(r)Evolution. PSD2, Open Banking and the future of payment services

JP Fabri is convinced that the future is one of an open banking world, he writes about how PSD2 has laid the regulatory foundations for this new world

JP Fabri is a co-Founding Partner of Seed Consultancy. An economist by profession, JP has advised a
host of local and international clients including nine governments of small states. A visiting lecturer at the University of Malta, he has a passion for solving business challenges.

No other banking activity is as important to either society or business as payments. Payment services underpin main street, the wheels of industry, the operation of markets and the existence of government.  

They have also been sources of innovation and disruption. Current generations have seen the emergence of credit cards, debit cards, online payments, mobile phone payments, contactless payments and other innovative methods of payments.  

Technology and regulation are driving innovation in payment systems and creating new sources of value. So significant are the changes that the future payments market will have a profound effect on the structure of today’s banking sector and other sectors too.   

In 2015, the European Union acted to create a ‘digital single market’ for payment services in Europe.  This move was championed by the EU’s Second Payment Services Directive (PSD2) which strengthened consumer rights, introduced new security measures, and provided the regulatory infrastructure for its own form of Open Banking (‘OB’).  This game-changing Directive opens up consumer bank accounts to third party providers (TPPs), unlocking banks’ data-lakes and providing a level playing field with other financial services providers. As such, it represents a fundamental change in the European banking sector, and a significant step towards Open Finance. 

PSD2 is an attempt by European lawmakers to facilitate the creation of a new ecosystem to drive competition and innovation in the payment services market.  

 The basic tenet behind OB lies in Banks making bank-held customer data available to authorised third parties in a safe and secure manner. PSD2 has taken a dual approach in this regard by introducing ‘Account Information Service Providers’ (‘AISPs’) and ‘Payment Initiation Service Providers’ (‘PISPs’), both referred to as ‘Third Party Providers’ (‘TPPs’). AISPs are online services which are authorised to extract consolidated information from various different payment accounts held by payment services users (‘PSUs’), potentially with different payment service providers. A PISP, on the other hand, is authorised to initiate a payment from a PSU’s account in favour of any third party, such as a merchant, by creating software bridges between both accounts and relying on existing banking railways to complete the transaction. 

Regulatory innovation is a key enabler in the creation of new services. However, from a study our team at Seed published on PSD2, open banking and the future of payment services, it is evident that other factors need to come together in order to ensure a revolution in payment services. These include: 

• Simplicity: innovations which allow customers to utilise payment services in a single tap or automatically by leveraging connectivity. 
• Interoperability: most innovative payment solutions are not restricted to a single payment method, allowing customers to manage and use a variety of credit cards, debit cards or bank accounts for payment. 
• Value-add services: many innovative solutions offer value-add functionalities in addition to payments, enabling merchants and financial institutions to interact more closely with customers and deliver additional value. 

I believe that PSD2 and Open Banking will not only significantly change the financial services value chain but other key sectors including remote gaming. If you are a business leader in an industry that can be disrupted through PSD2, we highly recommend that you take a strategic and adaptive approach.  

The future of payment services 

This is especially needed because various innovations spurred by PSD2, technology and consumer behaviour are continually pushing the envelope with respect to payment services. The following are increasingly being seen as the key drivers behind the future of such services: 

• Cashless – more cash will be displaced by electronic transactions as payment innovations make it beneficial for customers to use mobile and other alternative means of payments even in small denomination transactions 
• Engagement – as payments and mobility becomes more integrated, the importance of payment transactions as a potential customer interaction point will increase for merchants and financial institutions alike 
• Data-driven – with greater adoption of electronic payments, more data will be accumulated from payment transactions, allowing financial institutions, service providers and merchants to gain a greater understanding of customers and businesses 
• Increased access to loans – as more payments are processed through electronic rails, financial institutions’ visibility into individuals’ and businesses’ cashflow and spending patterns will increase, improving their ability to extend loans to customers previously less understood 

• Reduced costs – since innovative solutions build on the existing infrastructure, which has very low variable costs, the cost of making electronic transactions will fall as electronic payments gain more volume 

Further disruption and disintermediation in other sectors, gaming included 

These forces, together with regulatory and technology innovations, will usher in a new era of customer control. With the appropriate permissions, customers will be able to centralize their account information and payment options into one unified mobile application, enabling them to conduct day-to-day banking on the platform of their choice, provided by their bank or an innovative fintech. Whilst he obvious threat for banks is one of disintermediation, with fintechs potentially owning the customer relationship, the potential upsides for other sectors are significant.  

One such sector in which a strong impact could be felt in the coming years is the remote gaming industry, where the standards around payment methods utilised by consumers is subject to continuous scrutiny by regulators and operators alike. Malta is no stranger to this sector, with the jurisdiction accounting for 284 active online gaming companies by the close of 2019.  

