The UK e-commerce market is Europe’s largest and is set to reach £90 bn before 2020 (up from £60 bn in 2015). But while e-commerce grows, the preferred consumer payment mechanisms are changing.
The Payment Services Directive 2 (PSD2) will come into force in the UK (and the wider EU) within two years and will have a profound effect on retail and commercial banking. While new payment categories like PISP (Payment Initiation Service Provider) and AISP (Account Information Service Provider) will transform how consumers interact with their banks and third parties, they also hold the potential to transform e-commerce.
Today, credit and debit cards in particular are the preferred consumer payment method in the UK, with card spending comprising 63% of all e-commerce payments.
However, according to WorldPay, alternative payment methods will see their overall share of transactions grow from 37% to 50% by 2019. The implementation of PSD2 will act as a catalyst and will further fuel the use of alternative payment methods for e-commerce transactions.
As it stands, there is nothing fundamentally wrong with current payment methods and in all likelihood, debit and credit cards will continue to represent a significant share of e-commerce transactions. However, the card model continues to be expensive (despite the recently introduced interchange caps) and settlements happens at best D+1 (i.e. the day after the transaction).
But in the faster e-commerce model of the PSD2 world, consumers will authorise trusted third parties to perform direct transfers from their current accounts that leverage a more efficient (in terms of cost and speed) payment infrastructure via the UK Instant Faster Payment scheme.
All this is good news for customers, of course. When authorising PISPs to make payments, they will no longer have to manually enter card details, transforming a multi-click checkout process into one click. It should also lead to significant declines in cart abandonment and higher sale conversation rates for merchants. However, merchants may need to incentivise the consumer through loyalty programs to start using PISP payments instead of card-based solutions.
For merchants, faster e-commerce will bypass expensive card platforms, enabling instant settlements. Merchants will be able to see transactions in their accounts within seconds, resulting in improved working capital, as the days sales outstanding (DSO) drop from multiple days to same day.
Though merchants clearly benefit from the new system in terms of cost savings, the intangible advantages of card payments (namely, the consumer fraud protection) will not be removed entirely. Liability will be broadly shared between PSPs acting on the payer's instructions and those receiving payments on behalf of payees. Each PSP will be liable for any issues related to their part of the transaction while merchants’ liabilities are reduced.
Post-PSD2, issuing banks are not necessarily relegated to becoming the “dumb pipes” of the payments world. While some interchange revenue will be lost, innovative financial institutions can stay relevant (and cross-sell) with value-added offerings, using AISP to perform Personal Finance Management services.
The downside of the faster e-commerce model is the risk that card schemes and merchant acquirers stand to be hit hard by declining card volumes. However, card companies are already being pushed to make strategic choices due to IFR (Interchange Fee Regulation) and are reviewing their future business models. For example, Master Card is in exclusive talks to take over VocaLink, the UK Faster Payment processor.
Within the next few years the European payments space will undergo considerable changes as PSD2 improves access to customer accounts for TPPs (third party providers). While some banks may look to implement the bare minimum of the PSD2 requirements, there are sizable rewards and opportunities for financial institutions willing to invest in upgrading their payment capabilities. Faster e-commerce is not a futuristic prediction – it will become reality in the very near future.
Tristan Hugo-Webb is a Consultant at Capco’s London office, with over four years of experience in global payments research and consulting. Tristan served as the International Payments Analyst at Mercator Advisory Group, where he produced research on a broad range of payment topics, including consumer payment preferences, emerging payment technologies and alternative payment service providers.
The content and opinions posted on this blog and any corresponding comments are the personal opinions of the original authors, not those of Capco.