By Milena Angelova, Associate at Schoenherr Bulgaria
Directive (EU) 2015/ 2366 of the European Parliament and of the Council of November 25, 2015 on payment services in the internal market (“PSD 2”), which entered into force on January 12, 2016, transforms the European banking sector by integrating and harmonizing the regulation of the European payment services market. The main objectives of PSD 2 are setting a level playing field for all payment services providers as it makes the market accessible not only to traditional banks and large financial institutions, but also to smaller, innovative and independent market players. It also aims at improving the competition on the payment services market, security and client protection. PSD 2 replaces the previous EU payment services directive and promises to revolutionize the way electronic payments are perceived by consumers.
All EU member states had to implement the PSD 2 in their local legislation by January 13, 2018. Bulgaria transposed the PSD 2 through the adoption of a brand new law – the Act on the Payment Services and Payment Systems entered into force on March 6, 2018.
What is new?
Along with the well-known payment services regulated by the previous EU payment services directive, PSD 2 introduces two completely new payment services – payment initiation service and account information service. The payment initiation is a service which directly accesses the payee’s payment account and initiates payment with the payee’s consent. It allows consumers to shop online without the need of having a payment card and is a low-cost solution for both merchants and consumers as it basically removes the need of intermediation of a card issuer (which imply additional fees and sometimes causes delays in the delivery of the goods/services). Payment initiation applies exclusively in the area of e-commerce. As payment initiation is now a regulated payment service, payment initiation service providers have become subject to payment institution licensing requirement. This would guarantee the EU payment services users a sufficient level of security, confidentiality and data protection.
Account information is an online payment service which provides a consolidated information on one or more payment accounts held by a payment services user with either another payment service provider or with many payment services providers. The account information service is a useful tool which would allow payment services users to easily keep account on their personal finances and have an overall view on their financial situation.
The common feature of both newly introduced payment services is that their providers are not allowed to hold client funds. This is why, their providers are subject to less stringent licensing/ registration requirements compared to the remaining payment services providers which operate with payment accounts. In addition, the fact that these new players are never in possession of their customers’ money makes them more trustworthy by the users and does not expect them to have solid financial background in order to grab market share.
The mainstream thinking is that the niche of these payment services will be primarily occupied by new market players – ’boutique’ payment providers which will place the emphasis on offering one particular payment service rather than on the entire variety of payment services (as this is most generally the case with banks).
What comes to one’s mind when getting acquainted with these new payment services is the question how these new players being their providers would access the users’ payment accounts so that they could offer them this type of services. This is where the real leverage of PSD 2 comes on stage – the concept of open banking. PSD 2 is, in fact, the epitome of open banking. Open banking is a system which allows the sharing of customer banking data to third parties and now finds its recognition at EU level through the PSD 2. It uses the advancement of technology to provide new functionality for the payment services providers and their users. PSD 2 imposed an obligation on all account servicing payment services providers to grant access to the users’ accounts they hold. Such access should be granted on a proportionate and non-discriminatory way so that all payment services providers be able to provide their services without any obstruction. In practice, this is made through the creation of technical infrastructures which should, without any doubt, guarantee the security and confidentiality of customer information. To ensure this, in November 2017 the European Commission has adopted a Delegated Regulation on Regulatory Technical Standards (“RTS”) outlining the minimum technical requirements which must be observed by the account servicing payment services providers when putting into effect such infrastructure. The 18-month deadline for application of the RTS by the account servicing payment services providers expires on September 14, 2019. The banks had until March 14, 2019 to provide access to their infrastructures for all payment services providers willing to test their software and applications they would use for the provision of payment services.
The Bulgarian payment services market is primarily driven by banks. Banks determine what would be the pace of development of the payment services market and what catalogue of electronic payment services should be offered to the users. As a year has barely passed from the implementation of the PSD 2 in Bulgaria, it is challenging to assess whether its objectives have already started to take effect and whether the Bulgarian payment services market landscape has been affected by the new regulation.
What we see for the time being is that basically all Bulgarian banks have already made themselves compliant with the PSD 2 requirement to provide the technical infrastructure for payment services providers for testing the access to the customer account data. This means that the first steps towards effective open banking in Bulgaria are already made. What would be interesting to observe from now on is whether this opportunity will be grabbed by new and still unknown players which would bring the necessary movement of the payment services market. It also remains unclear whether banks would not only limit themselves to simply comply with the new legislation, but would also use the opportunity to develop and introduce innovative payment services.
As of the date of this article, оnly a few payment services providers have expressed their intention to start providing the new services of payment initiation and account information on the Bulgarian market. These providers are already present and well-known on the market. The sector’s expectations are that possible new players will emerge this fall or by the end of 2019. Such new players could be either fashionable, recognisable and well-capitalised fintech companies established in Western Europe or the United States, or purely Bulgarian startup companies having the courage and confidence that their software/ application is sufficiently good and that they could gain popularity amongst the youngest users.
One of the major reasons why it is hardly imaginable to say that the Bulgarian payment services market will be revolutionized following the arrival of PSD 2 and open banking, is the lack of consumer trust in this kind of digital, technology driven products. The Bulgarian banking consumer could be determined as conservative and cautious with innovations. According to publicly available data, less than 10% of the clients of Bulgarian banks actively use mobile banking applications. Although mobile banking is significantly more convenient and cheaper, people still prefer to visit a bank office and to make physical contact with the bank officers when their personal finances are at stake. If one of the main objectives of PSD 2 – enhancement of transparency and information on payment services, materialises, this tendency of lack of consumer trust in the digital, impersonal banking experience will surely change, however, such change will not happen right away.
The other important market players – the fintech companies, started to gain popularity in the recent years, however, it looks like they still lag behind the traditional banks mainly in terms of consumer trust. Representatives of fintech companies admit that the Bulgarian payment services sector is rather unorganized and fragmented, and that the continuous support of banks is needed in order for them to survive and to be able to invest into new payment products. It looks like that the cooperation between traditional banks and innovative FinTech companies is key to the transformation of the Bulgarian payment services market.
Open banking and innovative payment products are in bloom around the world, especially in Western Europe, Asia and the United States. The Bulgarian payment services market is far behind such digitalised markets, mainly due to the lack of active consumer demand. As far as consumers are satisfied with the current catalogue of payment services and with their payment experience, banks will not be persuaded that something should be changed now and immediately. At the same time, fintech companies struggle to build trust amongst customers and to break the market dominance of traditional banks. Despite this, the digitalisation wave around the world is becoming bigger and bigger being reinforced by PSD 2 and its arrival to the more conservative Eastern payment services markets, including the Bulgarian, is inevitable.