Exec Summary

Most jurisdictions share a common interest in pursuing the public policy objectives of safety, efficiency and meeting the needs of users for national payment clearing and settlement systems.

However, the weight each jurisdiction applies to each public policy objective may differ, according to the jurisdiction’s priorities or payment system agenda. In addition, every jurisdiction has its own legacy systems and processes, which may serve to either magnify or blunt the force of drivers of payment system change.

As a result, few jurisdictions have taken the exact same approach in renewing their core payment systems.

As Canada continues to engage in a dialogue to develop the approach to modernize its core payment systems, we set out to better understand the options and approaches taken in other jurisdictions. Our primary objective is to provide stakeholders, who are familiar with payment clearing and settlement processes, with a common understanding of key core payment system design considerations.

To that end, payment systems were analyzed in 27 jurisdictions, where we find the following:

• Most have added (or are in the process of adding) a new real-time retail system.
• All jurisdictions have a batch retail payment system, and most use centralized architecture. Automated clearing house (ACH) systems are the most common. Jurisdictions that maintain a batch retail payment system without centralized architecture have built additional core retail systems to provide for faster processing and enhanced functionality (e.g., real-time retail payment systems or separate systems for bill payments).
• The vast majority of jurisdictions have made major upgrades to their large-value payment systems (LVPS) in the past 10 years, keeping LVPS at the centre of core payment systems. Most LVPS have been redesigned to include liquidity-savings mechanisms (LSM), with technology to facilitate advanced liquidity management and faster retail payment system settlement.

Looking across the different payment system attributes of access, functionality, interoperability, timeliness of payments and risk management, the most prominent trends observed are the following:

1. Access: Jurisdictions are opening up their core payment systems to greater numbers of direct participants. The increasing numbers of direct participants have coincided with jurisdictions upgrading core payment system technology to enable risk-reduction processes and controls.
2. Functionality: Payment operators are leveraging centralized architecture to implement advanced system capabilities to provide monitoring and efficiency-boosting tools (e.g., liquidity management tools) for participants and value-added services for end-users.
3. Interoperability: Payment systems are expanding their degree of interoperability (automation), mostly between core infrastructure and other domestic payment systems and, in some cases, cross-border systems.
4. Timeliness: Most jurisdictions have introduced (or are developing) separate retail payment systems for direct credit transactions that provide funds access in real or near real time.4 Depending on the features of the batch retail system, real-time systems can gain wider usage by being designed to serve either business or consumer payments.
5. Risk management: Most jurisdictions are making payment system changes to reduce credit risk exposures, such as through more frequent retail payment system settlement and expanding LVPS processing capabilities.

The vast majority of jurisdictions have upgraded more than one core payment system. In the jurisdictions that have made technological advancements to more than one core payment system (e.g., a real-time system and batch retail system, or to a retail system and a wholesale system) the result has been highly interoperable, yet distinct, core systems that are complementary in meeting public policy objectives. Here we observe four distinct core payment system configurations emerging:

• Enhanced large-value payment systems (LVPS) that can process large volumes of retail payments. LVPS are operated alongside batch retail systems with centralized architecture (e.g., an ACH). In this configuration, the LVPS provides safety and speed, and the batch system provides enhanced functionality and services for end-users.
• ACH systems supplemented with new real-time (or near real-time) retail payment systems. The ACH provides liquidity cost efficiencies and offers rich services for participants and end-users, but with a delay in the availability of funds for payees. The real-time retail payment system provides end-users with an option for faster funds availability where needed.
• Settlement before exchange (SBE) batch retail systems supplemented by new real-time retail payment systems. The SBE systems use an integrated retail and settlement system process that minimizes credit risk, while offering the potential to also improve batch item timeliness and functionality. The real-time systems provide participants and end-users more timely payment options.
• Decentralized batch retail payment systems supplemented by additional core payment systems with centralized architecture to offer more feature-rich and timely payment options.

Conclusion

In sum, most jurisdictions surveyed have made changes to improve (or are in the process of improving) their core payments systems. As the trends provided above suggest, there are multiple approaches to consider in core payment system modernization.

