09 March 2009 Features

 

Counting down to PSD

Heather McKenzie

In six month's time the Payment Services Directive comes into force. Will the remaining issues be resolved to everyone's satisfaction?

The European Commission's Payment Services Directive  has the potential to change the landscape of payments in the region. The PSD, which was formally adopted by the European Parliament in November 2007, provides a legal basis across all European Union member states for the processing of payment instruments, such as direct debits, in all currencies. It also opens up the possibility of greater competition in the payments market, through the introduction of payment institutions. Such organisations will be able to provide certain payment services under a lighter supervisory framework than banks.

However, with just six months left before the deadline for PSD implementation of November 1 2009, there are still very divergent views as to exactly what the new payments world will look like and where competition will come from. Moreover, with so little time left, the national legislation required to bring the PSD into effect is yet to materialise in the majority of member states.

The UK has been one of the trailblazers - its legislation going before parliament on February 9 and entering into force on March 2. The Government said it had committed to early implementation in order to "help firms consider the incoming requirements and prepare for compliance". The Financial Services Secretary to the Treasury, Lord Myners, says: "This legislation will drive competition in the market for payment services, leading to greater efficiency, transparency and more innovation, bringing further benefits and certainty to UK consumers and businesses making everyday payments. It will also enhance consumer protection, with the new rules for payment service providers."

Simon Newstead, head of the financial institutions advisory group at The Royal Bank of Scotland says: "With draft legislation before Parliament the UK is very well placed for PSD implementation. There are still some points to resolve, such as exactly what is or is not a payment account, but we are getting very close to clarity. This matters because there are specific rules in the Directive regarding how you process payments transactions and they extend to the way in which you pass those payments on to a payment account - right through to making the funds available."

The UK aside, the timing of publication, enactment and effective dates of legislation in each of the EU and EEA countries is not clear, says Simon Bailey, director payments and transaction banking at Logica. "Given that legislative calendars are driven in part by political and economic issues of the time there is a risk that the timing of roll out gets extended," he says. This raises the risk that some countries will have legislation in place before others and therefore the prospect of common single euro payments models and migration will decline.

It is not just the timing of legislation that will vary from country to country - interpretation of the PSD will also come down to national differences, says Bailey. "The PSD is a ‘maximum harmonisation' directive, which means every country has to implement it - and as far as possible in the same way," he says. "Unfortunately the languages of Europe and the pre-existing legal structures and definitions vary. In addition, there is a built-in ability to vary parts of the PSD and the use of terms that are not objectively defined in the legislation - ‘micro-enterprise' and ‘payment account', for example. The probability is therefore is that the country implementations will vary."

Ruth Wandhofer, head of payments strategy and market policy, treasury and trade services EMEA at Citi Global Transaction Services agrees that the flexibility of the supervisory regulation and treatment of payment institutions under the PSD is likely to lead to differences from country to country. "Some markets, such as Germany have a risk-averse attitude and are expected to carefully manage the introduction of these new players in the market. This is due to the fact that payments institutions will have relatively low capital requirements compared to banks, although these institutions will deal with customer funds as part of their payment service provision."

With so much uncertainty still evident, predicting the impact of the PSD on competition in payments is very difficult. Wandhofer says she does not believe there will be "a tsunami of new payment institutions from November". She argues that it will be difficult for regulators and supervisors to install such organisations in a supervisory setting straight away. "While the Financial Services Authority in the UK has begun extensive work on the PSD and the supervisory regime for payment institutions, similar approaches are not yet too visible in other European Union countries."

Where will competition come from? Non-bank payment providers, such as money remitters and other informal cash handling networks will come under the regulatory umbrella with the implementation of the PSD. The Directive also allows ‘hybrid' payments institutions to emerge, says Wandhofer, "which means that any business is allowed to apply for a payment institution licence in order to provide payment services alongside any existing core business." In such a scenario, telecom providers or supermarkets could start offering payment services, she says. "The question remains whether this opportunity will be taken by many businesses in the market. I am, for example, not yet seeing a large business appetite from mobile operators to become payments institutions as many of them currently consider Europe to be over-regulated and prefer to focus their efforts on providing mobile payments in other areas of the world such as the Middle East and Africa."

The spectre of telecoms companies becoming involved in payments has been around for many years, says Paul Mee, a partner in Oliver Wyman's strategic information technology and operations practice. He does not believe there is any "commercial traction" in the idea, pointing up that margins tend to be very thin in payments and managing the credit side is very difficult. "The practicalities of moving into something that banks have been doing for many years are quite complex. Process and control requirements are a bit of a barrier and I think most telecos would rather joint venture with banks rather than going it alone."

Chris Pickles, head of marketing, investment banking and global accounts, BT Global Services, does not agree with these assessments. He says the PSD will have the same effect on competition as did another EC initiative - the Markets in Financial Instruments Directive. That Directive created multilateral trading facilities as competitors to the incumbent stock exchanges and they have mushroomed since MiFID was introduced on 1 November 2007. "The European Commission and the European Parliament introduced the PSD to provide for competition for the benefit of investors and the public. In increasing the competitive environment, the PSD will work in the same way as Mifid, leading to the proliferation of payment institutions," he says. BT will be classified as a payment institution.

Stephen Ley, partner and payments risk expert at Deloitte, says the PSD gives the opportunity for supermarkets and telephone companies to do more in the payments space. "The PSD will encourage competition because it will create more players in the payments space, makes it easier to operate across borders, reduced entry barriers, ensures more uniformity of services and increases transparency," he says. Banks that treat the PSD as a minimum compliance project will be at a disadvantage, he adds. "Forward-looking banks will see the changes brought about by the PSD as an opportunity to get closer to their corporate clients. Improving and maintaining customer relationships will help to offset the additional competition that is coming."

Pickles argues that banks will have to change their business models and attitudes towards payments if they are to see off competition. "Banks are very restricted in their mentality of what the business does. Supermarkets are selling clothes and doing banking; a bank would never sell vegetables. I can envisage mobile telecos being payments institutions under PSD. Banks say payments are complex because they are protecting their own turf." BT