Impact on Competition

The PSD creates a new legal figure, the Payment Institution. The Payment Institution is an organisation that provides payments services based on one of the instruments covered by the PSD and in one of the geographies covered by the PSD. In addition to payment services they are allowed to offer credit provided it relates to the payments made (e.g. a credit card issuer).

A Payment Institution is a regulated organisation and must meet regulatory capital requirements (not particularly onerous). Importantly they do not have to be a bank. Even more importantly a Payment Institution cannot be excluded from a payment scheme because they are not a bank. Thus the PSD is trying to open the payments market to companies other than banks to participate.

Another aspect of the opening of the market is that a Payment Institution regulated in one country can provide payment services without being approved by the second country’s regulator. This too should open up competition and in particular British banks may well think about competing to win euro payments mandates or merchant acquisition mandates from eurozone countries.

Finally the standardisation of rights and obligations of payers, payees and Payment Institutions means that a payment tool devised in one country will be acceptable in others.

Changes to Pricing

The PSD is silent on the subject of charges believing it is a matter for competition and market forces. However, it is worth remembering EC regulation 2560 is still in force. This states that any cross border payments denominated in euro must be charged at the same rate that a similar payment within the payer’s PSP’s country would cost, i.e. a non urgent cross border euro payment should cost the same as a domestic ACH payment.

This is not much of an issue for euro payments originating in the UK as there is no low cost way of making euro payments within the UK. The euro zone subsidiaries of UK banks on the other hand do have an issue. They have to charge cross border payments at domestic ACH prices. Typically a cross border payment costs between EUR10 and EUR30 whereas the domestic equivalent costs between 1 and 30 cents. This is a major price constraint for those subsidiaries.

There is an upper limit of EUR50K on the payments to which 2560 applies and it makes no constraint on FX rates and fees.