What does PSD2 mean for online merchants?

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The purpose of the upcoming payment service directive PSD2 is to create an even playing field for payments and encourage innovation. The players on this field include banks, fintechs, the PCI (Payment Card Industry) and merchants. I have explained the basics of the directive in this post. While banks are at risk of losing up to 43 percent of retail payment revenues by 2020, the directive represents several opportunities for online merchants.

I addition to friction in the checkout process leading to cart abandonment, credit card processing fees ranging from 1,5% to 3,5% take a serious bite of online retailers margins. The combination of high friction and cost has led to the incredibly growth of alternative payment methods such as Klarna, and according to WorldPay, alternative payment methods will see their overall share of transactions grow from 37% to 50% by 2019.

With PSD2, online merchants have the possibility of becoming their own payments processor as a PISP (Payment Initiation Service Provider) and connecting to bank accounts directly through APIs under the XS2A (Access to Account) rule. This moves payments away from established payment gateways, card schemes and PCI networks and potentially eliminates costs for card schemes and other intermediaries in the PCI ecosystem.

With PSD2, the Directive will allow merchants to ask consumers for permission to use your bank details as a payment method. Once you give permission, online merchants will be able to securely access your bank account and collect their payment. In addition to cost savings, a solution where merchants take on the role as PISPs eliminates the need for complex checkout processes and providing “one click”-payment options for recurring customers. By collecting payments directly from customer’s ank accounts PSD2 will also enable faster payments.

However, becoming a PISP will involve some complexity and increased costs. Merchants must comply to the directive’s Regulatory Technical Standards (RTS) which is under development by the EBA (European Banking Authority). In addition to providing strong customer authentication and secure communications, it is also suggested that TPPs (Third Party Providers) should be supervised to ensure consumer protection, security and settlement risk. Anyone who has any experience from the financial services industry knows that compliance is expensive. For the largest online retailers, this may still make sense if the business case shows that cost reductions from processing fees and potential increased revenues from reduced friction outnumbers compliance cost.

No matter the outcome, the way we look at payments will change in the next 2-5 years.

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