European Payment Services Directive 2
The European Payment Services Directive (PSD2) will be transposed into member state law by 2018 and will have a transformative effect on nation state and cross border electronic payments. The Directive aims to increase the convenience of security of electronic payments. This is achieved by promoting payment innovation, for example by Open APIs, and by deregulation of financial service roles. PSD2 will allow new payment service providers to enter the market. Technology firms and mobile operators may be the greatest beneficiaries.
The Directive will transform the way users access their bank accounts during digital commerce. For example, the user may choose a mobile network operator’s payment mechanism as part of a contactless payment.
Opportunity for Mobile Operators
PSD2 mandates the use of robust authentication standards. Any technology provider with authentication and authorisation capabilities can take advantage to PSD2.
The advantage for Mobile Operators is their ability to support network authentication and service location functions. These functions are all particular to mobile networks, making operators a valuable partner in the development of new identity and authentication solutions.
- 100.1 million contactless credit & debit cards in issue in the UK (Q1 2016)
- £39.2 billion – UK domestic spending on debit (October 2016)
- £2,903.2 million – UK contactless card spend (November 2016)
- £249.9 million – payment card gross fraud in the six months to (June 2016)
- 12 million Apple Pay monthly users globally (Q1 2016)
- 71% – proportion of UK adults with a smartphone (Q1 2016)
Electronic Identification and Trust Services
Electronic Identification and Trust Services (eIDAS) regulation is a tenet of the EU’s Digital Single Market. Mobile Operators have already launched pilots for eIDAS compliant cross-border authentication solutions for the use of public sector services.
PSD2 together with eIDAS give a unique opportunity to operators to support identity for both the private and public sectors. This identity management capability will be critical to all Open APIs in any new PSD2 mobile banking platform.
Some likely use cases
The freedom to “delegate” bank account access is the first major shift that users will see. Under PSD2 an account holder will be able to allow a licensed Payment Initiation Service Providers (PISP) or Account Information Service (AISP) access to their bank account for the purposes of initiating a payment or evaluating the user’s ability to pay.
Online commerce is likely to become simpler through such rules as it will allow all banked consumers to buy online using just their bank account, removing the reliance on debit or credit card ownership. This represents a leap forward for consumer and merchant alike, since direct bank transfers can typically clear in two hours or less with some services offering instant settlement.
Discounts for mobile cash?
For merchants wanting to ease cash flow this is a benefit and service for which they may be willing to offer incentives. Direct bank transfers and instant settlement provide simplicity for the user and immediacy for the merchant that may be equivalent to when merchants offered “discounts for cash”?
The power to delegate bank account access is set to trigger major changes in the way digital commerce is conducted. The appearance of new innovative payment services that rely on the powers conveyed by PSD2 is highly likely; as is the anticipated reaction from traditional card schemes whose profitability may well be curtailed by PSD2’s cap on interchange fees and merchant surcharging. Either way the consumer will benefit.
With increased openness comes issues that relate to “security”. To address these PSD2 is demanding the use of strong authentication. The European Banking Association (EBA) has been tasked with defining a standard that achieves this and first drafts are out for review now. From the application designer’s perspective traditional authentication systems that employ one time passwords (OTP) or static personal identification numbers (PINs) may be deemed unfit for use within future digital commerce applications as the banks and other service provider’s latch on to the EBA’s regulatory technical standard.
The EBA is asking for two factor authentication where the user has to be in possession of two things, for instance, a password and an access token to prove their identity. Mobile phone based services like GSMA Mobile Connect will become more prevalent in the future digital market. Advances in smart phone will also increase the use of biometrics as an authentication factor..
Direct Carrier Billing
All the impacts of PSD2 will not come just from easier access to bank accounts or added security. PSD2 has tightened the rules on Direct Carrier Billing (DCB). Consumer accustomed to buying digital content via their mobile phone and charging it to their phone bill will see their options curtailed.
Under PSD2 single DCB transactions will be capped to a maximum of €50 per transaction with a maximum monthly limit of €300. PSD2 continues to allow Electronic Money Institutions (EMIs) to extend the reach of DCB from digital content to the purchase of physical goods.
Mobile Operator Opportunities and Partnerships
Mobile Operators have a PSD2 advantage through service location functions and authentication. SIM & eSIM based authentication can be extended to provide security for customers and merchants by implementing Electronic Identification and Trust Services. With 5G, new network slices may be able to provide a Quantum Encryption Network Slice that would guarantee merchant to bank transactional security.
The greatest opportunity may be through partnerships. The GSMA Mobile Connect and mobile payments projects are likely avenues for greater partnerships. The advent of contactless payment cards in the late 2000s saw early attempts by UK mobile operators to act in partnership as a bank. The advantage of PSD2 is that it removes the requirement for mobile operators to become banks as they can instead focus on interactions with payment processing companies.
Finally any potential European Commission regulation on Anti-Trust on mobile device payment solutions could further open the market for mobile operators (or mobile industry bodies) to provide payment solutions. Such a change in regulation may allow the handset vendor to offer their services as part of the initial contract sale.