The Payment Services Directive is one of the most talked-about pieces of regulation in recent times and its impact on the payments industry is yet to be fully gauged. However, as Victoria Conroy reports, industry professionals have mixed feelings over the intended aims of the directive and whether they can be fully achieved.
November 2009 saw the Payment Services Directive (PSD) being implemented across several European markets, but its reception among the financial services industry has been mixed to say the least.
A new market intelligence report, commissioned by financial news distributor Finextra in conjunction with global money transfer provider Western Union, gives further weight to the ambivalent attitudes of many in the payment industry. Published in December 2009, the report surveyed payment professionals at several European banks to gauge the industry’s opinion of the PSD and how it will affect their business. The survey sought to examine:
• How the market will react to new payment institution (PI) entrants;
• What partnership opportunities will the PSD introduce, if at all;
• What impact the PSD will have on the retail market; and
• How the industry views future challenges related to the PSD.
The geographical split of respondents was roughly equal. Over 45 percent of respondents came from Northern Europe, 21.5 percent each from Southern Europe and Western Europe respectively, and 12 percent from Central and Eastern Europe.
Appetite for partnership opportunities
The results of the survey show a growing appetite within banks for partnership opportunities with the new PIs, but also highlight that many banks, whether they are domestic, regional, or global, still see competition and/or synergies coming from within the traditional bank environment. A large percentage of organisations that do not currently offer remittance services, but plan to, are looking to partnerships in the post-PSD marketplace.
Key findings from the survey were:
• 38 percent of banks surveyed viewed the introduction of new PIs, established by the PSD, as an “opportunity to form partnerships”.
• 34 percent saw “marginal or no competitive threat” from new PIs. More than half of the banks surveyed, 55 percent, felt that foreign and international banks posed “the biggest competitive impact post-PSD”. These results may reflect how the market will react to the PSD, but they also indicate the banking community has failed to see beyond other banks as any kind of competitive threat.
• 63 percent said they would become or remain a full payment service provider as a result of the PSD.
• 52 percent said they do not offer specific products targeted to the migrant sector.
• 60 percent of participants already offer remittance services.
• 60 percent of those who were interested or who were planning on offering remittance services were “unsure” of what products to introduce.
• 47 percent of those who already offer remittance services claimed they were not looking for nor needed to partner with a PI in the post-PSD environment.
• 40 percent of those that plan on offering remittance providers either plan to partner with a remittance provider or partner with a bank.
The question of whether payments processing would continue to be part of organisations’ core business going forward drew an emphatic positive response from survey respondents. Only four out of 102 respondents said that payments would no longer be a core part of their business going forward as a result of the PSD. Out of those four, three said they will partly outsource payments value chain activities. They all said they are not interested in offering remittance services.
In addition to the more traditional transactions, such as online payment providers and remittance service providers, new competition will come from retail sectors such as supermarkets, which will be eligible to offer payment services.
Foreign banks represent a threat
In response to the question of where the highest competitive market impact would come from as a result of the PSD, an overwhelming 55 percent of those surveyed anticipated that the highest competitive impact will come from foreign and international banks.
The PSD is a European directive, but many banks view its introduction as an opportunity for large, multinational banks to increase their payments and remittance share in Europe.
However, these findings can also be interpreted as showing lack of foresight on behalf of the banks. Banks are still looking inwards, within the traditional banking community for any incoming competition. Traditionally, bankers tend to focus more on the traditional products such as loans, deposits, trading, and mergers and acquisitions.
In sharp contrast, only 4 percent saw competition coming from remittance providers (such as Western Union) and only 6 percent saw it coming from the retail sector such as supermarkets and retail chains. The lack of concern, especially in regards to retail sector entrants, is startling, especially amid such high-profile bank services from the likes of supermarket giant Tesco in the UK or France’s Carrefour.
