The PSD2 tsunami

This article was originally published on?Forbes?23. September 2019

My predictions for the next three to five years is that card payment volume will continue to drop. Account payments on the other hand will rise, and consumers will find one mobile app to manage?their finances. Banks - start preparing

Slowly forming in the dark

Most people in the payments industry are so tired of PSD2 that they would welcome PSD3 for a change. But now that it’s here, it’s time to predict what will happen. The actual regulatory change; the requirement for banks to open up accounts for other payments providers to access, is now live. Much like the shift of tectonic plates, it is a major event that you can’t really see, but it’s shifting the world around us. The first thing consumers will notice is that it will become more secure, but more cumbersome to pay with cards.

SCA is short for Strong Customer Authentication.

SCA for most type of payments is now a requirement. For card payments this means we need to know it’s really you when your card is being used. You will be asked for your PIN more often when paying in store, but most predominantly SCA will feel like a speed bump when you pay for Spotify subscriptions, shop on Amazon, charge your card to download an app,,rent a movie or renew your Netflix subscription. So in effect, this means SCA is required for basically all situations a modern consumer use their card.

Most cards have fairly good consumer protection. At least that’s what the credit card companies have told us, which is why so many of today’s consumers are not afraid to use their cards online, even when we know millions of card numbers gets stolen and fraud is on the rise. So will SCA be good or bad?

Would you like some friction with that payment sir?

SCA will technically make payments safer. Safety is great and all, but consumers don't like friction during their shopping. In fact, any additional step in a payment flow will dramatically reduce conversion. We know this from analysing online shopping patterns and you have probably given up downloading an app just because you did not remember your password for the mobile app store account? We hate payment friction so much that Klarna’s business model and eventual success was built upon consumers choosing to accept a paper invoice with credit interest at about 18 percent rather than enter card details on a website.?

With SCA, card payments will become more complicated and slow, and consumers will be offered much more nimble alternatives. This is catastrophic news for the card industry. And for that reason, card transaction volumes will drop, and alternatives will rise.

Please welcome ‘the bank account’ to the main stage

There are many reasons why you will pay with your bank account going forward. Firstly, most consumers in Europe already pay with their bank account, as most Europeans have a debit card that is directly linked to their bank account. For this group of people, they are already used to paying with money that they have, and will typically check their balance before larger purchases. If you are a bank, and offer SMS balance check, push messages for transactions or low balance warning, an app with easy access to balance or something similar, you know that a balance check is the #1 thing people do, besides paying.

With PSD2, any payment provider can connect to your bank account and pull money from your account for transactions you make. Where cards used to dominate, with PSD2, such payments can be made directly from your bank account. From a security perspective, a card payment and account payment would be subject to the same SCA process, so the same friction. But there is one major difference. Card payments are expensive for the recipient (the business you are paying to). Bank account payments are not. In fact, they are free!

With access to publicly available data, we can make a rough estimate that Spotify, who has about 110 Million premium subscribers at an average monthly price at €6, pay somewhere between 3 to 5 MEUR in card fees, every month. They pay this to the card payment networks simply because you pay for your music using a card. By switching from card to bank account payments, Spotify would pay zero. Spotify is just one example. The same logic applies to any company who can charge bank accounts instead of cards. The financial incentive alone is undeniable. Imagine improving your bottom line with millions of euro from one day to the next. Customer experience would be the same, as both card and account payments requires SCA. Over the course of the next couple of years we will see ‘pay with your bank account’ popping up as the preferred payment option everywhere you are using your card today.?

There is an app for that

Apple coined the phrase and told the world that there is an app for everything. We have become addicted to and reliant on apps. They wake us up in the morning, tells us where to go, when to meet, and they will give you control and power over your money in ways you could not imagine. All the big players are jumping to join the financial services dance. Apple has made a credit card with Goldman Sachs. Amazon has invested hundreds of millions to position themselves in the payments race. AliPay and their APAC competitors have become some of the world’s biggest financial services companies by providing payment apps.

In the payments industry these payments apps; Venmo, Zelle, AliPay, WeChat Pay, MobilePay, Swish, Settle and many more are labeled ‘alternative payments’. Companies now have people in charge of ‘alternative payments acceptance’. And with the extreme adoption of these apps, all around the world, truth be told, they are not alternatives, they are favorites.

When bank accounts can be accessed and charged by these favorite apps, and you can see your balance across all accounts in one place, and you can pay Spotify and all the rest with a tap in the app, you will.?

If you are a consumer, you may ask yourself; what app will I end up using?

If you are a card company or a bank, you should be asking yourself; Do I have an app in the race?

Your favourite app, and those best positioned to become the favorite in markets yet not covered, will most likely be subject to consolidation. Bigger players will buy, merge and consolidate to reach the masses. In the same way the card industry put a card in everyone’s hand, these apps will be on everyone’s phone, and the world of payments and commerce will forever be changed. Especially in Europe, due to regulation. Now, please hand me that PSD3 whitepaper.