Of Primordial Soup, New Payment Services And #PSD2

Source: Shirtigo

Figuring out the impact of the proposed changes to European payments law (PSD2), is like watching primordial soup, with new types of regulated creature emerging all over the place. Previous posts have considered the impact on loyalty schemes and technical service providers, while this post looks at the new “payment initiation” and “account information” services. The scope of these new services could introduce many new software and service providers to the regulated world, increasing costs as well as potentially limiting competition and innovation.

A “payment initiation service” is one where you can ask the service provider to pay your energy bill, for example, or make batch payments to staff and suppliers, using one or more payment methods provided by other service providers. It is conceivable that an e-commerce checkout feature, for example, might also qualify. Member States must ensure that payers have the right to use a payment initiation service in relation to payment accounts that are accessible online. A payment initiation service provider must not handle the payer’s funds in connection with the provision of the payment initiation service.

An “account information service” is one that allows a single view of all your transactions on one or more payment accounts held at one or more payment providers. Account information service providers will be exempt from certain authorisation, information and contractual requirements, but will be treated as payment institutions - so they will be allowed to passport to other EEA states, for instance.

PSD2 assumes that both these new services will provided by “third party” payment service providers, i.e. those who do not also offer payment accounts or handle funds themselves. Let's call them “TPPs” for short, as opposed to firms that provide or maintain payment accounts, which is the job of “account servicing payment service providers” or “ASPs”.

TPPs will need to become authorised or registered financial institutions, or become appointed as agents of authorised firms. Those initiating payments will need at least €50,000 of working capital and (along with account information service providers) will have to hold professional indemnity insurance. TPPs will also have to provide information about themselves to customers, as well as have quite a lengthy contract with each of them (unless they are exempt account information service providers). If a payment goes wrong, the TPP who initiated the payment must be prepared to prove that nothing went wrong in its own systems when it sent the payment to the ASP. The TPP will also have to give information about the payment to the intended recipient(s) and meet certain security requirements (see my article for the SCL).

Regardless of the customer benefits, it seems certain that these requirements will add to the cost of providing payment initiation and account information services to consumers and small businesses.

The regulations would also seem likely to limit competition and innovation in the event that firms structure their services to avoid regulatory overhead.

Specifically, it's not clear whether firms wishing to avoid increased costs could qualify for the technical service provider exemption by supplying their services directly to ASPs instead of customers. But even if that were possible, or if ASPs were prepared to appoint TPPs as their agents, it's likely that each ASP would only involve the services of a limited number of TPPs, and would add its own margin to their charges in any event. In other words, the number of potential TPPs and related services could just become a function of the number (and type) of existing ASPs.

So it seems the adverse consequences of regulating these services may well outweigh any benefits.

The End Of Third Party Payment Gateways?

Source: paymentsgateway.com.au

Changes are being proposed to European payments law that will affect service providers who send payments data from retailers to financial institutions. This post explains how they may be affected, and what they may be able to do about it.

Most retailers rely on an external service provider to send their payments data to a financial institution for processing. Sometimes the financial institution itself handles the data transfer as part of its acquiring service. But often a third party agrees to do that on the retailer's behalf, particularly for online payments. The financial institutions call such service providers "third party gateways" because the institution typically has no contract with them and it's up to the retailer to ensure the data gets to the financial institution. From a regulatory standpoint, the gateway provider doesn't handle any funds, so they are currently also exempt from payments regulation as 'technical service providers'.

But under proposals for a new Payment Services Directive (PSD2), such service providers will only be exempt if they contract with financial institutions (e.g. merchant acquirers), rather than retailers or other payment service users. That may help the financial institutions control the quality of the data that flows their way, but it also potentially undermines the ability for large retailers to control the processing of their transactions.

In addition, “acquiring of payment transactions” will be regulated where the service provider contracts with the retailer to accept and process payment transactions, and this 'results' in a transfer of funds to the retailer. Not only is this aimed at certain merchant acquirers and bill payment operators who believe they are outside the scope of the current PSD, but it could also catch third party gateways, since it appears that the service provider does not have to be the one actually transferring the funds.

It is also possible that the activities of technical service providers may fall within the scope of other regulated activities, particularly 'payment initiation services', 'account information' services, or perhaps even 'issuing payment instruments' (see my longer article for the SCL).

