The European data sharing regulation, PSD2, is often seen as a compliance burden for banks — but if used correctly, the rules provide a path to boosting digital payments revenue.
Online banking e-payments (OBEP) are already a popular way to pay for e-commerce purchases in continental Europe, and PSD2 provides more regulatory cover for OBEP, also known as account-to-account payments.
“PSD2 provides the clear regulatory framework in which these [A2A] payment services take place,” said Oscar Berglund, CEO of Stockholm-based OBEP service Trustly.
Under PSD2 and the U.K.’s Open Banking regulations, an Account Information Service Provider license allows access to bank customer data, while a Payment Initiation Service Provider (PISP) license allows a service provider working on behalf of a merchant to initiate payments from the customer’s account. But customers must give explicit consent.
PDS2 also mandates strong customer authentication, which requires payments service providers (PSPs) to use authentication methods involving at least two factors from two different categories: “knowledge” (e.g. password); “possession” (e.g. smartphone or card); and “inherence” (e.g. unique attributes of an individual’s behavior, such as how they interact with websites).
Another trend driving A2A payments is the increased convenience of online authentication, due to the use of mobile banking apps, according to Berglund. Historically, consumers authorized A2A payments via passwords or PINs, and then hardware security tokens, which calculate a one-time code, Berglund said.
“But banks now put software security tokens in their mobile apps, or they send a one-time authentication code via SMS, or require the use of biometrics," Berglund said. "These methods make it easier to authorize payments and, of course, fingerprint authentication works better than static passwords.”
According to Berglund, there is considerable consumer willingness to use bank accounts for e-commerce payments in Europe as an alternative to cards, Berglund said. Trustly processes around 5 million bank-to-bank account payments a month across 29 countries on its platform. In November 2017, Trustly said it had processed over €10 billion worth of payments since its launch in 2008.
Nordic Capital, one of Europe’s largest private equity investors, acquired a majority stake in Trustly in May 2018, valuing it at €700 million, according to the
Europeans don’t rely on credit cards, giving A2A transfers an additional lift.
“Outside the U.K., most European payment cards are debit cards or deferred debit/charge cards, not ‘real’ credit cards,” said Ron van Wezel, Aite Group senior analyst. “It’s relatively easy to get an overdraft facility on a regular bank account in Europe, so there’s only a limited need to borrow on credit cards.”
As Maestro-branded debit cards and Visa V-Pay debit cards requiring PIN entry can’t be used online, OBEP-based schemes such as the Netherlands’ iDeal are popular, according to van Wezel. “Adoption has also been driven by merchants, because the business model for iDeal is more attractive to them – a fixed, low fee per transaction rather than ad-valorem.”
Berglund noted that other OBEP-based payments platforms such as Trustly and Sofort, which is now owned by Klarna, have variable fees.
PSD2’s API-based approach will provide an added boost for banks. Trustly and Sofort have had success with online banking solutions that used “screen-scraping” to access the bank’s online portal, said van Wezel. “This involves obtaining consent from the account-holder, but bypassing the bank itself,” he said. “Under PSD2, PSPs such as Trustly and Sofort will use an API to access the bank account data. PSD2 says that banks must offer a ‘secure communication interface’ to third parties to access their customers’ bank accounts. Although the regulation doesn’t speak about API, the consensus is that banks will implement this via APIs and PISPs must use these APIs.”
The scope for cost reduction with A2A services may be limited, according to Celent senior analyst Zilvinas Bareisis.
“Interchange rates in Europe have already been capped at 0.2 percent for debit and 0.3 percent for credit cards,” he wrote in his “Replacing Cards with Account-to-Account Payments for Shopping: Hold Your Horses” report. “Although card scheme fees would be eliminated, merchant service provider (PISP) fees are likely to remain for all but the largest merchants willing to become PISPs themselves. Whether they become PISPs or not, merchants will need to invest upfront to add A2A as a payment method.”
Trustly has several competitors. iDeal, which is a bank-led initiative, has about 60 percent of the Dutch online payments market. The number of transactions by Dutch consumers on iDeal rose 34 percent year-on-year in 2017 to 378 million, worth €33 billion, according to iDeal’s operator Currence. A third of all iDeal payments take place on non-Dutch e-commerce sites, as iDeal is available at 7,000 e-stores in 60 countries.
“In Germany, a comparable initiative is Giropay, which has much less traction than iDeal,” van Wezel said. “This because Giropay has a less attractive business model, and has no ubiquity, as some large banks don’t participate in it. In the Nordic region there is also MobilePay.”
For OBEP services to gain mass adoption, ubiquity is essential. “That means an easy registration process for consumers, or no registration at all; finding key merchants to offer the payment method; and proper scheme management and governance to manage issues during the start-up phase,” van Wezel said.
PayPal is a major player in European e-commerce, but its market share differs from country to country. Unlike pure OBEP schemes, PayPal allows customers to fund their accounts from cards as well as bank accounts. “PayPal’s European clients can use Trustly to fund their PayPal accounts,” said Berglund.
A European bank-led initiative, MyBank, is offered in France, Spain, Italy and Greece by the Euro Banking Association EBA Clearing subsidiary. MyBank has 10,000 merchants and 40 million users across Europe. Between its launch in March 2013 and February 2018, MyBank processed €5 billion, with over 50 percent of transactions taking place in 2017 alone.
“Trustly experiences competition from bank-owned A2A payment solutions in various countries, for example iDeal, which is a strong competitor in the Netherlands,” said Berglund. “The advantage of services like iDeal is that consumers in markets where they are available know how A2A payments work, and that drives customer uptake for our solution.”
In other European countries without incumbent A2A solutions, Trustly has to educate consumers from scratch. “The best markets for us are where consumers already know how to pay via bank accounts,” Berglund said.
Trustly is particularly seeing growth in cross-border transactions. “Merchants appreciate the fact that we have access to 500 million European consumers and that merchants experience one agreement and one integration with us to reach these consumers cross-border,” Berglund said. “For example, we enable merchants in the U.K. to accept cross-border bank account payments from European consumers.”
Each payment is local from Trustly’s perspective, as payments from consumers go through Trustly’s bank accounts to its merchant clients’ bank accounts. “If you pay in Sterling from a U.K. account, the payment will go to our account in the U.K.,” said Berglund.
Trustly plans to provide domestic A2A payments in the U.K., a market where domestic consumers generally use cards for online purchases. But it will contend with an incumbent player, Pay by Bank, formerly called Zapp.
In July 2018,
Pay by Bank, which was created by U.K. bank payments scheme Vocalink, now part of Mastercard, enables consumers to pay for e-purchases directly from their bank accounts via their bank’s app.
“Pay by Bank had serious difficulties going to market over the past few years,” said van Wezel. “But now it seems that, with Mastercard’s support, the scheme is finally rolling. If Pay by Bank can match iDeal’s achievements, i.e. service ubiquity of service with all major U.K. banks participating, user convenience, and attractive merchant pricing, it has definite potential. But, given that consumer payments habits are hard to change, it will be interesting to see if consumer behavior in the U.K. will change from card to A2A-based payments.”
