Ovum, the market-leading research and consulting firm, for the first time quantifies the detrimental effect Instant Payments and PSD2 will have on traditional credit and debit card payments. The research “Instant payments and the post-PSD2 landscape”, commissioned by Icon Solutions, publishes the only quantitative insights into how PSD2 will be the catalyst for both the decline in card transactions and the uptake in direct and frictionless payment methods such as Instant Payments in Europe. It also shows how Instant Payments under PSD2 will change the way consumers pay for goods and services, revolutionising e-commerce.

Icon Solutions initiated this research in response to feedback from their European banking clients who expressed a need to more fully understand the likely implications of PSD2 and instant payments on consumer behaviours, and the resulting change to their business model and revenue streams.

The research predicts that PSD2 will significantly disrupt the European retail payments landscape, unlocking new revenue opportunities for those nimble enough and adequately prepared. E-commerce card usage will stagnate at current levels of around €260bn annually and by 2025, boosted by increased consumer convenience and the lower charges that PSD2 facilitates, Instant Payments will overtake cards. Card volumes are expected to stagnate at €260bn post-PSD2, rather than reach the €411bn predicted without PSD2, representing a 37% decrease in expected volumes. 

The research indicates that the shift away from cards is likely to gather pace, and by 2027, single-transaction ecommerce card payments will drop from the top spot declining from 40% market share to just 11%. This will leave Instant Payments and digital wallets (such as PayPal) as the two dominant payment methods across Europe as early as 2024.

After the introduction of PSD2, Instant Payments are expected to absorb much of the rapid growth expected in European e-commerce over the next decade - which will gradually see a market share increase against established payment methods, to an average of 29% of expenditure across Europe. This figure is expected to range from 72% in the Netherlands, to just under 20% in Italy.

This shift of European commerce to digital channels will continue to apply pressure to merchants to increasingly take an omni-channel approach, bringing a focus on new payment methods to the forefront of merchants’ agendas. This, combined with potentially declining card revenues, is expected to place pressure on banks to provide the services that merchants need to become truly omni-channel.

“PSD2 and other open banking initiatives are a golden opportunity for retail banks to re-imagine their products and services, and ensure they are fit for purpose in tomorrow’s digital ecosystem” said Kieran Hines, Head of Industries, Ovum. “In particular, those banks that combine early adoption of Instant Payments infrastructure with a proactive approach to PSD2 compliance and a focus on the payment needs of both merchants and consumers will be the ones that enjoy the most rapid growth over the coming years”.

“PSD2 and Instant Payments together offer a better and safer customer experience than cards for online shopping. The whole idea of a “plastic card” is irrelevant in the digital world” stated Tom Hay, Head of Payments at Icon Solutions. “Instead of adding cost and complexity by digitising and tokenising it as the card schemes are doing, the right approach is to simplify things by eliminating it completely as Instant Payments does. A simpler, more secure buying experience drives cost savings for all participants. No wonder PSD2 and Instant Payments are set to dominate online payments in the coming decade”. 

The research, conducted by Ovum and commissioned by Icon Solutions, the independent payments and specialist technology provider, covers ten European markets and is built around a European payments database, populated from a variety of sources including; national banks, national statistics agencies, and payments associations. Combined with a minimum of three independent sets of economic forecasts, data from Ovum’s ICT Enterprise Insights surveys, and a range of secondary research inputs the model provides two outputs covering post-PSD2 and non-PSD2 scenarios of expected customer behaviour online and at the POS. It is being officially launched at EBAday. Please visit Icon at stand 48 for more information or a hard copy of the research.