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The implementation of the Second Payment Services Directive (PSD2) early next year is set to have a far-reaching and positive impact on payments and digital commerce.
Integrating Third Party Providers (TPPs) into the Financial Conduct Authority’s (FCA’s) regulatory framework will lead to new levels of transparency and security in the online transfer of money. A new wave of competition and innovation in payment services will emerge, ultimately enhancing the customer experience.
Innovation in this space has exploded over the past few years, and each subsequent development has made it quicker and easier for users to make a payment whenever they want, from wherever they are, using the most convenient method which, increasingly, tends to involve a mobile device.
Four out of five adults in the UK own a smartphone, and one in three will check their phone in the middle of the night, so it’s unsurprising that they are becoming increasingly used as payment devices.
In today’s digital society, consumers have come to expect the ease of “one tap” or “one click” payments when buying goods or services online. Not only do they expect it to be quick and easy, they expect to be offered a range of payment options. Consumers are now showing an increased interest in the application of new technologies that will make shopping faster, easier, and more secure.
Indeed, as Android Pay joined Apple Pay as an option for consumers in the UK last year, recent figures have revealed that £288 million was spent on mobile contactless payments in 2016; a staggering increase of 247 percent on the previous year.
Developing nations – mobile first
Around 2.5 billion people in developing countries are “unbanked” and must rely on cash or informal financial services, particularly in rural areas and particularly the low paid. These services are less safe, inconvenient and expensive when compared to markets benefiting from mature financial infrastructure. However, over a billion of these people have access to a mobile device, which can be used to extend the reach of financial amenities and provide the means to pay for goods and services.
In these markets, the mobile phone is at the front line when it comes to online purchasing, with many consumers paying merchants directly from their phone. Requiring no credit or debit card details, this mobile-centric model allows transactions to be completed without involving a traditional banking provider, greatly improving the customer experience.
With a well-established banking and card infrastructure, and a high level of financial inclusion, the market in the UK is very different to that of developing nations. Nonetheless, mobile payment technology is becoming increasingly popular, especially as businesses recognise the importance of delivering quick and seamless payment capabilities to improve mobile commerce and the overall user experience.
The implementation of PSD2 will offer new clarity on the ‘Pay By Mobile’ model, in which a consumer’s mobile billing account could be used to make purchases against their phone bill. Security and consumer protection around this payment mechanism will be enhanced under PSD2.
This will, however, lead to new requirements relating to the provision of the payment service and the distribution of funds through the supply chain. Most importantly, any party providing a payment service to a consumer or other entity will either need to be licensed as a Payment Service Provider (PSP),or register with the FCA to operate under an exclusion. However, the exclsuion under which Telecommunications providers generally operate only applies to the provision of Digitial and Content services, charitable donations and e-tickets. It is also considerably limited by transaction caps. Purchases of physical goods and services have to be undertaken through a licensed Payments Service Provider.
As UK Mobile Network Operators (MNOs) witness the success of their counterparts in developing countries, they too are looking to find ways of monetising their billing relationships outside of their core business offerings, with e-money a particularly high priority.
While these MNOs don’t need to be licensed as payment providers, they too will be required to register with and notify the FCA that they are benefitting from the exclusion, provide details on how they will manage the caps (a €300 consumer spending limit across all services, including voice, SMS, donations ticketing and digital content and €50 single transaction limit) and submit annual reports of breaches of these spending limits..
This last part is no easy task though as, in order to avoid breaches, MNOs may need to implement a “hard stop” as soon as the €300 limit is reached. Although the type of content or service, and the prices charged for them are reasonably easy to control through contractual agreements between the MNO and their intermediaries, the overall spend on “third party products” is not. Should an individual subscriber spend more than €300 in any month, they may push the MNO into a technical breach of the payment services regulation if they’re not registered as a PSP.
Change is coming
The PSD2 legislation is still at thehands of the Treasury. However, if the Directive is directly transposed (and tweaked in minor ways to reflect industry consultation requirements) the likely outcome is:
MNO’s and Service providersof digital services and content currently operating or intending to operatemobile billing services under the current exemption under PSD1will need to take action, prior to18thJanuary 2018, when the new regulation comes into force.. They will need to notify the FCA they are providing services pursuant to the relevant exclusion and (most likely) audit annually to demonstrate compliance. In addition they remain subject to the regulatory supervision of the Phone-paid Service Authority formerly known as PhonepayPlus (PPP).
Service providers using, or looking to provide, a Pay By Mobile offering under PSD2 beyond the scope and limitations of the exclusions or for the provision of physical goods or services, will need to ensure that they are licensed by the FCA and meet all FCA related requirements..
For further reassurance, Pay By Mobile delivers new levels of security for online payments, providing users with real-time payment authentication and authorisation during the actual payment process, and offers complete payment transparency during, and immediately after, purchase.
PSD2 is expected to open the gate to a range of innovative new payment services, with mobile poised to be at centre of these offerings. Pay By Mobile, which allows consumers to pay directly from their phone, charging transactions to a mobile wallet or phone billing account, will sit comfortably within this new landscape.
Bringing value to all parties the ecosystem – merchant, MNO, and customer – Pay By Mobile is a payment model fit for today’s digital world.