Understandably, the new category of PIs is viewed with some wariness by a proportion of respondents, but 38 percent see the PSD as introducing an “opportunity to form partnerships.” Of those, 77 percent of the banks that saw it as an opportunity to partner were from Northern or Western Europe, which amounted to slightly more than the 61 percent of total respondents from these regions.
The next battleground surrounding perceptions of the PSD again concerned the new competitive marketplace. While 34 percent of those surveyed saw the new PSD environment offering “marginal or no competitive threat” to their existing business, 16 percent anticipate a “serious competitive threat” from new PIs. By contrast four percent felt the PSD will have “no impact” on the current competitive environment.
Opportunities for remittance providers
Considering that 38 percent saw the PSD as an opportunity to form partnerships with new PIs entrants, only four percent saw the new environment as a chance to acquire new payment and remittance providers. All those that saw it as an opportunity to acquire new entrants were large UK or Spanish banks that already offer remittance services.
In terms of payments processing, when asked which strategies will be most relevant for respondents as encouraged by the PSD (and SEPA), enhancing or increasing their own internal payments business was the main strategy of those surveyed when looking at the impact of the PSD.
However, online and e-banking activities emerged as a strong area for growth among those surveyed, with 51 percent saying they would increase focus in this area. However, as much as 36 percent of participants say their business strategies will remain unchanged post-PSD.
Outsourcing saw few fans from those banks surveyed. Only 9 percent planned on outsourcing payments value chain activities, and no bank planned on outsourcing payments processing completely.When asked whether their organisations would offer a specific product/service to target the migrant segment, most respondents were of the opinion that they had no interest in doing so. A 2009 report by the United Nation’s Conference on Trade and Development claimed that migrant remittances to developing countries amounted to $305 billion in cash globally for 2007, up nearly 9 percent on the previous year.
According to the World Bank (July 2008) the international remittance market has increased 63 percent over the last 5 years (unrecorded remittances can be up to 50 percent more), with more than $550 billion expected to have been remitted in 2008. According to the World Bank, the US and European markets are the biggest source of remittance payments.
The United Nations estimates that 191 million immigrants worldwide send money to relatives back home. In many countries around the world, remittances are the most important poverty alleviation programme and represent a considerable economic force (up to 10 percent of the GDP in countries such as the Philippines).
In this survey, the participants were split on opportunities arising from the migrant market. More than half, 52 percent, said they do not offer specific products targeted to the migrant sector. Of those offering services targeted specifically at migrants, only 8 percent were from Northern Europe (as opposed to 22 percent of total responses from this region).
Challenges going forward
In regards to remittances, 84 percent of those surveyed who offer specific products to migrants already offer a remittance service. The remittance split was more varied among those that did not offer migrant services. Some 38 percent already offered remittance services, while 36 percent were not interested in introducing those services.
Remittance services are a large part of the payments activities already provided by those surveyed, with 60 percent of participants already offering remittances. However, 10 percent of those surveyed were interested in introducing remittances as a result of the PSD. The remainder were either not interested in pursuing remittance services or had not considered offering the service.
Of those who do offer remittance services, 57 percent offer account-to-cash services, followed closely by 56 percent that offer cash-to-cash services. Only 16 percent offered only an account-to-account only remittance service. However, by adhering to a strict definition of remittance, it could be argued that account-to-account services cannot be classified as a remittance service. However, 60 percent of those who were interested or who were planning to offer remittance services were “unsure” of what products to introduce.
Out of those who already offer remittance services, 47 percent claimed they were not looking for nor needed to partner with a PI in the post-PSD environment. However, for those that plan on offering remittance services, 40 percent either plan to partner with a remittance provider or partner with a bank. The real opportunity for partnership opportunities seems to lie within organisations that do not currently offer, but plan to, introduce remittance services.
When asked what their organisations’ main challenges in terms of the payments industry in the near future would be, by far most of those surveyed cited cost reduction and regulatory compliance as the main challenges within the payments industry in the coming few years.