favour of the Payment Services Directive has been widely applauded,
there are obstacles to successful implementation that may have
considerable implications for the cards industry. Francesco
Burelli* presents an overview of the challenges.
On 24 April 2007, after protracted negotiations and compromises
among the main stakeholders, the European Parliament voted in
favour of adopting the Payment Services Directive (PSD), the legal
framework underpinning the Single Euro Payments Area (SEPA)
initiative. The PSD is the key step in the establishment of a
common legal framework for payments across the European Union (EU),
and creates the basis for a more consistent industry outlook within
Europe as it also covers non-EU countries.
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The law introduces the concept of the payment institution, a new
type of entity that will be able to operate payments, and, in so
doing, will potentially enable non-banks to access the payment
infrastructure and to expand their businesses into the provision of
payment services; they may then compete directly with banks across
Europe or disintermediate the banks by accessing the payment
infrastructure directly.
On the road to SEPA
The PSD has been welcomed as a step towards the implementation
of SEPA and, more broadly, towards achieving the objectives of the
Lisbon Agenda (an action and development plan for the EU set out in
Lisbon in March 2000).
However, there has also been criticism, as the implementation of
the PSD poses considerable challenges to the payment industry. For
example, the European Savings Bank Group has taken quite a critical
position towards the PSD, particularly regarding the introduction
of the payment institution and its regulatory requirements, as, in
its view, it could threaten both public confidence in the PSD and
its implementation timeline.
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By GlobalDataThe PSD, which consists of over 120 pages and 87 articles, will
require the EU member states to interpret it and translate it into
domestic law by 1 November 2009. Even though the PSD is in
principle what it terms a “maximum harmonisation directive” –
meaning that the member states may not go beyond the requirements
of the directive in national implementation – many important issues
such as surcharging and setting of tighter capital requirements
than those specified in the PSD are still left to the discretion of
member states to resolve during the implementation stage. There are
many other points that may be subject to even more discretionary
interpretation.
The full impact of the PSD on the cards industry has not yet
been fully realised and much will depend on how the PSD is
translated into domestic law. The entry of non-banking
organisations and the effect of the new provisions on existing
agreements, fees, charges, clearing and other operational aspects
bear close examination.
Payment institutions are non-banking organisations that will be
able to have access to the payment infrastructure and to operate
payments directly without the need for a banking intermediary. In
the cards industry, non-banks could apply for their own issuing and
acquiring licences and, potentially, could become direct
competitors to the established issuers and merchant acquirers.
The constraint on the maximum volume of payment transactions is
such that it is unlikely that any of the major processing
organisations will ever be in the position of applying for its own
licence and disintermediating its clients. It is, however, likely
that major merchant organisations will consider it as an
opportunity for reducing their cost of card payments
acceptance.
Once non-banking organisations have payment institution
licences, the implications for the card payments industry could be
significant. For processors, it is likely to mean more potential
clients for their services. For bank issuers and acquirers, the
implications could be not just seeing clients turning into
competitors, but the opportunity to offer white label issuing and
acquiring services.
It is unlikely that a non-banking organisation will be able or
interested in entering the issuing or acquiring business on their
own, as they lack required core skills. For banks, this will
present an opportunity that will see them competing with processors
and that will require a significant shift from the traditional
issuing and acquiring business models.
Redrafting of agreements
The PSD will require the redrafting of cardholder and merchant
agreements in order to comply with a number of requirements. The
PSD requirements in terms of transaction authorisation,
communication and claims mean that the topics of refunds,
transaction disputes and type and timing of transaction
confirmation to be provided to the payer (cardholder) and payee
(merchant) will require the redrafting of contracts and agreements
in order to reach compliance.
In many cases, substantial changes will be required to include
information about the payment services provider, use of payment
services, charges, interest and exchange rates, terms of
communication, safeguards and corrective measures, changes and
termination of framework contact and contract duration.
While all these points are typically already included in the
standard agreements in use, the PSD sets out additional details and
formats for the inclusion of such information under Title III.
Articles 27 and 28 define the specific information to be made
available to the payer and the payee after the receipt of the
payment order and after execution, respectively. For example,
subject to the interpretation of each individual member country,
the PSD requirement for “immediate” information provision could
result in the need to provide a set of information to the
cardholder and merchant on an almost real-time basis, rather than
the current time-delay system.
Depending on the interpretation of Articles 27 and 28, there
could be significant implications for the cards payment industry,
as issuers would have to find ways to provide cardholders with
information immediately after the receipt of the payment order (or,
in the case of a card payment, upon the receipt of the
authorisation request).
Industry consultancy Capco has carried out impact assessment
projects with a number of merchant acquirers. On the basis of its
finding, Capco believes the implementation of the requirements
included in Article 28 will pose quite a challenge, and will not be
workable in all cases on the basis of the current infrastructure.
As the member states translate this provision into domestic law,
there will be implications at infrastructure and operational level
for card payments.
Fees, charges and clearing
The PSD indicates that the sharing of charges between a payer
and a payee is the most efficient system to facilitate the
straight-through processing of payments. While on the one hand the
PSD allows fees to be levied on the payer, it also states that this
provision does not affect practices wherein the payment service
provider does not charge the consumer for crediting their accounts.
It also states that the fee may take the form of an annual fee.
All this does not imply any changes to the current practices
within the European cards industry; however, the PSD also states in
another article that the payment services provider should not
prevent the payee from requesting a fee from the payer for using a
specific payment product. This will allow merchants to surcharge
cardholders for a card payment in those countries where the
national government has not decided against this in their
translation of the PSD into domestic laws.
Title IV, section 2, 60 has significant implications,
particularly for merchant acquiring, as it states that a payment
should be cleared into the payee accounts within one day from
transaction date. Leaving aside the impracticability of
implementation on the basis of the current infrastructure, given
that an overnight batch process would enable a merchant acquirer to
issue a payment order to the merchant account only on the day
following the transaction, this would require at least an
additional day for the funds to reach the account and be available
to the merchant. Moreover, if this were the case, there would be
significant additional funding costs for the merchant acquirer,
given the cycle time of clearing a transaction through the payment
scheme’s network.
For those merchant acquirers that are managing credit risk in a
proactive manner, it means that they would not be in a position to
manage credit risks through delayed settlement and that they would
be left with only the lever of collateral deposits from the
merchant, insurance or third-party guarantees to mitigate credit
risk. It remains to be seen how merchants will lobby individual
governments in order to obtain a more favourable domestic
interpretation and translation of the PSD into law.
The PSD has succeeded in achieving a good degree of political
compromise around a number of critical issues. The exemptions for
small e-money networks and the capital requirements set for a
payment institution are tougher than those included in the initial
drafts. While the UK was hoping for more liberal rules, countries
such as France and Italy have been pushing for more restrictive
requirements as a way to protect the banking system from potential
new competitors or, if looked at from a different perspective, to
protect and to ensure the reliability of public confidence in the
payment industry.
All in all, it is doubtful that the PSD will meet its goals in
full as there will be differences in the way countries will
interpret it and finalise it into law. This will likely lead to a
situation in which some countries may offer more favourable
regulatory requirements for different players within the value
chain.
*Francesco Burelli is principal consultant at Capco and may be
contacted at francesco.burelli@capco.com
