Regulations and instant payment alternatives put pressure on cards businesses to innovate

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In light of Europe’s Revised Payment Services Directive (PSD2) implementation in 2018 and the 2017 launch of the SEPA Instant Credit Transfer (SCT Inst) scheme, much debate surrounds the regulations’ future impact on card payments.

Both customers and merchants are frustrated by complicated and slow payment instrument processes that can lead to e-commerce checkout cancellations and tedious in-store queues. Now, in the era of post-PSD2 open banking, instant payments offer shoppers and sellers the convenience of frictionless real-time payments. The interplay of PSD2 transparency and instant payments, together with the upcoming “request to pay” standard, is sparking direct instant payments, while industry opinion remains mixed.

PSD2 requires banks to give third-party payment providers (TPPs) access to customer accounts and account information – with customer approval – via application programming interfaces (APIs). TPPs such as merchants, telcos, and tech giants could use APIs to make instant payments directly from customer accounts to the TPP’s bank account, bypassing card schemes and fees. No doubt such a frictionless service would be a customer experience win.

Additionally, online payment service providers (PSPs) – such as PayPal, Stripe, Klarna, or Braintree – could use APIs and instant payments as an alternative to SEPA Direct Debits (SDDs).[1] However, instant payments often mean PSPs must hassle with uncovered accounts or late payment returns, so they instead choose credit cards as their underlying payment instrument.

Within PSD2 parameters, third parties must simply register as a PSP in an EU member state to get an eIDAS certificate and enter the marketplace.[2] All of this means that the combination of PSD2 and SCT Inst has enormous potential to disrupt existing business models, depending on the level of API standardization and penetration of instant payments in the European Union.

Three PSD2 elements are particularly pertinent: funds checking, payments initiation, and account aggregation. With SCT Inst, retailers and merchants may access customer accounts for funds checking – with consumer consent – then deduct the money and bypass the card altogether.

Merchants can save significantly on service charges through this model, which means they may be likely to opt for innovative PSD2-driven services in the future. The possible result? Cards’ use decline that spurs banks to implement PSD2 and instant payments infrastructure.

Moreover, cards’ businesses have been slow to develop competing offers and demonstrate substantial customer benefits. Instead, incalcitrant cards’ businesses have earned a reputation for mono-brand models, interchange escalation, and an unwillingness to innovate, which has forced regulators to intervene and new players to design novel payments instruments.

To spur competition, regulators have relied on credit-transfer innovation – a core payment method for bank and FinTech advances. New service offerings based on SCT Inst scheme rails offer both customers and merchants a variety of benefits.

Customers Merchants
  • Direct to bank account
  • Push authorized
  • Immediate balance update (in real time)
  • EU-wide acceptance
  • Very low transaction costs
  • Simple/no scheme rules
  • No batch submission
  • No chargebacks
  • Faster/immediate
  • EU-wide acceptance


The payment rail allows customers to see transactions appear in their accounts right away. Merchants, meanwhile, enjoy quicker cash flow, empowering them to do more with their businesses through speedier — and cheaper — alternatives to card acceptance.

Where are cards struggling?

Regulations and instant payment alternatives

Source: Capgemini Financial Services Analysis, 2018.

However, an industry counterpoint argues that cards may not be vulnerable anytime soon. Recently, the cards-acceptance infrastructure has beefed up check-out processing times, which has earned it widespread, established, and successful use. Another area where cards have an advantage is the reach with both retail customers and merchants.

To effectively compete with cards, instant payments must offer a less-than-10-second processing turnaround time if allowed by the SCT Inst scheme – with an e-commerce target significantly less than 10 seconds, and less than three seconds for PoS transactions.

It will not be easy for PSD2 and instant payments to replace cards considering the strength of card-based regulation, its global reach, extensive acceptance network, greater agreement on card scheme rules, and universal standards. SCT Inst will take time to achieve critical mass among the users to achieve higher uptake while offering new payment methods simultaneously. This effectively means changing POS/eCommerce check out, in addition to achieving mobile reach using QR code/specific Apps. Hence, the combination SCT Inst and PSD2/Open Banking replacing cards will take some time before becoming reality.

Amid industry debate, customers and merchants seem to appreciate services offered through a combination of PSD2 and instant payments because innovation in retail payment instruments is based on low cost and convenience. If the cards’ industry fails to innovate at a similar pace; it is not at all surprising that a PSD2-instant payments duo may soon devour cards’ market share.

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[1] A SEPA Direct Debit (SDD) is the standard across Europe for the collection of funds between a debtor (payer) and the creditor (payee).

[2] eIDAS (electronic identification, authentication and trust services) is an EU regulation enacted in September 2014, it ensures that up-to-date, internationally admissible standards of digital identity and trust verification and validation are in place.

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