As each jurisdiction considers their course, they need to determine their specific modernization objectives, based upon how they weigh their public policy objectives, their drivers and needs, and the gaps resulting from their legacy systems.

A solid understanding of the modernization objectives, articulated from a country’s unique set of circumstances can form the foundation for a holistic, multi-system plan to modernize core payment systems.

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While the main goal is to create a harmonised Europe-wide payments market, this Regulation also aims to help

The impact of the interchange fee regulation: a Processor view

cardholders make informed decisions when it comes to their payment methods. Additionally, it will contribute to cost reductions for consumers and retailers, and encourage competition for a broader availability of payment methods.

This also means that acquirers and issuers will take this opportunity to develop or modify their customer offers by adding attractive value added services. This will, therefore, impact processing as it will need to adapt and support the new fee models and associated business rules and to provide extended offerings with innovative services. Hence all stakeholders and, in particular, the processors will be challenged on their capacities and capabilities to operate with pan-European reach.

In this article, which first appeared in the EPC news letter, Ulrich Engelhart, Worldline’s Head of Payment and Industry Analyst Relations, outlines Worldline’s vision on the long term implications of the IFR for processors.

Impact of the Regulation on processing

Processors provide solutions that are compliant with the supported brands’ scheme rules and that answer their customers’ needs.

The Interchange Fee Regulation (IFR) has an impact on processing, as it will need to adapt and support the fee models and associated business rules. It is expected that some acquirers/issuers will take this opportunity to develop/modify their customer offers by adding attractive value added services, for example.

Schemes will publish adapted scheme rules with updated interchanges according to articles 3 and 4 of the Regulation. Additionally, possible domestic interchanges could add a level of complexity as it is still unclear which Member States will apply them and when that decision will be taken.

Acquirers will probably adapt their commercial offers to their merchant customers; which could also require some adaptation/reconfiguration of the billing components.

Article 8 of the Regulation on co-badging and choice of payment application mainly impacts acceptance processing (e.g. physical point of sale (POS), card not present environment), but not acquiring processing.

The new concept of product type identification (pre-paid, debit, credit, commercial), introduced by article 10, has to be integrated in the card management chain on the issuing processing side (e.g. preparation of card personalisation data), amongst others, in order to ensure information is encoded in new cards. Product identification in environments where the chip on the card is not used (i.e. physical POS not accepting chip cards, card not present environment) could require use of Bank Identification Number (BIN) tables with possible interaction between acceptance environment and acquiring processor.

The requirement, expressed in article 12 of the Regulation, for acquirers to provide merchant customers with detailed transaction information (or aggregated if agreed upon by merchants) on interchange fees may also have an impact on reporting solutions provided by acquiring processors.

Article 7, on the separation of schemes and processing activities, is beneficial to processors as it reinforces principles allowing processors to use alternatives to schemes’ default authorisation, clearing and settlement solutions (e.g. bilateral or intra-processor solutions) and also should prevent schemes from selectively offering better services to parties using their processing infrastructures.

We look forward to the more detailed regulatory standards that the European Banking Authority should publish in the near future on this matter. In this context, as a processor, we also welcome the business principles and requirements defined by the Cards Stakeholders Group (CSG) in Book 7 – Card Processing Framework – applying to all actors of the value chain (e.g. schemes, acquirer/issuers and their processors, specification providers) aiming to further facilitate an open and transparent market, which maintains competition, improves efficiency and fosters interoperability.

The other part of article 7, requiring processors to interconnect with other processors through the use of standards, is more ambiguous. In order to ensure full reachability – acceptance of any card from any issuers – acquirer processors are already connected to solutions ensuring transactions can be exchanged with any issuers of the supported brands.

Long term impact of ongoing self-regulatory activities

Regarding the Single Euro Payments Area (SEPA), important initiatives related to standardisation of SEPA Credit Transfer (SCT) and SEPA Direct Debit (SDD) have taken place. The focus is now more on SEPA for cards. The CSG initiative is focusing on standardisation of card payment transactions. The proposed standardisation and compliance ecosystem will aim at easing the deployment, by specification providers, of generic implementation specifications (e.g. specifications of the protocol between POS and acquirer processor) open to any SEPA scheme (and thus not specific to a certain card brand).