In its 2019 Annual Report, the Malta Gaming Authority (MGA) reported that as many as 28.8% of all consumer deposits with MGA licensed operators occurred through credit and debit cards, with bank transfers and e-Wallet/Online Accounts accounting for 26.9% and 24.4% of all payments respectively.  

Bearing in mind that e-Wallet and Online accounts are often used as proxies for loading funds through cards, it is clear that the latter still represents a widely popular payment option with local operators. Nevertheless, it is also worth noting that almost 27% of all funds were loaded directly through consumers’ bank accounts, thereby bypassing cards and all other intermediary payment instruments.  

Even so, the downsides to each of the aforementioned payment methods are widely acknowledged. As discussed earlier in this report, card-based payments are synonymous with numerous transaction fees due to the presence of various third parties which are required to authenticate the transaction and ultimately settle the funds at their destination.

Moreover, credit card gambling bears the risk of irresponsible betting through players effectively gambling on debt, leading to foreign regulators such as the UK Gambling Commission (UKGC) to formally ban the use of credit cards in online gambling as from April 2020. Bank transfers on the other hand, whilst generally perceived to be a safer payment method, are still dependent on online banking portals, most of which lack the technological infrastructure to offer a quick and efficient payment experience to consumers on a widescale basis.  

Against this backdrop, OB-powered payments are extremely well positioned to flourish in the remote gaming space both in the short and long-term, as evidenced by numerous international operators who have recently started offering payment initiation options for consumers wanting to load funds. An OB platform providing PISP functionality enables seamless account-to-account transfers between the player and the gaming operator, without the need for the former to authorise the transaction through his/her banking portal.

Each transaction is securely authorized by the respective Bank with which the consumer’s account is held and which receives the payment initiation request, with no third-party involvement at any stage of the transaction.       

In this way, OB platforms are able to maintain the simplicity of card payments and combine it with the security offered by bank transfers. Moreover, given their very nature, OB enabled payments also ensure that transaction fees are significantly minimised and that the risks associated with debt gambling are effectively mitigated as players would no longer be able to gamble on debt but only with funds which are available in their account. 

Having established all of the above, it should be noted that the value which gaming operators can derive from OB is not simply limited to an alternative means of payment. An OB platform’s AISP functionality may further provide gaming companies with solutions aimed at achieving regulatory compliance, or even a competitive advantage over other operators. Having direct access to consumer data could facilitate a gaming company’s ongoing AML/CFT compliance obligations as well as provide the necessary monitoring tools to ensure a responsible gaming experience across its organisation.  

The advantages of embracing PSD2 

We see a massive opportunity here for gaming companies to turn the regulation – and the broader shift towards OB – into a number of competitive advantages; these being: 

• firstly, the Gaming Operators can benefit from savings in time & effort no doubt; avoiding the current administrative load associated with compiling and sharing paper documentation including bank statements if used as a means of determining or supporting income assessments / re-assessments; 
• secondly, near real-time access to a customer’s statement information enables the Gaming Operator to make quicker, more informed decisions and reduce associated risks from a better understanding of a customer’s income and expenditure profile ‘over time’. Open Banking will show a Gaming Operator their customers spend profile when compared to previous months say; and, 

• lastly, ‘real’ data on income and outgoings can be more easily integrated with everything else within the customer account or service history to provide a more comprehensive view of affordability. The use of such a rich set of transactional banking data will more accurately reflect the customer’s financial circumstances and their ability to gamble / game ‘more safely’ (should that be an issue). 

Recommendations for business leaders 

From our discussions and research, we believe that business leaders in gaming operations and other sectors with a strategic interest in embracing the changes in payment services should: 

• elevate the discussion to a strategic, C-Suite and Board level so executives can determine how they want to respond, what opportunities OB creates and what risks are created through inaction; 

• Operators need to focus on creating partnerships with fintechs to make the most of the opportunity. 
• Operators need to consider the vertical-integration model specially to leverage the data potential. 

Regulations, emerging technologies, changing consumer behaviour and competitive dynamics are fundamentally altering the payments landscape. These changes are already posing major threats to the traditional competitive advantages, customer relationships and revenues enjoyed by banks. Now PSD2 is set to heighten and accelerate these disruptions. 

Despite the uncertainties and challenges, there are significant opportunities for a number of players including banks, financial institutions and gaming operators to redefine their business and operating models to unlock new value and provide innovative customer propositions. These opportunities will be realised primarily by forward-looking companies who gain a first mover advantage—but achieving this will require clear decision-making now over the different strategic options. 

As Seed, we are convinced that the future is one of an open banking world. But we are equally convinced that only those players that proactively shape their own future will succeed in it.  

PSD2 laid the regulatory foundations of such a new world – now it is up to business leaders to realise this.  

The evolution in payments has the potential of kickstarting a revolution.