PSD2, why the confusion? Oh, that’s why!


[This post begins a series of blogs which will examine in detail the effect of the EU’s new payment service directive (aka PSD2) from both a technical regulatory and business opportunity perspective. It was originally posted on our sister site Digital Baobab]

Attending recent seminars on PSD2 brought home just how much industry uncertainty still exists around the directive. This is not surprising. For despite the fact that member states have two years to implement it, much of the detail remains to be defined.


This job has been largely been left to the European Banking Authority (EBA) who have been mandated to define the necessary guidelines and regulatory technical standards (aka RTS – although they won’t be defining anything ‘technical’ as technologists might understand that term) which are subject to their own timelines. In fact, the EBA’s own role in defining PSD2 is worth a post in itself, something we’ll be publishing in the coming days.

The EBA currently have an industry discussion paper out on strong customer authentication and secure communication issued on the 8th of December. This will be the most contentious and politically sensitive of the RTS’s to be defined and has been exercising the minds of compliance departments across the banking industry. The deadline for responses is the 8th Feb (i.e. this coming Monday) and opportunities for industry lobbying to shape this thereafter will be slim, so for those who wish to influence its outcome speak now or forever hold your peace. The EBA will assuredly have their work cut out to incorporate the slew of responses coming their way and whether they meet their own deadline of Q2 this year for a draft RTS on this topic remains to be seen.


Some of the current confusion around PSD2 can also be attributable to how the EU legislative process works. For clarity, those timelines might be worth clarifying. The revised payments services directive (PSD2) was first proposed by the European Commission in June 2013, adopted by the Parliament in October 2015 and entered into the Official Journal (OJ) of the EU on 23rd December of that year (making it legally binding in all member states). Its ‘entry into force’ (EU jargon for ‘effective from’) was the 12 January 2016 (20 days after publication in the OJ), giving all member states two years to transpose it into national law.

All clear and simple, right? Well, yes, except with one major caveat. And that is that all RTS’s to be defined by the EBA have their own timelines. These by and large fall within the two years’ deadline national legislatures have to implement PSD2 – that is to say the 12th Jan 2018.

Except for one – the big one. The RTS on strong authentication and secure communication (which we mention above), is subject to a separate timeline. It is intended that this will come into force some 18 months after being adopted by the EU Commission. Given that the earliest foreseen adoption date is Jan 2017, this implies the earliest date this RTS can come into force is September 2018, some 8 months after the deadline for PSD2. The EBA readily admits that given its sensitive nature this date could be pushed out into the calendar year of 2019. To help give some clarity around these timelines we’ve drawn up a ‘PSD2 Timeline’ infographic that some might find useful.


Given that it is this RTS that underpins much of how PSD2 will operate, can we effectively have an industry operating under PSD2 until that last remaining RTS comes into force date? Could some banks refuse to cooperate with trusted third parties and payment service providers until this final RTS is in place? We believe so. But the more forward thinking will have long since been operating under an open API environment, leaving the defensive laggards to serve as the utility banks of the future.

Next up in this series we will be taking a closer look at some of the more pertinent articles in the directive as they relate to banking and payments, plus an examination of the role of the EBA in defining the technical standards that will underpin PSD2. We feel that this technical understanding of the directive is crucial before one can apply it to the new business models that will disrupt the industry over the coming years.


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UK Life and Pensions Sector – Digital Wish List for 2015

red briefcase

The Red Briefcase of Change

In April 2014 George Osborne’s budget set off shockwaves throughout the UK’s life and pensions sector. With the swipe of a pen he removed the requirement that pension policyholders be required to invest in an annuity upon reaching 65, and instead that from April this year they could begin drawing down on their investment pot from the age of 55 to invest as they wished.

This shook up the business model of this sometimes sedate sector. Gone were the safe roll-over annuity businesses of the past, where customer engagement consisted of a once-a-year mail shot or potentially two in the year the annuity was due to be purchased. Instead the sector woke up to a new dawn where customers were free to take their investments elsewhere, vastly increasing competition in the sector and handing a major advantage to industry’s digital disruptors. Customer engagement now had to be at the heart of their strategy if they wished to retain existing customers and attract new ones.

But the trouble is that after years of actively pursuing a strategy of low engagement with their customers, third party disruptors in the form of fund aggregators and wrap platforms have stolen the march on traditional financial services firms by offering sophisticated digital experiences, exactly the type of vehicle pension holders would be likely to turn to when they draw down on their investments. This left the sector with a dilemma – to pursue the same strategy and continue to miss out on new customers as well as losing those from their mature businesses, or embark on a new approach developing their own direct-to-consumer (D2C) digital strategies?

