Many smaller and mid-tier European
banks are struggling to meet the requirements of the European
Union’s Payments Services Directive to be implemented on 1
November. Michael Burkie of Bank of New York Mellon examines what
banks in this situation can do to resolve this significant
The European Union’s (EU) Payment
Services Directive (PSD) becomes a reality on 1 November, putting
regulatory compliance back to the top of banks’ to-do list.
However, many smaller and mid-tier banks, especially those with an
extended reach across Europe, are finding themselves very much in a
“too little, too late” scenario.
Although no organisation can claim that coming
of the PSD is a surprise, the importance of meeting its demands has
been, more often than not, put on the back-burner in light of the
need to put all their efforts into revenue-producing lines of
business in a bid to survive the financial crisis.
Understandable as this may be, it is not
without consequence, and many are now finding that compliance by 1
November is an impossible goal.
Breadth of the legislation means that the PSD
presents banks with technological, manual and practical challenges.
Compliance, in brief, will require banks to upgrade existing
platforms, revisit current service level agreements (SLA) with
foreign partner banks and find alternative revenue sources to
replace those lost under the directive – hardly an overnight
Under the payments services regulations,
responsibilities of all payment services providers – which include
banks, building societies, electronic money issuers, non-bank
credit issuers and non-bank merchant acquirers– are obliged to
provide customers with up-to-the-minute transparent payment related
information, such as execution times, charges payable and, if
applicable, a foreign exchange rate.
For many banks, information
transparency is the chief source of effort, if not difficulty. In
order to provide this, banks must be capable of obtaining required
fee information and validating bank account numbers and routing
details – which is where the time-consuming need to update SLAs
comes into play.
This, however, is merely an inconvenience in
comparison to the need to upgrade technology and find replacements
for current practices that will no longer be valid once the
legislation is in force.
From the live date, a ‘full amount’ policy is
the order of the day, which means that deductions by remitting and
receiving banks from payment transactions are not permissible. The
entire payment must travel end-to-end without any deductions or
charges applied by any participant in the payment chain – putting
an end to value dating and therefore eliminating revenue earned
from float opportunities. For many banks, this has yet to be
replaced as a process.
Loss of revenue is a particularly grave
consequence in light of the cost associated with compliance. Banks
will need to upgrade their banking platforms to be capable of
displaying data and information at very granular levels, and this
may prove out of the reach of most, considering their strained
working capital positions.
All of these problems are magnified for banks
present in more than one European Economic Area (EEA) country. The
two main sections of the PSD (market rules for PSPs and codes of
business conduct) include 23 “opt-outs” whereby certain provisions
may be varied at the EEA member states’ discretion. This will more
than likely result in national variations, and banks with
multi-presence must ensure their operations are compliant within
each individual jurisdiction.
It is important to note that national
variations also apply to ‘one leg transactions’ – payments that
originate or end outside the EU, or not in euros or any other EEA
member state currency.
Differing approaches to these payments have
the potential to cause great confusion for any bank attempting to
issue such a payment, and they must be prepared for this.
Compliance, in this regard, has been
complicated by matters outside banks’ control. Before any bank can
be sure of what constitutes compliance, the PSD must be transposed
into the national laws of EEA member states. PSD legalities are
complicated by more than national differences.
Financial terminology carries different
meanings across the region, meaning that translation of the PSD is
not enough – interpretation is necessary before translation can
take place. This has made legal transposition of the directive a
lengthier process than may have been anticipated – and has
presented another intellectual hurdle for banks to overcome.
It is little wonder that banks are finding PSD
compliance a struggle and even questioning whether the PSD is worth
the upheaval its implementation is causing. The end prize, however,
will be worth it.
The PSD will allow banks and other payment
services providers to benefit from greater freedom of access to EEA
countries and their markets, and customers will enjoy consistent
consumer protection and faster payment times. In short, the PSD has
the potential to increase competition across the region,
potentially leading to emergence of new types of payment services
providers and innovations.
So what can banks not on course to
meet the deadline and requirements, do? Though there is no one
definitive answer an option worthy of consideration is to outsource
payment functions to a fully-compliant and technologically-capable
specialist global payments provider.
For these organisations, payments are a core
business activity, meaning they have overcome intellectual and
practical hurdles of the legislation, and are among the few with
payment systems required to ensure compliance, and multinational
compliance if necessary.
Of course, the traditional outsourcing model
is not always a particularly attractive option to smaller and
mid-tier banks, because they are understandably wary of exposing
themselves to inherent competitor risk of another bank carrying out
This is the reason some specialist global
payments providers focus purely on payments services and not on
retail or corporate banking services, thus fostering partnerships
that can eliminate a potential threat of loss of local business to
the larger bank.
Partnerships of this nature allow local and
mid-tier banks to gain access to the necessary technology to
execute an efficient and compliant capability with reduced costs
and risks – secure in the knowledge that the presence of a larger
bank is no threat to their local business.