It is now just six months since PSD2, the EU’s second Payment Services Directive, came in force across Europe, and already, we are starting to see new developments in the way that people pay for products and services.
Take the recent news that the International Air Transport Association is teaming up with Deutsche Bank to trial a real-time payment system for people buying aeroplane tickets in a bid to reduce costs for merchant fees and fraud.
PSD2 requires financial institutions to have open APIs and, if the consumer consents, to share account data with approved third party payment service providers (TPPs). Coupled with the arrival of Instant Payments last November, that means it will become straightforward for merchants to trigger payment from customers, bypassing the fees and potential fraud involved with credit cards.
According to reports, the IATA/Deutsche Bank system would charge just a small fixed fee per transaction, compared with the relatively high fees currently associated with credit card payments.
Deutsche Bank would be able to check in real time the availability of customer funds and then transfer the cash to a travel agent or to the airline directly. This will generate significant working capital and liquidity benefits, reducing the cost of funding for airlines.
IATA has said that there is high demand from airlines for an alternative to credit and debit cards. But how will customers respond to these innovations in payments?
Winning over the customer
That is the key question that will determine the success of today’s new payment possibilities enabled by PSD2. For merchants of all sizes, from corner shops to global airlines, the appeal is clear. Which retailer would not like to receive a customer’s funds in just a few seconds, while incurring almost no transaction costs?
I expect PSD2-enabled payments to be cheaper to process than payments with credit cards, because of the greater simplicity of the system, the availability of funds, and the lower risk of funds.
For consumers, however, the advantages of Instant Payments are not immediately obvious. Many people like to pay over time, rather than instantly. For instance, a lot of consumers still make purchases at the end of the month with their credit cards, and then pay off the card at the beginning of the next month. It is not clear what advantage they would receive from paying instantly. There are also insurance benefits to using a credit card, which is especially relevant in the air ticket sector and other big ticket items.
If innovative new forms of payment are going to be effective across the much wider B2C marketplace, then retailers may need to incentivize their consumers to use them. Interestingly, Deutsche Bank and IATA say they intend to share some of the benefits of PSD2 and Instant Payments with their consumers, by offering price discounts or loyalty miles to those customers who choose to pay on the new system.