The principle being that the Volume produced by the CSG contains functional and security requirements, that the implementation specifications produced by the specification providers must be compliant with the requirements of the Volume and that the products (terminals, processing solution) developed by vendors (terminal vendors, processors) are compliant with implementation standards. The active involvement of representatives from the entire value chain, such as schemes, payment service providers, processors, vendors and retailers, and the relationship established with the regulatory bodies (European Commission, European Central Bank, Euro Retail Payments Board) should ease the development of more standardised solutions. Convergence towards a reduced set of implementation specifications in the various domains of the value chain will mainly be market driven.

It is already the case, for instance, in the card-terminal domain with the EMV contact specification. It is expected that convergence will also apply in the field of the POS-acquirer domain with initiatives like Nexo (Electronic Protocols Application Software – EPAS protocol) and Acquiris (Common Terminal Acquiring Protocol – CTAP protocol). On the acquirer-issuer side, changes may occur, taking into consideration the evolution of ISO 20022 standard and related initiatives (Acquirer to Issuer Card Messages – ATICA). This evolution will require schemes to adapt their default authorisation, clearing and settlement solutions. This exercise would only make sense if a real alignment happens, rather than the deployment of new ISO 20022 based solutions, each with their own specificities, similar to what happened with ISO 8583. Finally, it is not yet clear if there will be, in the short term, a positive business case for schemes and processors to migrate existing solutions to new ones.

Innovation in payment cards remains important mainly to ensure new user experiences via mobile or remote payments (Host Card Emulation (HCE), wallet, tokenisation…). Of course, innovation cannot be subjected to, or constrained by, standardisation objectives and should be able to be based on new specific technical solutions. Nevertheless, it is expected that, once an innovation becomes mature or has been adopted by several schemes, some standardisation should take place in order to achieve an open and competitive market.

To summarise, processors may expect, in the coming years, some move to a limited set of standard implementation specifications in some domains of the value chain (e.g. POS-acquirer, acquirer-issuer). Nevertheless, processors will continue to support specific implementation specifications, as new innovative services are being introduced and because the above-mentioned evolution is expected to be market driven.

Last but not least, besides the solutions provided by processors, which are aligned to scheme rules for payment card processing, there are also several solutions, independent from scheme rules, which aim to provide additional services to customers (e.g. contract management, invoicing, reporting, servicing, …), therefore, leaving room for differentiation and new specific developments in a competitive environment.

Market evolution

Harmonised fees and, more importantly, the separation between schemes and processing will open the market for issuers and acquirers to select the most suitable processing suppliers in terms of market coverage, functional scope and competitive pricing.

New interparty transaction processing

Processors will offer services to promote European interconnection of different schemes using their knowledge of European standards and their intermediation software as an extension of their functional scopes. This new interparty transaction processing (enriched Automated Clearing House) service will become a true alternative to single branded transaction processing by schemes. It will also empower issuers with loyalty programs and card-linked offers, with high-end data analytics as well as advanced fraud detection services.

Scale matters

At Worldline, we anticipate that profitability from standard card processing services will continue to decrease. This trend can be compensated by increasing transaction volumes, thanks to higher card acceptance and pan-European reach. To stay price competitive in commodity processing, economy of scale is crucial. Processors are forced to operate scalable IT platforms, that can support multiple languages out-of-the-box at a low cost, and to manage fixed operational costs efficiently.

Omni-channel processing

In addition to their traditional card business, processors will have to support alternative and innovative payment instruments, such as Online Banking ePayments or payment wallets, to provide omni-channel ecosystems. With the integration of a global payment platform, clients will benefit from synergies, such as fraud management, authentication, data monetisation, etc. Therefore those processors operating a global infrastructure, which includes a wide range of payment instruments and innovative services for the entire European territory, will be more attractive business partners as they allow their clients to differentiate in the market and to create new revenue streams.

Outsourcing trend  

Today, we face a high level of insourcing, with 29 out of the top 40 commercial acquirers¹ and around 50 percent of issuing processing still insourced by banks². Analysing the business case in light of IFR, the financial institutions will be under more and more pressure to divest their payments portfolio processing and outsource it to a well-positioned business partner in Europe.

