Payments 4.0 and SME’s, PSD2 and the new digital challenge

By Paolo Marizza*

Electronic payments: the PSD2 Directive represents the new frontier of SME’s digitalisation

PSD2 represents the “Industry 4.0” in financial services: Payments 4.0, a cyber-physical-system that enables the development of new macro and microeconomic equilibrium. The Payment Services Directive (PSD2) goes far beyond simply re-regulating the existing legal framework for payments.

Entering into force on January 13, 2018, it will introduce a fundamental element that changes the rules of the game: the obligation for banks to provide third-party access (TPP) – even non-banks – to information on accounts held by customers. Banks will in fact be required to provide access to account information to payment service providers (PISPs) and information service providers (AISPs), the two new entities provided for by law.

Four major impact areas:

  • Range of coverage, covering domestic payments and from or to EUU countries
  • “Interchange fees” elimination for cards in Europe,
  • Third party access to account information,
  • Security of online payments and access to accounts.

Today, the debate focuses on the consequences and challenges for banks and payment providers, but an equally important impact will affect SMEs, especially as a result of the last two areas of impact. The obligation to provide third party access to account information will be the most significant aspect of the Directive as regards the digitization of financial services to SMEs. But the impact will go far beyond digital banking: access to such information opens up new opportunities for digitalisation of internal and external business processes, thanks to the fact that this legislation allows new operators to access customers transactional data (IBAN, Account Balances, etc.).

Consider, for example, a fintech, or a traditional administrative / accounting / tax service provider that provides transactional and information services on payments and other services in the role of AISP and / or PISP. In addition to the direct payment service, directly from IBAN (buyer) to IBAN (seller), access to account information enables the provision of other value-added services such as data integration and reconciliation, treasury and financial management, payment tracking, etc., which are equally and perhaps more useful to SMEs, B2B2C, than to end-users.

All this information will enable the development of PaaS and SaaS (Platform and Software as a Service) for delivering custom services with a service experience targeted at the specifics of businesses. For SMEs, this creates opportunities for developing and using new innovative solutions in financial management, accounts receivables/payable cycle, working capital and logistics-commercial cycle.

However, it does not appear that SMEs have gained full awareness of PSD2 impacts and do not appear to be a priority issue in business agendas.

What are the potential benefits for SMEs in a PSD2 context? How would they use the information that will become available? What are the main criteria to consider when selecting a Payment Service Provider, being it a Bank or a Service Provider, suitable for the SME business? An operator that can support the enterprise in omnichannel management on the distribution, marketing, and service front or a pure vertical player that maximizes the efficiency of payments and cash flow management? Or is it a player who offers a constellation of services integrated with the supply chain? Or, again, a PSP/bank that not only offers transactional payment services but also supports architectures for loyalty programs, couponing, consumer credit, personal finance management for customers?

The Directive and the related regulatory technical standard (RTS) requirements for access, indentification, authentication, and data privacy use clarify that third party access to account information must be facilitated through open interfaces, what is defined as the enabling factor for the development of an open banking market through API’s (Application Programming Interface).

However, a common and interoperable standard for interfaces has not been defined neither in the Directive nor in the RTS (Technical Standards) provisions, which are still being discussed and specified. To date, it is clear that banks have some flexibility and tend to obtain degrees of freedom in defining their interfaces.

Banks could take advantage of these degrees of freedom to develop, in addition to basic payment services, digital services that SMEs require in different business processes (such as accounting, credit management, purchasing management, financial management, marketing management, e-commerce, etc.) with an interface that includes these value-added services.

After all, if a bank’s proprietary interface has all that a SME needs, there is no reason why a company should look for an alternative player.

But a SME will be forced to develop as many interfaces as the number of banks with which it has relationships? Or will the new third parties develop unique interfaces to reduce the risk of fragmentation? Or will partnership/alliances be established between incumbents and new third parties for the development of aggregation and integration platforms and solutions?

The new competitive arena is becoming crowded by dozens and dozens of players coming from different industries, each with its own offering and diversified vertical and horizontal extention.

In this scenario, banks have a clear advantage to exploit the opportunities, but only to the extent that services will go beyond a narrow approach and will not be irrelevant to the SME’s when compared with the offer of emerging players.

From a macroeconomic point of view, the PSD2 will introduce greater competition and systemic efficiency. What will make the difference will be the implementation mode, which is not an unconditional advantage, since it could not escape operational risks. Only market dynamics can hardly lead to a satisfactory equilibrium in establishing shared operating standards in a short-term horizon.

In minimizing operational risks, a key role will be played by regulation, still under development, to facilitate a structural change that businesses will have to face in a context hopefully not fragmented by the proliferation of interfaces, untrustworthy alternative payment methods, low value added services.


*Paolo Marizza, CFO Innoventually and Visiting Professor DEAMS-University of Trieste.