The missing link in the Access to the Account

The context

On the 5th of May, 2015 the European Parliament, the Council and the Commission reached an agreement on the content of the new Payment Service Directive 2 (PSD2). The final version is expected to be published in autumn. The EU member states are supposed to implement PSD2 in their national legislation within two years (autumn 2017).

Continued concerns over safety

The PSD2 provides for a new type of service for third parties, known as third party PSPs (TPPs), which can gain access to a payer’s current account at that payer’s request. For this purpose, the payer has to give this third party his personal codes for access to his current account. The third party can then make an online payment, on the payer’s behalf, for example for a purchase from a web shop (payment initiation services). Third parties will also be able to set up account information for the account holder (account information services). This is particularly handy if an account holder has accounts with several banks and he wishes to receive the transactions on all the accounts in a single statement. Here too, the account holder needs to give the third party his personal codes. There are several important risks involved in giving personal codes to third parties. These include phishing, which can be the result of a consumer unwittingly giving his codes not to the TPP, but to a fraudster. The banking sector has repeatedly drawn attention to these risks. The European Commission has therefore tightened the requirements for TPPs and has asked the European Banking Authority (EBA) to draw up Regulatory Technical Standards (RTS) for security procedures and measures. These have to be implemented by the payment service providers no later than 2018. This has not eliminated our concerns, however.

Cooperation is essential for successful innovations

Through these new services, the European Commission aims to foster innovation and competition in the payments sector. Numerous potentially new possibilities and opportunities lie ahead for providers and users of payment services.

The key element of innovations is that they contribute towards reducing the transaction costs in the economy and, in this case, in the payment chain. The term transaction costs is interpreted in its broadest sense: all the costs that relate to organising a payment in the payment chain. Not only immediately apparent costs, such as the cost of processing transactions, but also less apparent and less or not measurable costs, such as search and information costs, negotiation costs, contract costs and communication costs. As an example: a logo in combination with clear communication policies contributes to more trust in the payment chain, leading to lower transaction costs (albeit not always measurable).

As more and more players are becoming involved in the payment chain, the importance of transaction management is increasing. The aim of transaction management is to reduce transaction costs, creating as much value as possible in the payment chain. Key to this is optimising the overall production process in the payment chain by harmonising the activities in all the links in the chain (1). Cooperation between the parties in the chain is crucial for achieving lower transaction costs. This cooperation is brought about by means of matching zones, in which as many stakeholders as possible participate. Examples of matching zones are the European Payments Council (EPC), iDEAL and payment card schemes.

PSD2 increases the transaction costs in the payment chain

A multitude of new services and providers leads to market fragmentation and increases the transaction costs in the payment chain. This is definitely the case if all the TPPs ally themselves independently to all the 7,000 banks in Europe. Experiences with two-sided markets have shown that cooperation limits market fragmentation considerably, creates reach and fosters confidence among end users. This contributes to lower transaction costs in the payment chain. Effective competition is impossible without good cooperation.

Standards reduce the transaction costs in chains. The RTS to be set up by the EBA contribute to these. However, in practice this will prove insufficient to reduce the transaction costs substantially. Consequently, the outcome of the PSD2 may actually be a rise in the costs of the payment chain. In that context, ideas are being developed by a number of market parties to limit transaction costs through the use of ‘matching zones’ (2) (3). These include standardised interfaces (APIs).

Standards are important but not sufficient

The reduction of transaction costs in the payment chain gains momentum if it involves more than just standards, and further steps in the cooperation are taken. This is the case if agreements are reached in areas such as:

- Payment chain security (e.g. criteria for onboarding new end users)
- Identical user perception and functionalities
- Resolving operational issues (responsible chain orchestrator)
- Fraud prevention, detection and monitoring
- Governance (participation, method of involvement of all the parties in the chain)
- Brand, public awareness (trusted brand)
- Public campaigns and market communications to increase reach

Experience with, for instance, iDEAL has shown that cooperation between all the parties concerned not only lowers the transaction costs considerably but also fosters competition in the market. This contributes to greater social welfare.

Successful cooperation in the payment chain brings greater prosperity

The PSD2 offers a host of possibilities and opportunities to new and existing parties for growth and competition. Their success depends to a large degree on the extent to which the transaction costs in the payment chain are reduced. New market players, in many cases with a lot of creative and innovative ideas, could therefore cooperate better with existing PSPs. There are a number of options for this.

Option 1

New and existing PSPs create a new cooperation arrangement together (matching zones, schemes) or affiliate themselves to existing Online Banking ePayments (OBeP) schemes, which expand their services with APIs (iDEAL, MyBank). OBeP schemes enable end users to pay for their online purchases securely from their own bank account. This allows new entrants to benefit straight away from the network effects and the trust that has been built up in the schemes. In that context many parties have preceded potential future entrants. For instance, along with six acquiring banks, 54 payment institutions (Collecting PSPs), (35 of which are outside the Netherlands) offer their customers iDeal.

                                                                                                              Source: Currence Annual Report (www.currence.nl)

Option 2

Existing and new payment service providers implement disruptive innovation by – jointly – developing completely new services with considerable added value for society. These include e-mandates, e-identity and seamless payments. Here too, cooperation is a precondition for achieving network effects and the lowest possible transaction costs in the payment chain. Dutch banks took the initiative for this within the Dutch Payments Association in 2014, via the ‘Payments 2.0’ programme.

Still plenty of challenges

In the world of payments the key factors are satisfying the needs of end users for the lowest possible transaction costs, a fair distribution of these costs and the mutual trust of all the parties in the chain. Cooperation between all those involved is crucial for this. Although the PSD2 facilitates innovation and the entry of new market parties, a lack of effective cooperation between all the parties will result in market fragmentation and higher transaction costs in the payment chain. So there are still plenty of challenges ahead before Access to the Account will create additional social welfare.

(1) Frank den Butter, Jelle Joustra, Nanko Boersma (2015), Koppelzones, lagere transactiekosten door organisatorische innovatie (matching zones, lower transaction costs through organisational innovation)
(2) See for example the Open Transaction Alliance, Innopay (www.innopay.nl)
(3) Equens SE, Nets and Vocalink (2015) White Paper on Caps for PSD2

About Piet Mallekoote

Piet started his career at the Dutch Central Bank. He held several senior management positions in economic research, economic and monetary policy and payments, lastly as a member of the Payments and Settlement Committee of the Eurosystem. In 2004 Piet joined Currence, the then newly established Dutch entity for ownership of the Dutch collective payment schemes, including iDEAL. He became its CEO in 2006. In 2011 Piet became also CEO of the newly founded Dutch Payments Association whose members are the payment banks in the Netherlands. Piet is also a member of the Payments Systems Market Experts Group of the European Commission.

About the Dutch Payments Association

The Dutch Payments Association organises the collective tasks in the national payment system for its members. Its members are providers of payment services: banks, payment institutions and electronic money institutions. The Payments Association’s responsibilities lie in the areas of infrastructure, standards and shared product features. The Dutch Payments Association seeks to ensure a socially efficient, safe and reliable payment system. This requires accessibility, openness and transparency of its organization. In this respect  the Association organises an active cooperation between the providers of payment services and representatives of end users, including consumers and business owners.