At any rate, technical service providers may find that it isn't commercially feasible to remain exempt as a result of one or more of these changes. In that case, the options are to either get authorised as an e-money institution or payment institution (or perhaps a registered as a small EMI or PI), or operate as an agent of someone who else or is.

Whether or not they are exempt, however, anyone providing technical services will need to be familiar with the proposed new security requirements, and the related standards that will eventually be issued by the European Banking Authority (see my longer article for the SCL).

A Developer's Guide to Privacy and Fairness?

Over the past few months I've noticed a range of different articles expressing privacy concerns about mobile apps, wearable devices and internet-enabled things, like smart TVs and bathroom scales ("the Internet of Things") on the one hand; and initiatives like 'Midata' to help you create your own 'personal data ecosystem', on the other. But regulation aimed at unfair trading is also relevant in this context, as are the various security requirements being proposed at EU level in relation to payments and 'cybersecurity' more generally. Official guidance in these areas is often broad but not comprehensive, as in the summary of privacy rules given in the context of Midata. It would be great to see a more concerted effort to draw all the guidance together. I have suggested this to the SCL. In the meantime, this overview explains briefly where to find guidance on meeting privacy and fairness requirements when using apps and other devices for consumer marketing purposes.

Note: as a developer, it's worth reading such guidance as if you were a consumer, to understand the regulatory intent. As a consumer it's worth reading guidance aimed at firms, since that gives you a better insight into how things actually work 'behind the scenes'.

The Information Commissioner has plenty of practical guidance on privacy in the context of cookies, mobile applications and data sharing (and a other guidance by sector or activity).

The Advertising Codes are important sources of information on how systems are supposed to behave in a marketing context.

PhonepayPlus has issued guidance on the use of premium rate numbers.

The Office of Fair Trading had plenty of guidance on how to comply with consumer protection regulation, which is now hosted by the Competition and Markets Authority, including principles for online and app-based games.

The OFT's guidance on what's appropriate in a consumer credit context, such as debt collection, is now in the FCA's consumer credit rules, and the FCA also recently consulted on updates to its guidance on financial promotions in the social media.

Firms seeking FCA authorisation often have to provide a lot of detail on their IT systems and governance in the process. The proposed new EU directive on payment services will broaden the range of regulated services and go into considerable detail on data security. In fact, security standards will be produced by the European Banking Authority, just to add to the confusion.

Knowing where consumers can complain is a guide to other regulators who may be interested in how your application works. There is an overview of UK consumer complaints channels here. There are specific complaints bodies for sectors, such as energy, financial services and telecoms, as well as for activities, like advertising and processing personal data.

However, it's you should be aware that the Data Protection Act gives businesses separate rights to process your personal data in the following circumstances:

• for the performance of a contract to which you are a party, or for taking of steps at your request with a view to entering into a contract;
• for compliance with any legal obligation, other than an obligation imposed by contract;
• in order to protect your vital interests;
• either for the exercise of a function conferred on a business by law or for the exercise of any other functions of a public nature exercised in the public interest;
• for the purposes of legitimate interests pursued by a business or by someone else to whom the data are disclosed, except where that processing is unwarranted by reason of prejudice to your rights and freedoms or legitimate interests.

Public sector bodies also have certain rights to use your data which I haven't covered here. However, it's important to mention the ID Assurance Programme run by the Government Digital Service team, which has issued useful guidance on ID assurance. And the Connected Digital Economy Catapult that builds platforms for SMEs is due to develop a code of practice on consumer protection.

The Beginning of The End of Consumer "Banking"

Funny to see a story from John Gapper in the FT this morning, saying technology will hurt retail banks but not kill them, only a few pages before First Direct admits it mis-sold complex investment products to consumers.  While I agree that innovation doesn't 'kill' anything, and must co-exist with what it is replacing, John seems to have a misplaced faith in retail banks' ability to maintain their direct relationships with consumers.  Banks are steadily being relegated to the back-office of retail finance.

 

John may be right to point out that banks lose money on the limited activity of offering current accounts, and possibly even savings account functionality, so that these are not attractive areas in themselves for technology businesses to enter. But of course you can't view those 'products' in isolation. They are just part of the 'bait and switch' routine that banks operate to persuade people to part with their money so the banks can earn far more from using those funds for their own ends.

To understand what the tech companies are doing, you have to consider how much money the banks make out of the end-to-end activity of robbing investors/depositors of yield while fleecing borrowers with expensive loans - and making everyone pay a lot for slow-cycle payment processing. 

