PSD2 introduces two measures amongst others that potentially contradict each other and may limit their ability to hit the goals they set out to achieve:
- Payment Initiation Service Providers (PISPs)
PISPs may initiate a transaction on behalf of the customer directly from their bank account. These transactions will bypass card networks and therefore avoid the costly credit card charges
- Banning of Surcharging
This stops merchants from adding fees on top of the transaction value to cover the costs of using the card network. Today merchants may add around 1-3% on top of the purchase price to cover the processing charges.
There have been many discussions and surveys hypothesising the success of PISP transactions. Many consumers, largely in mainland Europe, prefer to avoid using credit cards in favour of spending only the money they have in their account. There are already examples of thriving PSD2-like solutions (iDEAL, Trustly, etc.). However for the consumers who actively use credit cards, the typical question is, why they would choose to shift to PISP transactions. Now with the ban on surcharging, these consumers seemingly have even less incentive to use PISP services, especially when one factors in the additional benefit of card payments including protection and ubiquitous acceptance at point of sale.
How retailers react in the long term to the ban on surcharging will directly influence the success of PISP transactions. The possible reactions we will see are:
- No change: Retailers continue to accept card payments and maintain their prices.
- Blanket prices rises: Retailers increase all prices on the assumption that card will be used; ultimately hurting all consumers.
- Price caps: Retailers refuse to accept credit cards on payments over a certain amount.
- Discounts or Loyalty points: Retailers offer a discount or loyalty points for not using credit cards. Technically this is not surcharging, however can make pricing very confusing for the retailer and introduces complexity at checkout.
For the consumer this is likely to add significant confusion at checkout around understanding the true cost of the goods, what payment methods are accepted, and how they budget their spend.
The short answer is we will likely see a mix of these reactions. Low value transactions, for example at Supermarkets, will continue to operate as is. Online retailers and aggregators such as PayPal will opt for discounts or loyalty points for choosing to use direct to bank; Amazon has already introduced a 2% discount for paying with an Amazon wallet topped up directly from a bank account. High value purchases such as cars or holidays will continue to accept the deposit on credit card to lock-in the customer and refuse credit cards for the final payment.
Therefore there are clearly instances where the consumer will stick with credit cards and others that will promote the use of PISP payments. Does this mean that nothing has changed and the PISP payment is still a gamble?
There is however a significant opportunity for the innovative PISP. Let’s look at an example of the holiday buyer that wishes to spread the cost of his holiday on his credit card. The Price-cap scenario is a very likely outcome for the travel agents and tour operators who already have very tight margins. In this scenario the consumer no longer has the option to spread the cost of their holiday. They are left with option to pay the school fine and take the family on an off-peak holiday they can afford (a rant for another day) or learn to budget better.
The opportunity here is in the short-term lending market, such as PayPal Credit, and the opportunity will be huge.
It need not stop with switching from Credit Card to PayPal Credit. The smart provider will utilise the explosion in APIs to make these offers real-time during the merchant checkout in this manner:
- Make a call to the bank balance check API to assess affordability
- Call the KYC and Credit Check APIs
- Source multiple loan options from the comparison website API
- Provide real-time offers
This significantly improves the customer experience, ensuring that they do not need to spend time sourcing a loan before they start looking for a holiday, and also will ensure that the travel company does not lose customers because they can no longer to afford to accept credit cards.
The ban on surcharging will most definitely change the way retailers operate but also requires banks to think beyond PSD2 now and consider how they can leverage APIs across lines of business to deliver new value-added services in partnership with retailers. The true value of PISP payments is not just simplifying the initiation of payments from the bank account, but rather the value-add scenarios that can be created.