Allan Syms, COO of My PinPad, explores how the Second Payment Services Directive will provide both opportunities and challenges for third-party finance providers
Brexit might be happening, but that doesn’t mean UK business is immune from European legislation now or, depending on what Theresa May negotiates, in the future.
One piece of European legislation that might not have grabbed the headlines in the way straight bananas did is the Second Payment Services Directive (PSD2).
It’s currently due to be implemented in the UK next year and, until we hear differently, we can assume its implementation will go ahead. This point was emphasised by the Payments Strategy Forum in July, at an event to launch its consultation paper entitled Being Responsive to User Needs.
If implemented, it will have huge impact on the payments industry across the board. Payments is an industry which has struggled to adapt at a pace that can take advantage of disruptive start-ups, yet maintain tried and trusted legacy systems.
The start-ups and new entrants are looking to win customers with new payment methods, new technologies and new levels of customer services. But to be successful they have to operate within a highly regulated environment with well-established protocols and systems.
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By GlobalDataWhat does PSD2 involve?
PSD2 has a number of key elements which impact the motor finance industry:
- Offering better consumer protection;
- Promoting innovation in the payments space and reducing costs;
- Incorporating and providing clarity on the use of emerging methods such as mobile and online payments;
- Creating an level playing field for payment service providers – enabling new companies to get into the payments space.
There is, of course, a huge amount of technical detail in the directive that may be of more interest to banking specialists than those in motor finance, but from this summary, it’s clear there are several key aspects of significant relevance to the motor finance industry:
1) Offering better consumer protection
Credit and finance is an area that’s been fraught with controversy over consumer protection during the past few years, with banks still reeling from the PPI scandal. Car finance providers will have to ensure they are fully compliant with the consumer protection legislation in this directive.
2) Promoting innovation in payments
This is an interesting aspect for the motor finance sector given that, on the face of it, credit is usually applied for in a traditional fashion. Customers, either private or corporate, will generally apply for credit face-to-face and the dealership will run a credit search and check using a number of different credit providers to get the right deal depending on status and requirements. It’s an area with significant scope for innovation, such as opening up the field to greater competition from payment service providers, and doing so by enabling more flexibility through online and mobile payments.
3) Incorporating and providing clarity on the use of emerging payment methods such as mobile payments and online payments
The motor industry is an area where e-commerce and mobile commerce have yet to have had a significant impact as has been seen in retail elsewhere. In some respects, this isn’t surprising. Anyone buying a car will want to kick the tyres and take it for a test drive, and this is something that can’t be done remotely.
For all the flashy websites from car manufacturers and dealerships, today most deals are done face-to-face to obtain the best price and value of a trade-in. Not only does the customer want to test drive the car, the credit checks and applications are all done in person due to the ID and verification requirements.
But is this all necessary? In part, this is what PSD2 is here to challenge. While a salesman will be keen to seal the deal there and then, the technology is there to allow customers the opportunity to complete purchases or leasing agreements remotely.
Innovations have been made in mobile commerce where customers can use biometrics, passwords or PINs (or, most effectively, a combination of them) to authenticate themselves when applying for financial products from banks and other providers. Together with the growing use of data analytics there’s no reason why this cannot be done remotely using mobile or online payments.
It would allow consumers to finish the transaction at their convenience and not feel under pressure to take the deal. And that has to be good news for customers.
4) Creating a level playing field for payment service providers – enabling new companies to get into the payments space
This is the critical area for motor finance. In essence, the directive is looking to create greater competition and allow new entrants in.
The motor finance sector is already a busy one with a variety of providers offering finance to consumers directly or via a third-party dealer. There are ones that can offer credit to individuals with poor or variable credit scores, those that target high net worth individuals and a whole host of others.
So, the question for those already in the sector is: “Does PSD2 mean we will face even more competition?” And the clear answer is it almost certainly will.
In the payments industry, the bulk of the discussion around PSD2 has been on how it will impact traditional banks and the opportunities it will bring for new entrants to the market. The regulation obliges banks to allow third-party providers (TPPs) access to their data, with the aim of creating a more level playing field.
Given that the majority of motor finance through dealers is offered by TPPs, this is extremely good news for them. They will have access to valuable bank details and it will enable them to improve their offering and have more competitive products.
However, not everyone buying or leasing a motor vehicle uses dealer arranged credit. Self-finance is increasingly popular and with consumers using price comparison sites to shop around for the best deal before going into the showroom, they are negating the need for dealer finance and cutting out the TPPs.
This is an area where challenger companies, possibly emboldened by PSD2, will look to increase their market share through new products and innovation.
How can car finance providers defend their market share?
The answer is simple: don’t be complacent. For example, through cutting edge ID and verification technology, there’s no reason why consumers have to complete a motor vehicle deal in the showroom. Motor finance providers that deal directly with customers know this, and so make it easy for them to apply for this credit online and via mobile devices. And challenger companies will be adopting technology to make this even easier.
PSD2 is about challenging legacy banks. In the world of motor finance, the TPP companies could, arguably, represent the legacy providers. They have to think sharply about how they get in shape to face up against new direct credit providers. A legacy provider does not have to have legacy technology or legacy thinking. Those who recognise this will thrive in the PSD2 environment.