Thankfully, if slightly belatedly, most have chosen the latter route. However there are numerous hurdles that financial services companies must now navigate as they embark upon this journey. Chief amongst these are:

  • Delivering a consistent multichannel digital experience to their customers (including both mobile and web)
  • Developing compelling digital propositions to meet the needs of today’s consumer
  • Applying the lessons learnt from the move to digital in other industries such as banking
  • Understanding the digital supplier landscape and the art of the possible versus current technology capabilities
  • Navigating the supplier procurement and tendering process to choose the correct digital partner to deliver on the strategic vision
  • Delivering any resulting digital change programs on time and on budget in order to meet and exceed industry ROIs.

Once financial services firms recognise these issues and begin to address them directly they will be a substantial way down the path to developing a successful digital strategy. From here they can protect and even grow their market share. Putting the right structure in place today to take advantage of the changes coming later this year is crucial. If it is done correctly 2015 can be a year of digital opportunity.

* For commentary on impact of the changes to the pensions sector by 2014’s budget, check out the below video from 1:20 onwards. Followed by the Lex’s team less than sympathetic outlook for the UK’s annuity providers – with thanks to the FT

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Is the UK payments market about to fundamentally change?

The EC's new Payment Service Directive

The EC’s new Payment Service Directive

Is the UK payments space about to undergo a revolution? That is now a distinct possibility with this week’s announcement from the European Commission (EC) of its new payments service directive (PSD2) and a regulatory proposal to cap interchange fees on debit and credit card transactions. If the implications of the directive are considered alongside a new UK mobile payment initiative called Zapp (announced last month by Vocalink, provider of the UK’s debit and credit payment infrastructure that powers its faster payment service – FPS), might we as UK consumers be about to change how we pay for our purchases?

Threat to issuer revenue

In announcing PSD2 the EC is attempting to achieve a number of different goals. One is to integrate the EU’s fragmented payment system into one single market for both card and, especially, digital payments. This in turn will allow for innovation in the payment industry and allow non-bank payment companies to operate in the digital space. Another, and the most publicised, aim is to bring down the costs of payment transactions to both the merchant and also, indirectly, to the consumer. All told the EC expect debit and credit card interchange fees to almost halve.

Just how much of the savings on interchange retailers are likely to pass on to consumers is a moot point. However the EC are making a start by banning merchant applied card surcharges. Anyone who has recently bought an airline ticket will be familiar with those and it may well be that Michael O’Leary et al end up charging us a pound to spend a penny to make up for the shortfall in revenue.

Issuer - this will hurt me more than it will hurt you

Issuer – this will hurt me more than it will hurt you

But of course those who are most likely see their revenues diminish are the card issuers themselves. Not only will interchange fees fall but they will also bear increasing risk under the PSD’s consumer protection clauses that see consumer losses being capped at EUR 50 for fraudulent transactions (from EUR 150 today). When this is combined with the extra security being demanded for customer authentication, it would appear their margins are under attack from both decreasing revenues and increasing costs. Some cynics analysts point out this is only likely to result in increased card fees and interest rates for consumers. Also the question might be asked how will the directive apply to merchant acquirers, given that they and the card issuers are often one and the same? Merchants could see increased costs on the acquiring side, so we could possibly end up with a situation where ultimately the net benefit to the consumer from the directive is marginal.

Interestingly, three-party card schemes, such as Amex and Discover, will be exempt from the interchange cap. However retailers will be allowed to refuse payments from those schemes, or impose a surcharge, a luxury they won’t have with MasterCard or Visa. The implication here is that the expensive interchange charged by the three-party schemes will be borne directly by those cardholders and not by all consumers. This is an obvious threat to their business model and expect fierce lobbying from them.

Zapp – The new game in town

The new kid on the block

The new kid on the block

But while the card payment industry gets caught up in arguments about PSD2, there is a new UK payments kid on the block. Zapp is proposing to fundamentally change the nature of retail payments in the UK and more importantly it is going to do it through your mobile phone. Crucially payment will be by direct bank-to-bank transfer authorised via an app (QR codes for Apple, NFC for the rest of us), bypassing the card schemes altogether.

This is of course a further threat to issuer interchange revenue. And there is a paradox here as Vocalink, the providers of Zapp, are ultimately owned by the banks themselves. So here we have a bank-owned scheme proposing a mobile payments service likely to further reduce its members’ interchange revenues. Added to that, Zapp will be competing directly with other bank-offered payment services such as Pingit (or Buyit as it is being rebranded for payments). Which is why it is unclear for now as to which banks will ultimately sign up to Zapp.

