Simon Pepper, Head of Product at Tola
The second Payment Services Directive, more commonly known as PSD2, marks a significant change for the payments landscape as we know it, and subsequently, the digital commerce ecosystem. It will allow for the integration of Third Party Providers (TPPs) into the FCA’s regulatory framework, which will bring new levels of transparency and security in online money transfer, and provoke a fresh wave of competition and innovation in payment services.
We’ve seen a real shift in the payments landscape in the past few years, with each development making payments easier and quicker, possible from any location and via range of difference devices. As the mobile phone becomes an essential item for most people today, it’s no surprise that it’s become a key method of choice for making payments. In fact, 74% of British consumers manage their money or make payments using a mobile device.
As contactless, Barclays PingIt and Apple Pay integrate themselves into the ever expanding range of payments methods, consumers have come to expect one tap, or one click simplicity when it comes to parting ways with their money. This expectation is the same whether they are purchasing an item in store, or online. With simplicity and ease at the forefront of the consumer payment agenda, it follows that shoppers are increasingly interested in how new technologies can fulfil this experience.
Learning from overseas
In many developing countries, such as those in Africa, there are a high proportion of ‘unbanked’ individuals who rely on cash or informal financial services. However, given the high level of financial exclusion in countries such as these, traditional banking infrastructures find it difficult to make business models work to serve low-income communities.
However, of the 2.5 billion unbanked people in African countries, one billion of these individuals have access to a mobile phone. This provides a strong channel to extend the ways that consumers are able to make payments for goods and services – including direct from their mobile wallet. This model improves the customer experience and allows the user then to complete a transaction without the need for a traditional banking provider, or debit or credit card.
Change on the horizon
Of course, the market in African countries differsgreatly from the UK payments landscape, but we are seeing the demand for mobile payments growing in more developed markets too. Although there is a sophisticated banking infrastructure in the UK, with a low level of financial exclusion, businesses are still striving to find new ways to deliver quick and efficient payment capabilities to improve mobile commerce, and deliver the seamless shopping experience that consumers demand.
The introduction of PSD2 in January 2018 will provide clarity on the use of the mobile phone account to make payments against your mobile phone – ‘Pay By Mobile’. It will legitimise and improve security around the phone as a payment mechanism, which will soon be regulated in the same way as credit cards. However, this legislation will also restrict the distribution of funds through the value chain. In order to ensure complete protection for both merchants and consumers, any third party providing a payment service to a consumer, or other entity, will have to be a licensed Payment Service Provider.
Within this, there are few exceptions and exclusions. One of the segments that falls into this exclusion is telecommunication providers, who provide a payment service to their customers alongside their core services. This model is gaining pace in the UK, as Mobile Network Operators (MNOs) begin to learn from the success of their competitors in Africa by monetising billing relationships outside of core offerings.
Whilst these operators don’t need to register as payment providers, they do need to notify the FCA that they are benefitting from this exclusion. They must also detail how a €300 consumer spending limit will be managed – it’s important to note that this limit has to encompass all services, including voice, SMS and digital content.
This is no small task, and in order to avoid a breach, networks will likely need to implement a hard stop when the €300 is reached. Although the type of content or service, and the price per service, are fairly easy to control through contractual arrangements between the Telecom Operator and their intermediaries, the overall consumer spend on “third party products” is not. If an individual customer were to spend more than the limit in a month, it could push the Telecom Operator into a technical breach if they are acting under the exclusion and not registered as a PSP.
The importance of a licence
Currently, digital services and content providers are able to operate under this same exemption, but PSD2 will change this. Service providers who use a Pay By Mobile offering will need to ensure that they are working with an intermediary that has an E-Money licence. The intermediary sits in between the MNO and the consumer, and is responsible for handling mobile based payments, ensuring that they are correctly regulated by theFCA, and under the current watching brief of the Phone-paid Service Authority (PSA).
We’ve seen the payments landscape evolve steadily over the past few years, from the introduction of contactless cards in 2007 to the launch of ApplePay in 2014. Now, PSD2 could trigger the next wave of change in payments. The regulation will revolutionise the space, and Pay By Mobile will thrive in this new environment, allowing consumers to pay directly from their phone, charging transactions to a mobile wallet or phone account. This model benefits all parties within the ecosystem – the merchant, the MNO and the consumer. The stage is set for PSD2, the next catalyst for major change.