PSD2 and retail: Catalysing point-of-sale innovation

After several years in the making, PSD2 has arrived. The new regulations – which are designed to promote competition, innovation and security in the payments industry – require banks to grant retailers and other third parties access to consenting consumers’ online banking information. As a result, retailers will be able to initiate payments on their customers’ behalf.

The new regulations don’t require retailers to do anything differently, but leading brands recognise that they present an opportunity to streamline the payments process and distinguish themselves from the competition.

Simply put, the new regulations will allow retailers to make their marketing more accurate, enhance the experience for consumers, improve efficiency in the back office, and allay concerns about security.

  • Targeted marketing

The new regulations enable retailers to access Account Information Service Providers (AISP), which means consumers allow them to access their bank account information. 

AISPs could be a gold mine for retailers: a grocery chain could, for example, identify repeat consumers that spend money with them, but only do so intermittently. The grocer could then direct marketing activity at this individual and offer personalised marketing to tempt them back more often.

It’s worth remembering, however, that consumers overwhelmingly trust their banks when it comes to their financial information, more so than retailers and social media firms. According to recent research, two thirds of consumers said they wouldn’t share their personal financial data with third party providers.

Retailers will likely need to offer a compelling reason for consumers to share their data, be that personalised marketing or discounts. They can also gain consumers’ trust by demonstrating exactly how their data will be used.

  • An enhanced experience

Using consumers’ banking information, retailers can streamline and enhance the overall shopping experience, which is increasingly important in today’s industry.

Retailers could, for example, display an individual’s balance at the point of sale so they can confirm whether or not the purchase is affordable. The retailer could also offer the customer a loan to cover the cost of the purchase, either directly through their own finance arm, or through another third party.

PSD2 will also enable retailers to refund customers instantly at the point of return. The “buy now return later” culture has grown significantly in the last decade, so offering even swifter returns could be a key differentiator.

  • Simplifying the transaction process

Initiating online payments on behalf of consenting consumers, and accepting payment directly from their bank accounts, enables retailers to bypass the complex web of network intermediaries. This allows them to reduce or eliminate card transaction fees.

Direct payments from customer bank accounts can also take place in real time. This is a significant advantage over the typical two to three-day waiting period and has obvious working capital benefits. Retailers may decide to pass some of the financial benefits on to customers in the form of lower prices, should they pay directly.

  • Improved security and fraud reduction

To limit consumer fraud, PSD2 specifies security requirements with which payment services providers must comply.

To authenticate a payment, consumers need to prove their identity on at least two of three measures – something they know, something they possess, or something they are (which could be demonstrated by biometrics). In turn, online retailers will be required to update their payment processes to comply. But the benefit will be that retailers should be able to significantly reduce fraud.

In addition, payment providers that have a strong track record on fraud will be exempt for certain authentication processes. This incentivizes payment providers to focus on security and fraud reduction as those that do will be rewarded with being able to offer a consumer experience with less friction.

  • Conclusion: finding the right approach

PSD2 provides many opportunities for retailers, but there are challenges along the way. If handled badly, the additional authentication requirements could frustrate customers. It may also be difficult to convince customers to share their data.

Judging when to take the plunge is also difficult. Retailers will want to move swiftly to gain first-mover advantage, but this needs to be weighed against technical readiness and consumer willingness to embrace new payment methods.

Retailers also need to ensure that the PSD2 opportunities they pursue align with their long-term objectives for improving the point-of-sale customer experience. Different priorities call for a different approach to PSD2. Evaluating this can be tricky.  

That said, significant opportunities in retail are rare and fleeting. With this in mind, we can expect the most forward-thinking retailers to already be designing new customer experiences, assessing the technology landscape and evaluating the integration aggregators that will help them succeed.

By Rob Barnes, managing director in Accenture’s Retail practice