However, one thing is for sure. Zapp will prove very attractive to both retailers and consumers alike. For the retailer, interchange isn’t just halved, as it is under the PSD2 proposal, it is removed altogether. For the consumer it has all the attraction of a debit card transaction that pays straight from your bank account, albeit one transacted from your phone. And what’s more, it is instantly interoperable. By operating off of Vocalink’s platform, payments can be made from one bank to any other in almost real time, unlike many three-party mobile payment schemes in the market today.

From the consumer perspective it does away with having to manage different balances across different mobile wallets and cards. As Peter Keenan, Zapp’s CEO, said in a recent Finextra video “consumers already have a wallet – its called their bank account”. This bank-led thinking was further endorsed this week in a report from Monetise that found that a majority of European (including UK) consumers would be more confident in m-commerce by using a bank-offered payments app. This confluence of industry trends appear to be acting in Zapp’s favour and reluctant banks may not be able to ignore it.

Of course cards are not going away any time soon and the card franchises are also busy innovating in digital payments. But if PSD2 makes card issuance marginally less attractive to banks, does it in turn make an initiative like Zapp marginally more attractive? If that is the case, and if Zapp gets the endorsement of both retailers and merchants, the UK payments market is set for a fundamental change. Next stop Europe?

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Brewers to take Advantage of Mobile Payments?

In my previous post we highlighted the opportunity that an increasingly prosperous Africa presents for fast moving consumer goods companies (FMCGs). This opportunity is particularly big for the brewing industry. Africa’s beer market is already relatively large – estimated to be $11bn annually -and is growing rapidly. With a favourable confluence of economic and demographic factors the market could easily double within five years.

Continued Expansion

Many international brewers are already present in Africa. With generous margins of between 20% – 25% and the continuing potential for economic expansion, most major brewers are targeting the continent for future revenue growth. An interesting graph from PSG Asset Management which shows how beer consumption is correlated to personal incomes [see right], confirms that this makes good business sense. Further, a combination of increasing populations and rising incomes per capita implies that beer consumption on the continent is set for an exponential rise.

Small wonder then that the world’s largest brewers are investing heavily in Africa. SAB Miller, the continent’s leading brewer, has invested up to $2bn over the last five years to build local capacity. Diageo has invested over $1bn in the same period. It now has 25% of its global workforce based in Africa and sells more Guinness in Nigeria than in any other country. Heineken has been equally active, particularly in its biggest market Nigeria, where its Lagos bottling plant (one of eight in the country) produces up to three million bottles and cans per day.

Local Investment

We source locally

We source locally

Ethiopia represents the African opportunity in a microcosm. Its large population of 85m – the second largest on the continent – and economy are both growing rapidly. With that growth has come a corresponding increase in beer consumption. Yet until recently all brewing was in the state’s hands. As the rest of Africa succumbed to the forces of globalisation, the Ethiopian government embarked on a series of privatisations. Heineken picked up a pair of popular local breweries (and brands) for a little less than $160m and Diageo bought the number two brewery in the country for just $225m. That Diageo expect sales to double in the country within three years illustrates what a smart piece of business this was.

Whilst they are global in their reach these companies realise the importance of ‘localisation’, that is sourcing supplies locally and tailoring products for local tastes. As part of its investment in Ethiopia, Diageo is working on a pilot with the national government and local farmers to source the barley required to brew its beers. This is part of a stated global strategy to overhaul its supply chain and source more inputs locally, something that is necessary as brewers increasingly derive their growth from emerging markets. It also keeps national governments on their side as these policies boost local economies. Indeed, SABMiller got an excise break from the Ugandan government after agreeing to source the ingredients for its sorghum-based beer (Eagle) locally, allow them in turn to offer a product catered to local tastes at a competitive price. They believe that this allows them to compete with the local home brew market which they estimate to be four times the size of the formal market by volume.

Competitive Advantage

Only mobile money accepted

Only mobile money accepted

Having local supply chains means that brewers are also insulated from P&L fluctuations that might result from having inputs and sales in different currencies. However it also introduces an additional cost (and an opportunity) which they already face in their distribution chains, that is the use of cash as a form of payment (as detailed in our white paper). With financial inclusion hovering around the 20% mark in most African markets and a nascent payments infrastructure, there has until recently been no realistic alternative to cash when dealing with small suppliers and merchants. However with the advent of mobile payments across many markets in the region, an opportunity has arisen to reduce the use of cash, eliminate inefficient processes and eek out an advantage in what is an increasingly competitive space. Unlike other markets in the developing world, many merchants and suppliers in Africa already have access to mobile wallets and have the capacity to make and receive payments in electronic currency. Also, integrating mobile to inventory systems allows brewers and merchants to manage their stock with increased efficiency, resulting in more timely orders and boosting sales.