Consolidation

As the payment market is highly fragmented with more than 50 payment providers and processors, we expect that the current ongoing consolidation trend will be reinforced. Continuous investments in advanced and scalable end-to-end infrastructures, managing fixed operating costs and being present with pan-European reach will lead to new business models and ecosystems resulting in mergers and acquisitions, joint ventures and new partnership models. It can also be expected that some big emerging players, entering the market, may look for cooperation models with established ones to allow smooth transition of the consumer experience. The European processor landscape will change accordingly.

Conclusion

Given the changes described in this article, we believe that this Regulation will not impose important changes in functionalities and services offered by processors, but will impact revenues of most issuers; this will, in return, increase cost pressure on processors. Furthermore, the CSG’s ongoing initiatives should ease the deployment of a certain number of technical standards (e.g. POS to acquirer protocol) opened to several schemes. The adoption of these new standards will be market driven and adopted accordingly by processors. Additionally, the separation of scheme and processing activities will aim to reinforce a fair and competitive market for processors even if competition from schemes will remain challenging. Finally, in this competitive environment and independently of the Regulation, processors will continue to follow market evolutions such as the deployment of new innovative solutions and services, and cost improvements through the increase of operational volumes and consolidation.

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¹ As measured by number of bank transactions. Source: The Nilson report (2013)

² As measured by revenue. Source: First Annapolis (2013)

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The ways in which we pay and are paid are changing. Apple Pay has been launched in the UK, Barclays has announced that it will launch Android-based mobile payments later this year, and we expect Samsung and Android ‘Pays’ soon.

‘Omnichannel’ has moved from being a buzzword to a reality, as people buy using not just

The impact of the interchange fee regulation: a Bank view

one but a variety of channels. These changes have been enabled by the rapid evolution in shopping behaviour, and the widespread adoption of smart mobile devices.

While these changes have been going on, the European Union has substantially altered the regulatory environment for payments. At the heart of this has been a significant drop in the debit and credit card interchange fee.

In this article, which first appeared in the EPC newsletter, Alan Ainsworth, Director of Government Relations for Barclays, outlines two reasons why these regulatory changes could speed up, rather than de-rail, these emerging payments trends. First, regulatory certainty helps the industry move forward and second, there is no longer a clear financial distinction between cards and other forms of payment that could drive investment decisions.

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European payments are being hit by several disruptive forces, including heightened levels of innovation, competition and regulation.

One of the more significant changes is the European Union Regulation on the Interchange

The impact of the interchange fee regulation – a card scheme view

Fee for card based transactions, also known as the IFR. This article will not describe what is in the Regulation as plenty of literature on the topic is widely available. Instead, it will focus on the commercial implications as well as pointing out some critical issues that it creates.

In this article, which first appeared in the EPC newsletter, Marc Temmerman, Director European Affairs at Visa Europe, outlines the impact the IFR will have on card issuers (who will need to re-assess their card portfolios) and acquirers (the IFR will lead to a broader acceptance of credit cards, especially in areas where acceptance had been limited so far). He also focuses on the issues card schemes will need to deal with, raised for instance by the IFR definitions of ‘commercial cards’ and ‘cross-border payment’.

The Interchange Fee Regulation (IFR) is much more than a few articles capping interchange fees for debit and credit cards. The regulators have included a series of ‘business rules’ dealing with a variety of issues.

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This new law, proposed by the European Commission in July 2013, enhances consumer protection, promotes

EU agrees to adopt revised Payments Services Directive (PSD2)

innovation and improves the security of payment services. PSD2 is the latest in a series of laws recently adopted by the EU in order to provide for modern, efficient and cheap payment services and to enhance protection for European consumers and businesses.

Commissioner Jonathan Hill, responsible for Financial Stability, Financial Services and Capital Markets Union, said: “European consumers want to know that their payments are safe when they shop or make a payment online. The new Payment Services Directive will ensure that electronic payments in Europe become more secure and more convenient for European shoppers.

This legislation is a step towards a digital single market; it will benefit consumers and businesses, and help the economy grow. I want to thank the European Parliament for the work it has put into reaching this agreement, and pay tribute to the work of rapporteur Antonio Tajani, Vice-President of the European Parliament.”