 

It is wrong to say that technology companies are merely playing at the edges of 'banking' by offering payment services and person-to-person loans. This is all part of the strategy for disrupting the 'banking' sleight of hand.

 

Tech companies know that if they can provide a decent, transparent consumer experience to savers/investors on the one hand, and those who need the funds on the other, then they are in a position to cut the cost of moving money between the two. In fact, the money may not even have to move at all: the important issue is who is entitled to it, and whether it is available. 

 

You don't need a bank to keep the data and transaction records that tells you who owns the funds. It's all just data, as Marc Andreessen is quoted as saying. 

 

And it's far safer to separate the transaction processing and record-keeping function from the cash, which should be held separately from the processor's own funds. That's how e-money institutions, payment institutions, P2P lending and crowd-investment firms are set up...  They may rely on segregated commercial bank accounts for holding that cash, but the banks who provide those accounts have no control at all over which consumers own the money in them, or what those consumers choose to do with it amongst themselves.

 

In the EU, the regulatory support for such new business models began in earnest in Europe in 2000, with the advent of the first E-money Directive, and has snowballed with the Payment Services Directive in 2007, a new EMD in 2009 and the proposed revamp of the PSD. There are now hundreds of these payment institutions in the UK alone. And it's no coincidence that the UK has led the way in both creating and regulating P2P lending and crowd-investment platforms.

 

All of this spells the beginning of the end for consumer 'banking'.

 

 

Referral Process For UK Small Businesses The Banks Won't Fund

As mentioned briefly before, UK banks have been so hopeless in referring businesses they can't finance to alternative lenders that the government has decided to create a mandatory referral process.

Currently, the largest four banks account for over 80% of UK SMEs’ main banking relationships. Most SMEs only approach their main bank for finance, with around 40% giving up their search if they are unsuccessful.  A proportion of those rejected are viable businesses who simply don't satisfy the risk appetite of the largest banks. The result is that other providers of finance aren't able to help because they are not seeing the need among SMEs, and the SMEs are unaware of the alternatives to their bank.

So the government will use the Small Business, Enterprise and Employment Bill to require the larger UK business lenders to refer any SME whose finance application is rejected (with the SME's consent) to certain designated private sector platforms. Those platforms will then connect willing SMEs with participating alternative providers of finance (ranging from finance companies, to invoice discounting providers to peer-to-peer lending platforms to challenger banks). 

The platforms will need to comply with minimum standards to help ensure that SMEs are in control and properly protected throughout the process. All types of credit products offered by large banks to SMEs will be covered by the referral requirement, although there will be a low threshold below which it would be too costly to refer the funding application. Some businesses may also be excluded for various reasons that would include where the initial funding application was rejected for suspected money laundering. The proposals are also designed to complement and work in conjunction with the government policy to improve access to SME credit data, a process that is happening separately, but in parallel.

In summary, the SME funding referral programme should work as follows:

• SMEs must consent to be referred, and will have their details anonymised. Alternative lenders will only be able to see key information that would allow them to make an initial assessment of whether an SME may be a potential lending opportunity.

• If a lender wishes to explore a lending opportunity with a business, it would need to make contact through the platform and request consent to see that business’s contact details and begin a direct dialogue. Where a lender wishes to make a more detailed credit assessment, it will be able to obtain credit data from the business’s main bank via designated Credit Reference Agencies.

• Platforms will be able to exercise discretion over whether they grant financial and business advisers and other intermediaries access, but the platform must clearly notify SMEs when it is an intermediary that wishes to contact them, and not a lender.

The minimum standards for the referral platforms will be stipulated by the Treasury on advice of the British Business Bank. Standards will include: 

• data protection – to avoid excessive or misleading approaches or credit checks without consent;

• fair access to all SME lenders that agree to terms and conditions regarding appropriate treatment of SMEs contacted through the platform; and

• accountability for alternative lenders who fail to comply with the terms and conditions they sign up to when joining the platform. 

The Treasury will be able to de-designate platforms that fail to adhere to the standards. The FCA will oversee the obligation on banks to share information with platforms, and the platforms’ requirement to give fair access to lenders. Sole traders and micro businesses will be able to complain about platforms to the Financial Ombudsman Service when dealing with designated platforms. 

Further detailed regulation, including the designation criteria that potential platforms must meet, will be set out in secondary legislation following the passage of the Bill.