3 reasons why the US payments market is the one to watch
Much has been made of the implications of PSD2 for the European payments market, but what about the US payments market when it comes to innovation and disruption?
PSD2 is being implemented in early 2018 to increase the level of competition in the European payments market by making it mandatory for banks to open their payments infrastructure and customer data assets to Third Party Payments Providers. As Payments UK states, this means that ‘once a quiet corner of the financial world, the payments industry is transforming like never before,’ claiming that there is enormous potential for the UK payment markets to continue to lead the way. Whilst this is all true, the noise is distracting people from paying attention to the real story happening in the US which is more readily primed for disruption for three major reasons…
Uptake of the latest payments technologies in the UK, for example mobile payments, is actually relatively subdued. A survey of UK internet users conducted in Q4 2016 by GlobalWebIndex found that just 6% of respondents had used Apple Pay to make a purchase via their smartphone. Although this is partly due to barriers that Apple is currently trying to overcome, such as a availability of hardware and a £30 payments cap imposed by the UK Cards Association, it’s also a reflection of the fact that these types of payment services currently offer no added value over contactless cards for consumers and, with faster payments, even mobile P2P payments make little difference. There is, therefore, no incentive for customers to adopt the technology.
In the US, however, the mainstream payments market significantly lags behind that of the UK, with most card payments still being swipe or Chip and PIN, and the process for making P2P payments between different banks is long-winded. This is why FinTech payment solutions like Venmo have been so successful in the US, because they offer a significantly enhanced customer experience. It is estimated that nearly a quarter of US adults with a smartphone used a P2P payment app at least once a month in 2016.
As a consequence, increasing numbers of young US consumers are turning away from incumbent providers for payment activities. To fight back, the big US banks, such as Bank of America, are having to follow the open banking strategy mandated by PSD2 in the EU and embrace the use of APIs to offer added value services to their customers. With the demand for such services being higher, it is logical to assume that the impacts will also be greater.
2. Regulation & Trust
One of the main barriers to adoption of new payment technologies in the UK is concerns over security, with options such as contactless payments and mobile payments being perceived as less secure than traditional methods of payment, such as chip and PIN. In the US, this is less of an issue, as chip and PIN was only introduced in late 2015 and took a long time to bed in. In the meantime customers were happy to keep using magnetic stripe cards which are considered to be considerably less secure. The perception of what is and is not secure when it comes to payments is thus considerably different in the UK and US.
Furthermore, along with open banking, the other pillar of PSD2 is strong customer authentication. The exact impact this aspect of the regulation will have on both digital and face-to-face payments is not yet clear, as it will depend on the precise nature of the Regulatory Technical Standards, which have not been finalised. However, these will more than likely require two-factor authentication for payments, which could mean that journeys such as Amazon One Click and the recently launched collaboration between Android Pay and PayPal to allow Android users to make payments on the mobile web using Touch ID could no longer be allowed. In contrast, such a solution (which is soon to be launched) in the US will not be subject to the same regulatory restraints. This could make finding the balance between usability and security easier for US providers, lowering yet another barrier to increased competition in the US payments market.
3. Brand Power
Finally, one of the main areas of speculation surrounding PSD2 is whether it will encourage the likes of Google, Apple, Facebook and Amazon to make a more aggressive move into the European payments space. This is entirely plausible, but it’s more likely these big brand names will decide to pursue their payments ambitions in the US first where they have a stronger foothold. Facebook in the US has provided payments via messenger since 2015, a wider range of providers in the US have made use of Apple’s API for Siri to enable voice payments than in the UK, American Express has an Amazon Alexa skill, and Google has announced that their US customers will soon be able to make payments using the ‘OK Google’ voice command. Thus it would seem that these retail giants see the US payments market as their playground.
Combined, these factors suggest that the foundations are set for a wave of disruption to hit the US of far greater scale than that due to hit the European market.
As well as Mobile Banking platforms, Mapa now tracks and analyses Digital Wallets & Payments providers across the world, to provide competitor analysis, functionality benchmarking and user-focused insights. Find out more here.