Commissioner Margrethe Vestager, responsible for competition policy, said: “We have already used EU competition rules to ensure that new and innovative players can compete for digital payment services alongside banks and other traditional providers.

Today’s vote by the Parliament builds on this by providing a legislative framework to facilitate the entry of such new players and ensure they provide secure and efficient payment services. The new Directive will greatly benefit European consumers by making it easier to shop online and enabling new services to enter the market to manage their bank accounts, for example to keep track of their spending on different accounts”.

Following the Parliament’s vote, the Directive will be formally adopted by the EU Council of Ministers in the near future. The Directive will then be published in the Official Journal of the EU. From that date, Member States will have two years to introduce the necessary changes in their national laws in order to comply with the new rules.

Some of the changes that the new rules introduce are:

• Introduction of strict security requirements for the initiation and processing of electronic payments and the protection of consumers’ financial data;
• Opening the EU payment market for companies offering consumer or business-oriented payment services based on the access to information about the payment account – the so called “payment initiation services providers” and “account information services providers”;
• Enhancing consumers’ rights in numerous areas, including reducing the liability for non-authorised payments, introducing an unconditional (“no questions asked”) refund right for direct debits in euro; and
• Prohibition of surcharging (additional charges for the right to pay e.g. with a card) whether the payment instrument is used in shops or online.

For more information:

http://ec.europa.eu/finance/payments/framework/index_en.htm#151008

FAQ

http://ec.europa.eu/finance/payments/framework/index_en.htm

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With multiple countries implementing real-time payments initiatives around the globe, interoperability between

ISO 20022

systems is key. Therefore, the ISO Real Time Payments Group (RTPG), a collection of payments experts brought together by Payments UK, has published a first draft of ISO 20022 usage guidelines for cross-border real-time payments – according to an article in AFP.

Barry Kislingbury, senior principal solution consultant at ACI Worldwide, one of the companies that contributed to the first draft, identified some of the gaps in ISO 20022 and explained why this new “rule book” was needed. “Most countries, especially in the Western world, are looking at how they would implement real-time payments,” he said.

“ISO 20022 has become the standard for sending financial transactions—not just the value but the transactional data as well. But it wasn’t designed for real-time. It was designed to be sent and cleared tomorrow or the day after.”interoperability between systems is key. Therefore, the ISO Real Time Payments Group (RTPG), a collection of payments experts brought together by Payments UK, has published a first draft of ISO 20022 usage guidelines for cross-border real-time payments – according to an article in AFP.

Kislingbury explained that ISO 20022 currently lacks certain items that would allow for a real-time payments environment, such as confirmation messages that assure that payments have been made. “That’s something we’re going to have to design from scratch basically in this working group,” he said.

Additionally, there may be missing data that would be needed for real-time, such as e-invoicing. “You may well want to attach a document to a message that says, ‘Here is your invoice.’ Well, attaching a JPEG to a financial message isn’t necessarily the right thing to do because it makes the message massive. With instant payments, time and speed are very important. You want to be making these payments in seconds and not hours.”

Furthermore, with entities all over the world like the Clearing House and the European Payments Council wanting to use ISO 20022 as the messaging standard behind their real-time payments initiatives, the standard has to be uniform. “The problem is, if you’ve got another 40 countries implementing payments schemes and there are gaps in the standards, they’re all going to implement them slightly differently,” Kislingbury said.

This is one concern that Magnus Carlsson, AFP’s manager of treasury and payments, has had since ISO 20022 was first implemented. “We are already seeing some variances in the standard where it is implemented,” he said. “If these differences become more substantial, some of the information in the messages may be lost if the recipient doesn’t have the same version of the standard.”

Therefore, RTPG is seeking to ensure that ISO 20022 is cohesive for all parties involved. “In five to 10 years’ time, we will have interoperable real-time payments globally,” Kislingbury said. “But if everybody is still trying to make it their own way without talking to each other, that would make interoperability much harder. So that was what the working group got together to achieve—to take the current ISO 20022 standard and agree on what messages get used in which scenarios. That wasn’t always clear with ISO 20022, because some of the messages are very similar. We don’t want people using different types of messages for the same thing. So we agreed what the basic flows are for real-time payments, and what messages would be used in those flows.”

