Directives such as the payment service directive 2 (PSD2) enable safe and secure online card payments in the European Union (EU). This happens by enforcing the Strong Customer Authentication (SCA) mechanism for online transactions made via debit or credit cards. Additionally, the introduction of formal regulations in favour of open banking is likely to lead to the development of open banking in the US.
Listed below are the key regulatory trends impacting the online paymentstheme, as identified by GlobalData.
Electronic payments push
The payments industry in general has historically been pushing for cashless societies in the interest of maximising the proportion of transactions that generate revenue. Regulatory efforts to reduce cash use, such as those seen in Italy and India, tend to have the full support of the payments industry. Covid-19 has accelerated this push, with mobile payment services launching and being promoted by governments across the world. Further government initiatives are showing a strong desire to shift from cash to non-cash payments.
In Sweden, the government completed the first test pilot of its digital currency, the e-krona, and the currency is expected to go live within the next five years. Despite cash being the preferred payment method in India, the government took some initiatives to promote digital payment and financial inclusion. It abolished the merchant service fees made with UPI and RuPay cards in January 2020. With the growing digitisation of payments in India, digital wallets like Paytm, Apple Pay, and Google Pay largely benefited.
Open banking/Payment Services Directive Two (PSD2) regulation
Touted as a major paradigm shift in financial services overall, open banking legislation is designed to give third-party providers (TPPs) limited, authorised access to financial data held by banks. So far, the impact of the legislation has been limited, but it does allow for third-party services to integrate with the likes of instant payment services. This has created long-term opportunities for the growth of these services through more familiar third-party brands.
The initiative in open banking technology has been limited in the US compared to the UK and Europe, but the situation is likely to change, as the Biden administration is urging the Consumer Financial Protection Bureau to introduce formal regulations in favour of open banking.
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Pressure on card fees
National and supranational regulators across the world have already forced card schemes to lower interchange fees – a core component of the fees that merchants pay to their acquiring partners, set by Visa and Mastercard. Legal challenges to these fees are still ongoing; one such case concluded in the UK’s Supreme Court in June 2020, with the ruling being made in favour of the merchants challenging Visa and Mastercard, resulting in damages being payable to the merchants.
Transaction fees will only come under more pressure as countries become more cashless and merchants see more and more of their revenue ‘taxed’ by these fees. This exerts significant pressure on an already-strained value chain; card issuing and acquiring are run on very thin profit margins that are only likely to get thinner.
Blockchain technology, which can be used to develop real-time payments (RTP) networks, is not regulated in most countries. The approach to the sector is still disjointed at a global level. While Switzerland in 2020 passed a new set of laws in favour of blockchain called the Blockchain Act, which should incentivise investments in the technology, some countries are still considering what is the appropriate approach to dealing with it. A lot of countries are open to the blockchain technology itself but are not in favour of cryptocurrencies.
The countries that are considering developing their own Central Bank Digital Currencies (CBDCs) are conducting research into blockchain’s application and may impose some restrictions on cryptocurrency usage while authorising the development of the technology. This regulatory inconsistency will create long-term challenges to the interoperability of blockchain-based systems as they are developed.
Regulation: Buy Now, Pay Later (BNPL)
The BNPL sector was able to grow rapidly and provide credit services to consumers without regulatory oversight. Despite presenting itself as a cheaper and more flexible alternative to credit cards, BNPL interest-free credit has the potential to let consumers accumulate debts that they cannot pay off. Regulators are likely to impose regulations on BNPL companies, which so far are unregulated. In the UK, the Financial Conduct Authority proposed to bring the sector under its supervision.
When strict regulations are imposed on the industry, it will very likely reduce the growth of BNPL providers, and they will have to reconsider their revenue models if their ability to become profitable is affected. Klarna is already showing some signs of diversification by investing in ecommerce and turning its app into an ecommerce platform, as well as with its acquisition of Hero, a virtual shopping platform.
Fintech companies have long been able to operate without many regulations, but given the growing influence they are having on the sector, regulators are starting to pay more attention to them. In Europe and North America, fintechs that aim to provide lending services to customers have had to apply for online banking licenses and are being fully regulated. The 2020 Wirecard scandal highlighted the lack of regulation in the European fintech sector and will force regulators to introduce rules to oversee fintech companies and prevent a similar fraud scandal from occurring.
In China, regulators are looking to impose the same regulations imposed on banks with fintech companies that aim to provide financial services. China, in particular, is looking to reduce the influence that fintechs have on the economy. One company that directly suffered from this is Ant Group. In November 2020, Ant Financial was meant to go public. The initial public offering (IPO) would have helped it raise as much as $34.5bn, the largest IPO in history. But Chinese regulators intervened and suspended the IPO from taking place. Since then, Ant Financial has been under strict scrutiny from Chinese regulators and was ordered to restructure and create a new holding company for its financial operations.
There is concern that Ant Financial will only be allowed to own 50% of the new company, with the rest being made available to business partners. This could give an opportunity to the Chinese government to become one of the partners, which will give it access to the large array of Alipay user data. By accessing Ant’s data and technology, the Chinese government can use it to improve on the development of the Digital Yuan. Fintech companies that provide financial services in China have so far been able to operate without much regulation, but the Chinese government is planning to change this.
Strong Customer Authentication (SCA) online
SCA is a European regulatory measure that requires the use of multiple factors, dynamic authentication information, and/or biometrics for customer authentication when making electronic payment transactions. It is designed to protect customer data and reduce fraud, especially for remote transactions. The current deadline to implement the SCA requirement is March 2022. The push for this type of authentication puts mobile in a strong position as a payment form factor because in-built biometric readers allow for easier implementation of some of the faster and more efficient types of strong authentication.
This is an edited extract from the Online Payments – Thematic Research report produced by GlobalData Thematic Research.