As a result of the credit crisis and market volatility, global markets are in disarray, deleveraging is under way, regulatory oversight is increasing and back-to-basics banking has become the industry mantra. In today's economic climate, banks are focusing on their core competencies to survive and prosper. More than in the recent past, financial institutions are relying on payment processing as a principal profit driver.
As we move through 2009, however, many European payments providers will find this core transaction banking business under intense pressure from the requirements of the Single Euro Payments Area (SEPA) and the Payment Services Directive (PSD). Confronted with declining margins, many institutions will face difficult strategic investment choices. Those with a clear vision that regard payments as a core competency have the best chance to survive and prosper.
In 2008 the implementation of SEPA stretched technology investment budgets while reducing payment commissions through the implementation of the SEPA Credit Transfer. In 2009 the "Directive 2007/64/EC on Payment Services in the Internal Market," published by the European Union in 2007 and widely known as the Payment Services Directive (PSD), will further erode profit margins. Member states are required to individually adopt the PSD into national law no later than Nov. 1, 2009.
The PSD will have a direct impact on specific kinds of handling procedures, such as charge handling -- that is, full-amount principle or value dating. It may also lead to increased competition within the payments industry, as it allows nonbanks to act as payment service providers.
The PSD creates a uniform European legal framework for payment transactions, thereby regulating payment services and providers. It harmonizes customer protection and the rights/obligations for payments providers and users.
The PSD governs payment services in euros and other EU and European Economic Area (EEA) currencies for both domestic and cross-border payments within the EU/EEA. Payment services covered by the PSD include credit transfers, direct debits, card transactions, cash deposits, withdrawals on accounts and remittances. The PSD is applicable only to payment service providers located in EU and EEA countries, which include Iceland, Liechtenstein and Norway.
The PSD will have a significant impact on banks domiciled within the scope of the directive. Banks involved in the payments chain must transfer the full amount without deducting any fees. However, the payment service provider of the payee may deduct its charges from the amount if agreed with the payee. Whereas the full-amount principle only applies for intra-EU/EEA payments, the value date provisions apply even if only one party's bank is located in the EU/EEA. Furthermore, the PSD does not only affect banks' fee and float revenues but also payments processing procedures and systems, which need to be made PSD-compliant.
While the PSD is separate from SEPA, the two are closely linked. The PSD implementation is a prerequisite for the expansion of the SEPA Direct Debit (SDD), creating a Europe-wide low-value cross-border debit capability. Implementation of the SDD will greatly accelerate corporate account consolidation efforts by enabling clients with accounts in multiple European jurisdictions to efficiently transact from a single location.
Although payment service providers outside the EU/EEA are out of the scope of the PSD, there will be an indirect impact on the non-EU/EEA financial institutions with nostro accounts in multiple countries in Europe. European banks without sufficient volume will be faced with declining profit margins that can only be offset by substantially increasing fees on nonregulated payments or interbank-related fees, or reducing service levels. Some may be forced to exit the business entirely or seek partners, creating dislocations in this traditionally stable market.