The draft is currently being reviewed across the payments industry, ahead of RTPG’s meeting at Sibos 2015 in Singapore this October.

Barriers to ISO 20022 adoption

Carlsson has some concerns about ISO 20022 adoption, primarily that in the U.S. at least, there is a lack of understanding around it. “Obviously, in the U.S., we have the issue of getting to even using ISO 20022, especially on a corporate level,” he said. “Quite frankly, most organizations are not even aware of it.”

Carlsson noted that the U.S. stakeholder group has been very active in reaching out to the corporate world and spreading the benefits of the standard. “The problem is, they haven’t found a pure financial business case for a corporate to adopt it,” he said. “It’s more of a strategic case for the U.S. as a nation to move to ISO 20022. The problem with that is, you’re never going to see a mandate to adopt it like you saw with [the Single Euro Payments Area (SEPA)] in Europe.”

As a former corporate project manager for SEPA implementation, Carlsson knows that it will be difficult to convince businesses to adopt ISO 20022 without a similar mandate. “Just seeing, form a corporate level, the resistance to make any kind of changes, the business case you have to present will have to be so substantial that corporates will see some real benefits to it, or it’s not going to happen,” he said. “We’re talking about a country where 50 percent of the B2B transactions are still done by paper checks.”

Carlsson applauded RTPG’s efforts and noted that U.S. corporates do show interest in using ISO 20022. “We hear corporates say, ‘This is very interesting.’ But then it stops there,” he said. “We need to find a way to show there are real efficiency benefits and cost saving opportunities with ISO 20022. Without a mandate, that’s how you can reach broader implementation.”

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On 2 June 2015 the final compromise text of PSD2 was released. The updated PSD2

Update on changes to the new Payment Services Directive (PSD2)

broadens the scope of PSD1, captures a wider range of payment transactions, and also addresses some of the concerns raised during the legislative process regarding questions of liability.

Payment service providers (PSPs) will have to ensure that they comply with its provisions by the transposition date around end-2017. In this article, which first appeared in the EPC website, Maria Troullinou of Clifford Chance LLP looks at the key changes that PSD2 will introduce and at how the text has evolved since the initial Commission proposal was published in the summer of 2013.

A similar structure, a much broader scope

The new Payment Services Directive (PSD2) retains the same basic structure as the original Payment Services Directive (PSD1). PSD2 is divided into six titles, each of which focuses on a different subject-matter. Accordingly, title I covers scope and definitions, title II deals with the authorisation and regulation of payment service providers (PSPs), title III focuses on transparency, title IV establishes the respective rights and obligations of payment service users (PSUs) and PSPs and titles V and VI set out provisions on delegated acts and implementation. In addition, the different categories of payment service are set out in the Annex.

Despite retaining the same basic structure, the reach of PSD2 is broader than its predecessor. This is because of the expansion of the territorial scope provisions and the simultaneous narrowing down of the exemptions (commonly known as the ‘negative scope provisions’).

Territorial scope

Most provisions of title III and title IV of PSD2 will now apply to a broader range of payment transactions. Specifically, transactions in non-European currencies where both the payer’s and the payee’s PSP (or the sole PSP in the transaction) are located in the European Union (EU) will be caught, as will ’one leg out’ payment transactions in all currencies (i.e. where only one PSP is located in the EU).

‘One leg out’ transactions were outside the scope of PSD1, but PSD2 now brings them in scope “in respect of those parts of the payment transaction which are carried out in the Union”. This wording operates as a limit to the reach of PSD2 and seeks to offer some comfort to PSPs who would not be able to fulfil their obligations in respect of transactions (or components thereof) taking place outside of the EU over which they have no control (e.g, because these are subject to foreign systems and rules). PSPs will need to carry out an impact analysis and assess which parts of each transaction qualify as having been “carried out in the Union”; in the absence of guidance as to the precise meaning of this wording, this may not be a straightforward exercise.

Negative scope

PSD2 amends some of the exemptions established under PSD1. Changes to the “commercial agent” exemption attempt to address the divergent interpretations taken by some EU Member States, making clear that the exemption applies when agents act only on behalf of the payer or payee (not both).

