Does PSD2 really spell the end of credit cards?

A new contender enters the international payments arena. The question on many people’s mind: will PSD2 be the downfall of credit cards for online payments?

With the dawn of PSD2 and Open Banking, a new payment method has entered the market in the UK and Europe: Payment Initiation Services (PIS). With this method, trusted merchants can initiate a bank transfer on behalf of a customer. All the customer has to do is approve it. Fast, safe, and extremely secure, since customers don’t have to share their sensitive financial information with anyone. So, how does PIS stack up against credit cards?

What does the online payments market look like?

United Kingdom

How much of a market share PIS will be able to carve out is highly location-dependent. In the UK, credit cards are well-liked, well-understood, and accepted almost everywhere. According to Finder.com, there is about 0.9 credit card per capita in the UK, and people use their cards for around 7 payments per month for an average of a little under £50 per transaction. Consumers enjoy the reward schemes and guarantees provided by credit cards. That means credit cards have a very secure position, and other payment methods have to work hard to gain traction.

Europe

According to Payments, Cards and Mobile, there is more scepticism with regards to credit cards in continental Europe: people associate them with consumer debt, high interest fees and identity theft. This shows in the figures: there is about 0.5 credit card per capita, averaged across 33 EU countries, and people use their cards around 2 times per month. It also shows from the amount of credit card debt people carry in the different countries: Spendesk gives figured of around €1200 in the UK, versus €300 in France and €50 in Germany. Although worry about credit card fraud is higher in Europe, the fraud risk itself is actually higher in the UK, because the credit card market share in the UK is bigger.

Many brick-and-mortar shops and market stalls across Europe don’t accept credit cards, or only the major issuers, so they are not as overwhelmingly useful as in the UK. In Europe, it is common to have a credit card only so you can do online payments. And even in the online space, people are used to having a lot of alternative ways to pay: G2A Pay lists PayPal, Klarna, iDEAL, Sofort, and many more. That existing variety makes it easier for a new method like PIS to gain ground.

Benefits of Payment Initiation Services for merchants

Low transaction costs

The great benefit of PIS as a payment method is its low cost. PIS charges a fixed fee, while credit cards and many other payment methods charge a percentage fee (1.15%-3.20% on average for credit cards). This means that there is a break-even point for transaction value at around €15, above which PIS becomes the less expensive payment method. That makes PIS an excellent solution for retail, and even more for high-value transactions such as airline tickets, tech goods, luxury items and holiday packages: the higher the purchase value, the more money you save as a merchant if customers pay by PIS.

That can be leveraged to stay competitive in the face of a high costs of returns

That low cost also makes PIS a good tool to reduce costs in sectors with a high volume of returns. Over half of fashion and shoes purchases get returned, according to Salecycle, and over 40% of electronics. At the same time, merchants can’t just not offer returns: 68% of customers consider returns policies in their decision where to purchase and half have abandoned an online shopping cart after finding out there was no returns channel they liked.

As a result, merchants generally choose to absorb shipping cost, return shipping costs, credit card fees (which you don’t get back even if you refund the money), write-offs and the fees for packaging and later restocking the inventory, just so they can increase total revenue. If your business has a high average transaction value and a high percentage of returns, incentivising your customers to pay with PIS can help you stay competitive by cutting costs elsewhere.

Benefits of credit cards for merchants

One of the major benefits of credit cards is the certainty that money will come in. That is why an incoming credit card transaction is enough of a guarantee for merchants to send out the shipment. With payment methods without that certainty, merchants will necessarily have to wait until the money is safely in their bank accounts.

That makes payment methods such as PIS a great choice for purchases where customers can be incentivised to accept a 48h delay in delivery time, or for custom-fabricated items that need a longer delivery time anyway.

Benefits for consumers

In the end, it is the customer who decides which payment method he or she wants to use. And PIS and credit cards both have strong benefits.

PIS offers customers a smooth payment flow that is integrated into the e-commerce website. Because the payment is initiated and paid from their own bank account, customers don’t take on any debt. And if merchants charge for different payment types, they’ll probably charge less for PIS than for credit card.

In certain situations, of course, the fact that credit cards use delayed payment is an advantage. Credit cards also offer customers the ability to pay in different currencies, which is not always the case for PIS.

But there’s one unbeatable advantage of credit cards for customers that we haven’t mentioned yet: customer protection. Up to certain limits, the credit card network will help customers if goods are damaged or stolen by facilitating repair or replacement or by reimbursing the money altogether. For purchases where customers really want this guarantee, credit card is for now the only option.

So, who wins?

The answer to this post’s title is clear: no, PIS will not supersede credit cards any time soon.

But it still has enormous potential to become the preferred alternative for the millions of transactions per day that people don’t explicitly want to use credit cards for. That, too, is a great reason for merchants to start offering PIS to customers. All the other benefits of credit cards – the points systems and cashback schemes and ease of use – can be tackled and matched by the merchant’s sales and marketing strategies. Because of the cost savings on PIS, especially for high-value transactions, merchants have a lot of leeway to get creative to make PIS more appealing to customers.

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