With many mobile money operators now allowing access to their payments systems via APIs, banks are beginning to connect to these platforms. This creates a unique opportunity for brewers (and FMCGs in general) to partner with their existing banks, mobile operators and mobile wallet providers to introduce mobile payments into both their supply and distribution systems. The resulting benefits can allow them to capture extra market share and assist them in the race to become the continent’s leading beer producer.


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Rising Africa – the Case for Consumer Goods and Mobile Payments

deliveryAfrica is on the rise. For the past decade the picture has been steadily improving both economically and politically. No longer is it the ‘hopeless’ continent whose media narrative was one of war, famine and poverty. It is now the continent of hope and rising prosperity where technological advancements developed there are being exported back to its one-time colonial rulers. The media perspective too is more positive as evidenced by recent glowing reports from the Financial Times and the Economist. Companies once put off by the riskiness of investing in Africa are now establishing operations locally to take advantage of its expanding economy and population.

Today Africa as a region is growing faster than Asia. According to the IMF, seven out of the 10 fastest growing economies in the world will soon be African. The World Bank estimates that Africa is currently at a point where China and India were 20 or 30 years ago and poised for a similar rapid economic expansion. Like those countries, Africa is also set to reap a demographic dividend. Already the world’s second largest continent by population (and area), its population is expected to more than double by 2050. During this time it will produce ever increasing numbers of adults of working age who will help facilitate – and take advantage of – further economic growth. This will help rebalance its economy away from commodity-fuelled export growth of today (thus reducing tensions with an increasingly active and influential China), to one driven by consumer demand served by a local manufacturing base.

All this growth has created a new local economic and political force – the much-lauded African middle class. The African Development Bank has classified that segment of the population that lives on $2-$4 a day as the ‘floaters’ at the bottom of Africa’s middle class. By this (admittedly generous) definition the middle classes number 300m today and are expected to increase four-fold over the next 40 years. It is not their absolute wealth that matters here, more that they are a large consumer block with discretionary spending power who, through exposure to television and internet, are becoming more brand savvy. Increasing urbanisation means that this group are now easier to serve for the fast moving consumer goods companies (FMCGs) that are attracted to the continent. These companies are actively targeting Africa for growth as revenues in their traditional home markets have matured.

According to a recent report by McKinsey, revenues for consumer-facing industries in Africa should grow to $410bn by 2020, with consumer goods accounting for 45% of that. This creates a unique opportunity for those FMCGs wishing to operate in Africa. And many do, with around 70% of the world’s top FMCGs already present there with more to follow. However given the difference in consumer affordability and tastes with their home markets, companies are having to tailor their products for the African market. For instance, SABMiller makes a sorghum and a maize based beer (an acquired taste) for the eastern and southern African markets. Their locally sourced ingredients mean that they retail for one quarter the price of an equivalent bottled beer. Samsung too make a fridge that keeps food cool during black outs.

There are also mobile phones aimed at the African market. Feature phones still dominate but as the reliability and capacity of data networks improve there are an increasing number of smart phones being manufactured for Africans. Nokia has a range of smart phones that retail for less than $100, some of which have dual-sim and are capable of operating on both 2G and 3G data networks. There are a number of Chinese manufacturers who are designing smartphones that will retail at $50 or less. Of course mobile technology is one industry where Africa takes a leading role with Kenya being the birthplace of mobile money. East Africa has become a hub of mobile app development with local start ups creating software with local content aimed at the local market. Some argue that this may take the place of manufacturing in the future, with Africa exporting mobile technology software to the world, as China and India do today with manufactured goods and IT services.

However despite relatively developed mobile communications infrastructure, poor infrastructure elsewhere eats into the otherwise healthy margins that consumer goods companies experience in Africa. This is most obvious with physical infrastructure, such as roads or electricity but it is also true in financial services such as payments. FMCGs are increasingly setting up manufacturing bases on the ground and sourcing supplies locally. As many of the payments in their supply and distributions chains are still in cash, unnecessary costs and inefficient processes are introduced. As highlighted in a recent white paper, on collections alone this can cost companies up to 20% of the value collected.

However help is at hand. FMCGs operating in Africa can leverage off of existing mobile technology to introduce mobile payments into the supply and distribution networks. With the right financial services or mobile operator partner, they can reduce the direct costs associated with paying and collecting cash, as well as eliminating inefficient processes. This in turn gives those companies a competitive advantage in their sectors and allows them to gain market share in rapidly expanding economies.

In my next post I will be focusing on one sector within consumer goods that has enormous potential for growth in Africa – the brewing industry – and highlighting the favourable economic and demographic conditions that exist for exponential growth. As part of that I will examine how mobile payments can be introduced into supply and distribution systems, allowing brewers to substantially reduce costs, improve processes and capture market share.

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