Where agents act on behalf of both parties (e.g. in respect of e-commerce platforms) the exemption will only apply in cases where the agent does not come into possession, or have control of, clients’ funds.

Moreover, it will no longer be possible to use the same payment instrument within more than one limited network, or to acquire an unlimited range of goods and services and therefore the “limited network” exemption will now only be available to genuinely small networks. PSD2 also limits the scope of the mobile device content exemption to individual payments that do not exceed 50 euros and, on a monthly basis, transactions not exceeding 300 euros in aggregate per subscriber.

The Automated Teller Machine (ATM) exemption set out in Article 3(o) of PSD1 which was removed from the European Commission’s (the Commission) original PSD2 proposal, has now been reinstated. ATM operators will be subject to obligations to provide customers with information on withdrawal charges — both prior to the transaction and on the customer’s receipt — aiming to enhance transparency.

PSD2 seeks to minimise divergent interpretations around the application of certain exemptions. In certain cases, PSPs pursuant to PSD2 will have to notify competent authorities, so that an assessment can be made as to whether the requirements of an exemption have been met.

Expanding the market

PSD2 creates two new types of PSP, commonly referred to as ‘third party payment service providers‘ (TPPs) and attempts to strike a balance between opening up the payments market and maintaining appropriate security standards for online payments.

PSD2 contains provisions requiring EU Member States to ensure that all payment institutions have access to payment account services provided by banks. This is designed to prevent banks from refusing to open and maintain bank accounts for payment institutions. Although the right of a bank to reject account applications on valid grounds (such as anti-money laundering concerns) would not be affected, banks that decline to provide a bank account to another payment institution will have to explain the rejection to the regulator.

Under PSD2, payment initiation service providers (PISPs) are required to be authorised but are subject to a reduced minimum own funds requirement of 50,000 euros. Account information service providers (AISPs) are expressly exempt from authorisation, but are subject to a registration requirement. Both types of entity have to hold professional indemnity insurance or a comparable guarantee in order to ensure that they are able to meet liabilities arising in relation to their activities, as PSD2 aims to achieve a level of supervision commensurate with the risk such new entrants introduce into the system. PISPs that want to provide different payment services involving holding users’ funds will need to obtain full regulatory authorisation.

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The paper, entitled ‘The Global Adoption of Real-Time Retail Payments Systems’ highlights two key interlinked themes; the variety of different adoption speeds and the relationship with core drivers which are leading to the adoption of such systems:

RT-RPS growth is strong, but countries are adopting a variety of approaches which affects the rate of progress

• Numerous countries have undergone rapid adoption, typically as a result of the lead role that regulators have played in encouraging the market to migrate, coupled with the use of relatively new technology and supplemented with attractive pricing or incentives;
• Other countries are on a slower adoption path, typically where the regulator did not play a prominent role and/or the banking community showed little appetite; and
• The remaining systems are on a ‘typical’ adoption path, between the two extremes, usually characterised by active regulatory participation but where the systems were launched more than a decade ago and use older technology.

Real time retail payments system market landscape (Source SWIFT)

Regulatory initiatives are proving to be the key driver behind the increased adoption of RT-RPS

• The results show that the primary driver (73%) for RT-RPS adoption is the impact of regulatory reform. This comprised a number of factors, such as consumer protection, reduced credit risk, transparency, financial inclusion, fostering of competition, and wider macroeconomic impacts.
• The secondary driver (27%) for RT-RPS adoption is the impact of the banks’ commercial needs – both in responding to customers’ expectations, and/or responding to competitive threats from new entrants.

Drivers of real time retail payments systems (Source SWIFT)

“The emergence of real-time payment services is having a transformational impact on underlying payment systems,” says Juliette Kennel, Head of Market Infrastructures at SWIFT.

“Real-time is a growing trend led by consumer expectations, supported by regulatory reform. Different countries have implemented real-time retail payment systems in different ways, ranging from simply adapting current legacy infrastructures to deal with real time, up to building brand new innovative systems, as we are seeing in Australia. Legacy and new models will need to co-exist both at a domestic and cross-border level, so, for banks, interoperability will be key. The industry is going to have to come up with ways to enable banks to offer real-time capabilities while keeping costs in check. Collaboration and innovation is going to be key.”

