Are EU Banks Underprepared for the Payments Services Directive?

A recent survey of 30 major EU banking institutions has given an early view into how they believe the Payments Services Directive (PSD) may affect the EU. The European Parliament approved the PSD in December 2007. Charlie McCreevy, the European Commissioner for Internal Markets and Services, described its objectives as “generating more competition… providing a simple, harmonised set of rules… and ensuring a high level of consumer protection.” The PSD has the potential to impact every electronic transaction and account across Europe’s 7000+ banks but, with less than 18 months to go before implementation, is Europe prepared?

The PSD will have a revolutionary impact on the legal framework between banks and their customers setting stringent rules for information disclosure, conduct of business rules and service provision. In addition, it introduces a new lightly regulated licensed entity called a Payments Institution, which may allow non-banks to handle payments and join the bankers’ payment schemes and associations.

The introduction of Payments Institutions is expected to shake up bank payment services, a notoriously conservative section of Europe’s economy. 80% of those interviewed believe that Payments Institutions will have a noticeable impact on the structure of the EU payments industry.

Are Europe’s financial institutions already planning for implementation? Most (just over 60%) believed their company’s PSD knowledge and its implications was moderate to poor. As shown in Figure 1, just over 50% of those interviewed had completed impact assessments although, worryingly, 85% have no budget allocated despite the implementation deadline of November 2009.

Figure 1: Bank’s PSD Planning Status

One problem is that the payments sector is unused to such prescriptive legislation from the EU. As a consequence, smaller institutions appear to be unaware of the potential impact of the PSD on their customers and operations. The majority of larger institutions expect to be ready by 1 November 2009. However, substantial concerns were raised by those surveyed over the readiness of smaller banks. “Implementation of the PSD is only 18 months away; medium and smaller banks and non-banks must begin assessing its impact or many may not be ready by the deadline,” comments William Long at Sidley Austin, a firm of lawyers who specialise in the legal aspects of the PSD.

This survey’s results emphasise the importance of understanding the nature of the PSD’s impact sooner rather than later and Figure 2 indicates where the greatest impact is likely to fall.

Figure 2: Areas of PSD Implementation Effort

Two critical actions are highlighted in Figure 2:

• The need to update customer terms and conditions is regarded as the major area of effort.
• The requirement to update IT systems across all account and transaction types to enable information to be recorded and retrieved.

It is interesting that over 60% of those questioned have not spoken to their suppliers about PSD impacts. 70% had not approached the payment schemes and 60% their payment processors. Over 40% of banks surveyed believe implementing the PSD will cost them more than €10m and almost 25% believe it will cost over €50m. Significantly, nearly 60% of those surveyed do no believe the PSD will deliver competitive benefits.

Figure 3: Costs and Revenue Impacts of the PSD

The majority of those interviewed believed that the PSD will deliver Charlie McCreevy’s objective of increasing competition across the EU. When asked where the major revenue impact of the PSD would fall the majority highlighted increases in cross border competition (55% of respondents) and domestic competition (a further 23%).

The PSD will have a substantial impact on Europe’s banks and getting ready for the PSD will be a significant challenge. In most EU markets, national laws adopting the PSD are still to be drafted. As member states have the discretion to vary elements of the PSD this may lead to national market inconsistencies. Almost 95% of those interviewed believe the PSD will be changed as it is implemented into national law; of these, over 20% believed that it could change substantially. For those who are well ahead with their planning there remains a frustrating period while each country implements the Directive into national law. For those who have yet to get underway, PSE recommends the following 10 areas of focus:

1. Establish a governance structure with clear accountabilities and measurable, time-bound objectives.
2. Define an implementation plan, budget and resource requirements.
3. Co-ordinate all product owners within the organisation to carry out an impact assessment against an agreed interpretation of the PSD.
4. Ensure ongoing visibility of national implementation through local banking associations and public consultation efforts. This should be within the context of understanding the PSD’s impact on existing banking and consumer regulations.
5. Review all contracts for terms and conditions revisions and assess extent of required change.
6. Assess current information collection, storage and access processes to identify gaps and IT requirements.
7. Understand the requirements to run parallel processes for transactions pre and post 1 November 2009.
8. Identify products most vulnerable to cross-border competition.
9. Agree a customer communications approach (potentially in co-ordination with banking associations).
10. Contact and discuss requirements with all third party suppliers (from schemes to hardware manufacturers).

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