The “R” word.
Regulation is one of two words that keep a lot of payments executives up at night (the other being cybercrime) as regulation forces everyone across the ecosystem to allocate time, money and people to making sure that all of the regulatory boxes are checked and double-checked. Of course, many regulations impact the bottom line, as well.
That's where a Silicon Valley cloud-based payment network, Token, thinks it has carved out a niche. It has identified a regulation – namely the EU’s PSD2 – and created a way for banks to comply with this regulation while outsourcing the heavy lifting of that compliance to Token's network.
Token CEO Steve Kirsch says they can help banks make money in the process.
PSD2 – the EU’s Payment Services Directive (PSD2) – requires that banks create open APIs so that qualifying Payment Initiation Service Providers and qualifying account information providers can access customer account information inside of those banks in order to “level the competitive playing field.” It’s complicated because, to get up to speed, banks must spend a lot of money to both open up their networks and do it in such a way that security and banking infrastructure integrity remain sound.
“We started with this vision of making a better payments system," Kirsch explained in an interview with Karen Webster. PSD2 gave Token a use case to put his vision to the test.
"Token is about helping banks make the most of the PSD2 regulation. We can help banks solve their PSD2 problems – giving them better security, lower costs, but more importantly helping them turn PSD2 from a loss leader to a market leader in terms of revenue to the bank," Kirsch said.
The Nitty-Gritty Of PSD2
PSD2’s stated objective is to standardize and improve payments systems in the EU, offer better protection to consumers, encourage innovation, and provide a framework for emerging payment methods in the marketplace. The regulators have taken the position that opening access to innovators will “level the playing field for companies in the payments industry” despite a bank’s prior investments in building those systems to hold funds and secure account information and service consumers.
Token, explains Kirsch, is a way for banks to remain compliant without investing even more time and money in adapting existing systems. Token – as a cloud-based intermediary - integrates with the bank's APIs by using, as its name suggests, digital tokens to authenticate online transactions. Token also gives banks control over the entire transaction and reduces their costs, Kirsch claims.
While PSD2 doesn't restrict the profitability of a bank, it does set pricing for how they conduct their business under this new regulation. Using Token's platform, Kirsch said, banks can think of PSD2 as a revenue-positive tool.
"We are not capped. Our price to the merchant is not capped and we're not an interchange system," Kirsch said. “Token is a three-party-system which creates better security and puts the control back in the hands of the banks in a way that doesn't dent their bottom line.
Token’s Latest Mission
But back on the bank side of the equation, Kirsch said Token is currently working internally to test its system with one of the largest banks in the U.K. While he didn’t disclose which one, he did say it was one of the largest banks in one of the largest countries in Europe.
"Most people who do PSD2 - they meet requirements and it's not a very visionary experience," Kirsch said. "Instead of just meeting the letter of the law with PSD2, Token is like this huge infrastructure for banks that's more advanced. It's the next-generation payments system."
And that's how Token wants to be viewed: the payments network for the digital age.
"We're finally entering the modern age of payments and it's happening because the regulators forced it via PSD2. It's going to upgrade tech fast," Kirsch said. "The real big win here is that the technology that the banks put in for the retail customers can be used on the B2B payments side. This is the best thing to happen to banking. PSD2 shocks the banking system into moving."
And that's a system which Kirsch believes Token can win in on any single point — whether it's cost, disintermediation, protection from breaches, enabling the unbanked, cost avoidance, having API with critical mass, or user/developer experience.
Beyond that, he notes that Token "does all the heavy lifting in our codes" to create tokens and to ensure security and to do step-up authentication.
"The banks right now need to make a decision as to whether they are going to go with an internal API, whether they are going to go with us or whether they are going to go with a competitor," Kirsch said.
It’s Not Just About The Banks
The benefits, Kirsch said, extend to the consumer side, too. On the consumer side, Kirsch says that it's as easy as a few clicks to pay with Token’s digital payment option that can be easily integrated into a bank app API.
"We go bank direct on that transaction. The interface to the consumer looks very similar to any other slick digital buy button,” he explained. "From a consumer point of view, it's really very seamless."
Once a bank enables Token in the mobile app for the consumer it then gives that consumer the ability to eliminate the need to enter credentials wherever Token is accepted.
"The benefits for merchant may be cost. We may undercut payment cards and charge lower fees. It certainly helps with higher checkout conversion," Kirsch said. When merchants get paid, he further explains, they only get a limited use token that can only be redeemed by the merchant using the merchant's private key, which adds to its security pitch.
Plus, Kirsch points out: "It makes the whole customer journey much nicer. Merchants get instant payments." Beyond that, he adds: "It reduces their dependence on payments cards, it gives them additional payment options.”