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However, the regulatory landscape has evolved and while compliance remains a primary

Can you turn regulatory and payment scheme compliance into a competitive advantage?

focus, there is now an opportunity to gain a larger foothold in the payments value chain and seize a competitive advantage – writes Jamie Merritt, Partner, Accourt – Payments Specialists.

Historically, the ability to become principal members of the payment schemes has primarily been the domain of the traditional bank players. However, as a result of the Payment Services Directive (PSD) and its driving desire to create a broader competitive landscape, opportunities now exist for smaller, more agile organisations and those with bespoke niche propositions to operate in a space usually occupied by the traditional banks. For example, prepaid issuers and PSPs have been able to apply to the FCA for Payment Institution Licences (PI’s) or E-money Licences and principal membership of the Schemes, dispensing with the need for a traditional banking partner.

The rationale and potential barriers to enter into this space have been both commercial and regulatory, as access requires both principal membership of the payment schemes and a licence from the FCA. Whilst these remain unchanged, the opportunity to gain a stronger foothold in the payments value chain – and ultimately a greater share of the revenue pool – is worth consideration.

Traditional issuing and acquiring models have focused on a number of key players taking clearly defined roles.  Both prepaid issuers and acquirer PSPs have changed the landscape here, with additional organisations fulfilling both key operational/regulatory roles whilst providing additional value to the end customer. Consequently, there are a number of points to consider, namely:

1. The regulators and the European Commission are striving towards both greater competition and transparency on the various fee structures
2. With greater transparency, the quest for value provision to the consumer is paramount
3. An increase in the number of constituent parts of the payments value chain, whether from an issuing or acquiring perspective, will ultimately result in increased pricing for the end customer.

Therefore, organisations participating in this space – or those that have an appetite to do so – must have the ability to positively address these points. The key question is: how?

Fundamentally, they need a clear and full understanding of the implications associated with both the Regulator and scheme membership and/or accreditation. These implications fall into three broad categories:

1. Commercial – How can you build a business case that factors in both incremental revenues and the costs associated with regulator and payment scheme approval and on-going management of the business?
2. Operational – What infrastructure changes do you need to make to your business to demonstrate an understanding of, and compliance with, both the application and day-to-day management of the regulatory and scheme requirements?
3. Compliance – How can you demonstrate that the written policy and procedural documents are a living, breathing part of the company’s DNA?

It is also imperative to evaluate how responses to these questions will be viewed by a regulator. The FCA has summarised its role as four key functions:

• Regulation – A supervisory role of the overall conduct of regulated companies
• Best Practice – Upholding the highest operational and ethical standards
• Protection – Ensuring customer protection
• Enforcement -Taking the required punitive action against organisations who fail to meet these standards

The FCA’s overall objective is to drive better consumer protection, greater integrity of the payments system and enhanced customer experience by increasing competition. Consequently you will need to demonstrate regulatory compliance in line with all the JMLSG guidelines and all legal requirements through both the application phase and on-going management of the day to day business.

A similar level of due diligence is also required to support principal membership applications with the individual payment schemes, either as an acquirer or an issuer. The development of the supporting business case is key, both from the perspective of potential collateral requirements and in demonstrating a comprehensive understanding of the compliance obligations and fee structures.

Once you understand the rationale to embark on this journey you will need to work through how to best achieve the desired result.  The reality here is that this is extremely difficult to do well.  A critical factor is the selection of the right partner to assist you with the development of this road map and to help navigate through this extremely complex commercial and regulatory maze.

How Accourt can help:

• Assist in the development of the requisite supporting business case
• Develop a risk assessment and gap analysis on the supporting operational infrastructure
• Review and/or create supporting operational procedural documentation, including all the required regulatory and compliance documents
• Support and manage the application process to the regulator and provide all subject matter expertise
• Create supporting documentation for principal scheme membership
• Manage the application process
• Provide subject matter expertise and provide support for the scheme risk review
• Provide subject matter expertise and provide support for the go-live project

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