The new Payment Services Directive (aka PSD2), courtesy of the European Commission, is nearly upon us. It’ll have profound effects across the financial services industry both in Europe and beyond. Inevitably there are going to be unintended consequences and it’ll take time to figure out who are the winners and who are the losers, but many of our customers are already deep in the details of how this will impact their business models and technology.
There are an array of regulations, including some that open up access to bank account details to third-party organizations, and the regulation of a bunch of new types of participants, and we’ll look at those in a later blog. Alongside PSD2 is something called the Merchant Interchange Fees Regulation which confusingly overlaps with PSD2 but whose impact we’ll also consider here.
For a start we’ll look at the impact on the big international payment schemes running four party models (three party models are exempted from the regulations) who, it would appear, are a direct target of a lot of the regulation. They’re going to be impacted in a variety of ways.
The Commission is capping consumer card interchange fees, initially for cross-border transactions, but later for domestic ones as well. Their rationale is that the current free market is not in the best interests of the consumer, because the schemes are competing by jacking up fees to attract issuers:
Cardholders are encouraged to use cards that generate higher fees, and card companies compete primarily to attract issuing banks by offering high(er) interchange fees. Hence competition between payment card schemes actually leads to cost increases for retailers, which they pass on to all consumers through relatively higher retail prices, given that merchants find it difficult to refuse and/or surcharge in particular the ‘must-take’ consumer debit and credit cards.[From Payment Services Directive and Interchange fees Regulation: frequently asked questions]
The actual level of interchange fees allowed will be capped by the regulations and set on a national basis. There are indications that some countries will set them at zero. Obviously this will have other impacts – issuers will seek to find other ways of making this money and, no doubt, there’ll be some unexpected outcomes. But in terms of card issuance and acceptance it certainly makes domestic card schemes more interesting.
Partly as a consequence, and in parallel with this, the schemes will no longer be able to enforce the honour all cards policy – which means that the card scheme brand is no longer a guarantee that your card will be accepted by the merchant. The reasoning behind this to prevent retailers being forced to accept cards with higher fees simply so the issuer can pay out rewards to their higher value cardholders.
How this will work at the point-of-sale is anybody’s business – somehow it’ll be necessary to be able to identify the card product you’re using in order to know whether the merchant will accept it. And merchants will be permitted to steer consumers towards card products they prefer. Oh, and PSD2 allows for co-badging of cards, which is going to make branding interesting.
To add to this there’s yet another change – the schemes must separate their scheme and processing functions in terms of corporate structures and decision making – they won’t be allowed to make provision of a specific service dependent on the acceptance of any other service or to cross-subsidise one service by another. So, for example, it’s got to be possible to separate authorization and clearing of individual card transactions.
The impact of these regulatory changes will be widespread, and complex. For instance, as we saw in Tokens Are For Everyone it looks like Visa are providing an on-behalf-of tokenization service but cross-subsidising that from their on-behalf-of transaction processing service. How does all that work under PSD2?
The fact is that any financial services organisation not already deep in the detail of the impact of PSD2 needs to get a move on, the regulations start to take effect later this year.