Revised payments regulations coming into force next year are likely to radically change the way we pay for goods and services online, according to James McMorrow, head of payment strategy at Lloyds Bank. But, he says independent and small retailers are well positioned to reap the rewards.
On January 18 2018, a revision to European regulation on payments will come into force and could dramatically change the way we pay for goods and services online.
Designed to increase competition, innovation and transparency in the European financial services community, the revised Directive on Payment Services (PSD2) will pave the way for a range of new payments systems.
What these platforms will look like in practice, and who will be providing them, is still not clear.
But as a minimum, we expect new systems to emerge that let consumers and businesses make low value, immediate transactions online in a more secure and convenient way – as a lower cost alternative to card payments.
Tech-savvy consumers were the first to adopt innovations like Apple Pay and contactless cards. Those developments put high street retailers under pressure to be among the first to adapt.
As PSD2 creates similar opportunities online, smaller retailers in particular have an opportunity to get ahead of the game by pioneering the online payment systems that will meet the inevitable consumer demand.
Leading the charge
Smaller businesses are often able to be more agile than larger corporates. Decision-making can be much faster, with the decision to adopt any new system down to one or two individuals, whereas larger businesses often have to make a case to numerous management teams, right up to the board of directors.
They can also implement new technologies without having to develop tactical work-arounds or update well-entrenched legacy systems to accommodate new payment methods, which can be both costly and time consuming.
Together, these factors mean smaller businesses can respond quickly and steal a march on the rest of the market.
Secondly, there will be additional business benefits for retailers adopting these new systems.
If consumers make payments through the types of faster, open banking platforms we expect PSD2 to bring about, businesses will receive funds immediately and avoid any of the charges that come with card transactions. All of the business’s details will also be pre-loaded on its own payment portal, reducing the number of reconciliation errors and failed payments they experience.
Getting paid faster increases a business’s working capital - the amount of money it needs to cover its day-to-day running costs – allowing it to re-invest those funds more quickly during periods of growth, and to protect itself with greater liquidity in times of uncertainty.
Finally, there are the benefits that these new regulations will bring businesses in all sectors.
Online open banking payment platforms will be more secure. We foresee platforms collating and presenting the consumer’s financial world in one place through data sharing. These systems will also verify all payments, removing the card verification processes currently offered by lenders.
Data-sharing will also enable businesses to make better, more informed decisions.
The Access to Account rule within the new regulations will give traditional, established lenders and third-party providers alike access to account data from different banks.
We expect this will give small businesses a clearer view of their financial world through sophisticated account and payment aggregation services providing value-adding insights.
These services will allow management teams to see all their balances and transactional information on one, platform – making it simpler to manage assets and liabilities in a range of different places, and potentially helping to identify and unlock funds tied up in working capital.
The right advice
With a wealth of new payment services brought to market by PSD2 from a disparate range of sources, sorting the wheat from the chaff – in terms of choosing one rival platform over another – will present a challenge for firms.
The most important thing they can do is to speak to a trusted adviser. This could be their bank, legal counsel, accountant, or one of the many support organisations that exist for small businesses looking to grow, such as the Federation of Small Businesses or their local Chamber of Commerce.
They’ll be able to help businesses take a holistic view of their requirements and not only decide whether adopting a new system is a sensible business decision, but also advise on how to make the operational changes required to do so.
Whatever happens, the disruption that is around the corner is certain to bring opportunities. Small businesses in particular need to be alert to them if they are to take full advantage and prosper from them.