The PSD: Creating a Level Playing Field
The much-anticipated Payment Services Directive (PSD), which came into force in November 2009, provides the legal underpinning of the single euro payments area (SEPA). The PSD also offers a new regime of protection for payment service users covering all EU currency payments, not just in euros. It supports the single market by removing many existing and often archaic regulations and practices at Member State level.
It is part of a wider vision of European legislators to open up Europe’s financial services and create a level playing field where citizens of all Member States can transfer money within countries and across regions with clear expectations of performance and full transparency.
The PSD also introduces the potential for more competition by allowing non-bank players to become regulated payment institutions in their own right. This could add a new layer of competition to an already crowded market and have profound implications on bank’ payment businesses going forward. Additionally, large corporates can also set up payment institutions internally.
According to Andrew Long, head of global transaction banking at HSBC, the PSD will slash revenue lines, damage valuable fee income and squeeze margins yet tighter. “The PSD has opened the door for non-bank payment providers,” he says. “It is not a clear and present danger for banks, but a clear and future danger. Banks will be faced… with falling revenues arising from the dampening of tariff to a lowest common denominator, with rising investment costs to meet regulatory requirements and with new infrastructure players who can seek to offer efficiencies, new low-cost payment engines without the infrastructure of branch networks.”
In a nutshell, the PSD will cost banks a great deal to comply with, put pressure on their margins, and introduce competition from the likes of payment technology firms, supermarket banks and money transfer operators (MTOs). However, there are some benefits, including creation of a level playing field for banks as well as non-banks throughout the EU. For banks that offer modern, customer-friendly, transparent services, the PSD is not a real threat.
A recent survey from Finextra, sponsored by Western Union, found that there is little urgency among banks when it comes to facing new entrants to the payments market. Finextra surveyed 71 banks across 20 European countries and found that 55% regarded other foreign and international banks as presenting the biggest competitive threat post PSD. A healthy 34% consider new payments players as ‘marginal or no competitive threat’. This attitude is strange, especially given that there is now nothing to stop an MTO or supermarket such as the UK’s Tesco or France’s Carrefour setting up in direct competition to the banks. A further look at the survey goes some way in explaining this attitude. Nearly 40% of the participant banks actually saw the PSD’s application as an opportunity, for example, to establish partnerships with the new payment institutions. Banks also benefit from the huge incumbency benefits based on the bank account relationship and their role in cards. They must, however, maintain their competitiveness.
In terms of a competitive threat from the supermarkets, Elizabeth Lumley, one of author’s of the survey, puts things into context. “People should know that [the new supermarket banks] are just white-labelled services from established banks. They’re just using different channels. They may have a different brand name, but the back-end and infrastructure is the same.” In many cases, the new retail banks are partnering with established players and using their technology to roll out banking services. For example, M&S Money, which is a prime example of a new type of banking, is wholly owned by HSBC, an established player. There are exceptions, however. Tesco Bank is fully owned by Tesco, and since its launch in 1997, the bank has grown to have nearly six million customer accounts across 28 financial products and services.
On the remittance side, rather than see MTOs as a potential threat, 40% of banks that plan to offer remittance services either plan to partner with a remittance provider or with another bank. Fernando Alonso Becerra, general manager of Spanish bank Grupo Santander’s remittance business, believes that it is too early to tell the real impact of the PSD. He says: “In principle it will encourage the emergence of new players and increase competition, especially in those countries that currently have more restricitive regulations. It will also enable current operations to carry out new activities that would help create new ways of generating revenues.”
In the longer term, the PSD will indeed open up Europe’s payment markets and further increase the flows of migrant remittances within Europe’s borders. For consumer remittances it should be recognised that Europe’s population is one of the most mobile in the world and the traditional image of the migrant remitter as an impoverished blue-collar worker no longer necessarily applies.
Banks and MTOs alike are targeting a largely unbanked, fluid population that will demand not just plan remittance services, but a whole package of banking products. Partnerships between banks and the new payment institutions are one way of achieving this mix.