move all their payments to them. In all cases, life will go on. What the long-term effects of PSD2 will be, remain, to unclear, especially as existing banks will need to grapple with reduced incomes, higher IT costs and competition in products, However, in the short term at least the ultimate customer is a certain winner.