PSD2 presents challenges and opportunities for DCB
Dheeraj (Raj) Soni, President – Payments
The introduction of the European Union’s (EU) revised Payment Services Directive 2 (PSD2) last year continues to have profound implications for mobile payment service providers, banks, merchants and telcos handling consumer transactions in Europe and beyond.
And depending on how they look at it, the new regulation poses both challenges and opportunities for telcos and mobile network operators (MNOs) facilitating mobile payments by direct carrier billing (DCB) within EU countries. That’s because whereas the original PSD rules allowed consumers to buy digital goods and services like wallpaper, music, eBooks and ringtones using their mobiles phones, the PSD2 has extended that scope to the purchase of a much broader range of content and services (which can include movies, games, streaming TV subscriptions etc.).
What may prove more significant is that providing individual DCB transactions for digital goods are capped at €50 (up to a combined total of €300 per month) the telcos co-ordinating them are exempt from the PSD2’s controversial strong customer authentication (SCA) requirement introduced to combat online payment fraud.
DCB is currently used primarily for small scale payments, micro-transactions and subscription payments anyway - based on data compiled by Juniper Research, the average transaction value for digital content via DCB in Western Europe was €4 in 2016. So the majority of telcos are unlikely to feel too constricted by a €50 cap on individual transactions, though they may need to carefully manage buyer expectations and improve the user experience to ensure that any failed payments don’t have a detrimental impact on usage.
DCB is a ., quick and easy way to collect payments on behalf of digital content providers. As long as they stick to the €50/€300 cap telcos and MNOs will not have to radically change the systems or processes they already have in place to capitalise. With the opportunity to extend activity to a broader range of digital goods and services - ticketing, gaming and gambling for example – they also have a route to new customer bases for merchants using DCB as the billing mechanism.
By avoiding SCA requirements, telcos could also steal a march on rival mobile payment methods and providers which are now subject to much more stringent rules in the form of the SCA that many are finding difficult to quickly and universally implemented. The legal deadline for SCA compliance was official 14th September 2019, but research conducted by e-commerce website PYMNTS conducted in October found only 40% of merchants aware of the SCA felt they were ready to comply. The European Association of Payment Service Providers for Merchants has asked for a longer extension again to the PSD2-SCA deadline (plus a 36-month exemption for specific industry sectors like travel) arguing that 12 months is too short and imposes too much operational risk for payment service and e-commerce providers. Many individual European national financial services regulators too are negotiating for a phased rollout that could take as much as another 18 months to complete.
For telcos that want to extend their mobile payment activity beyond digital to physical goods and services with higher values, the PSD2 also provides options – albeit with stipulations that might well deter them from doing so. Those include the need to obtain and maintain a payment service provider license, likely to be an onerous, complex and even expensive procedure given the necessary changes to existing payment platforms and processes.
Few, if any, telcos seem set to go down this route but could instead prefer a model that allows them to act as a payment agent of an actual licensed payment service provider without having to obtain a full license of their own. That means an operator receives the funds from the customer before forwarding them on to the payment service provider or merchant via a relevant partnership contract which is approved by local European financial authorities in each state.
BT-owned mobile operator EE has entered this type of agreement in the UK whereby customers can buy physical accessories from its online store via DCB for example, while Ovum points to activity in Germany where MNOs are now looking to expand into physical-goods payments requiring no registration, such as vending machines, fast-food deliveries, taxi fares, and shared mobility.
In truth, many telcos and MNOs are still testing what is possible with the new PSD2 legislation and forming commercial strategies that can help them increase DCB revenue while complying with the law. Indeed analysts appear to recognise the opportunity - Ovum estimates that the value of DCB payments in Western Europe will increase from around US$6.4bn in 2018 to be worth US$7.9bn by 2023.