The Payment Services Directive: Are You There Yet?
It is somewhat ironic that the Payment Services Directive (PSD) – designed to establish clarity and uniformity of payments – has resulted in such confusion. The PSD is a regulatory framework that covers all bank and non-bank payment service providers (PSPs) operating within the 30 member countries of the European Economic Area (EEA), and aims to establish a uniform European payments market by formalising standards and clearly defining commercial and technical frameworks, which will standardise the rights and responsibilities of PSPs and payment service users.
As a result of this uniformity, it is hoped there will be enhanced competition among EEA banks, consistent consumer protection and increased payment transparency and efficiency. It is likely that new payment solutions will emerge in Europe, creating a region-wide competitive dynamic and as a result, PSPs will enjoy improved access to any country of the European Union (EU) and the EEA. The benefits of the PSD are clear, but the ambitious nature of the PSD means that reaching these goals is far from straightforward. The PSD contains two principle sections – market rules for PSPs and rules of business conduct. These sections are complicated by the fact that they allow for 23 areas of local derogation, meaning that EEA member states can vary certain PSD provisions at their discretion. This will, of course, lead to national market inconsistencies – meaning that, in reality, the end result of the PSD will not be a 100% uniform European payments system but rather a changed EEA payments regime that allows for the continuation of national payment clearing systems.
The PSD will unquestionably present banks with a series of major challenges – to the extent that many may question whether the end justifies the means. From an operations perspective, banks will face new challenges in both the back and front office. The PSD’s pledge for faster payment execution times means that the date specified for the bank debit/credit of funds is much stricter – putting an end to the practice of back- and forward-value dating, which allows banks to earn interest on funds that sit in their accounts while waiting for onward transmission to the final beneficiary.
In addition, there are restrictions on the deduction of bank fees from issued payments. The PSP/payer’s bank, the payee’s bank and any intermediary bank must transfer the full requested amount, and refrain from deducting charges from the payment itself. In order to do this, PSPs must provide customers with full transparency of information (i.e. the maximum payment execution time, all charges payable and the foreign exchange rate, if applicable) before and after a payment is executed. In order to do this, banks will need to be capable of validating bank identifier codes and international bank account numbers, as well as other local bank account and routing code details. This will require remitting banks to work on their service level agreements with their foreign currency partner banks to obtain the necessary fee information, and upgrade their banking platforms appropriately. Meanwhile, compliance with the conduct of business requirements requires sophisticated technology capable of displaying payment and client data and information at a very granular level.
Meeting the demands of the PSD is a challenge for all but, given the scope and complexity of the requirements, there are particular concerns over the readiness of domestic and mid-tier banks. These banks face the expensive and arduous prospect of upgrading their banking platforms and this may be too great a task for many in the wake of the economic crisis. In addition, mid-tier banks with a presence in several EU and EEA member states face the additional challenge of multiple compliance because of the implemented variations that may occur between the member states. The PSD states that any bank that maintains a presence in several member countries must ensure compliance within each individual jurisdiction, which complicates what is already a challenging compliance process. The main question, from a bank’s perspective, is ‘how?’.
Knowing what must be done to be PSD-compliant is one thing, but knowing how to do it is quite another – particularly under such time and credit constraints. Although it remains unclear what the consequences will be for those that fail to meet the deadline, the PSD is a compulsory initiative. Furthermore, corporates – for whom the PSD is good news as it will force banks to offer better terms on payments and allow them to better manage their cash flow – will expect their house banks to be fully compliant, implying that those that are not compliant will lose business.
Nobody has all the answers at this stage, but one option for banks struggling with the PSD’s demands is to outsource payment functions to a fully compliant and technologically capable specialist global payments provider. The chief advantage of this approach is that, for these organisations, payments are an integral part of their business offering – meaning that they fully understand the finer mechanisms of the PSD and are fully prepared for it. Understanding is a key point – even at this late stage, there are many banks that have yet to take on board the breadth of the legislation and the extent to which the PSD will impact their business. Furthermore, these providers are among the few to possess the required payment systems spectrum to ensure compliance for banks operating in one or several member countries. Therefore, entering into a partnership with a specialist provider makes sense for local and mid-tier banks if they wish to cut costs and avoid being left in payment limbo.
However, some are understandably uncomfortable about outsourcing their payments business to a bank that may, one day, become a local competitor for their own customers. It is for this reason that some specialist global payments providers offer to remove the competitor risk posed by the standard outsourcing format as they do not compete with their bank clients. The result is that local and mid-tier banks can gain access to the necessary technology for an efficient and compliant capability with reduced costs, minimal project risk and accelerated time to market.