Over the past few years Italian customers have increasingly shown interest in digital solutions. The rate of “digitalization” can be measured both in terms of infrastructure development and in terms of customer adoption. The penetration of Internet, Mobile and POS has reached unprecedented levels and Italian customers are increasingly using online services and shown an overall appreciation of de-materialization (i.e. the process of transforming previously physical objects, for example a credit card, into a string of code, for example information in a digital wallet)1.
Modern customers are more informed, spontaneously researching innovative products, demanding, thus severely judging their personal experiences with the different companies, and dynamic, characterized by higher willingness to make changes to their consumption habits in order to obtain more convenient or higher quality products and services.
This creates significant opportunities in different sectors for new and existing players to attract new customers and obtain more value from the current ones.
In line with the evolution of customer needs and preferences, the digital payments industry in Italy has been expanding at a relevant pace in recent years.
In fact, while in 2010 31% of total consumer spending in Italy was digital, in 2015 this method accounted for 36% of the total and this trend is expected to hold in the next five years, with electronic payments growing at a CAGR of 3%2
Also recent European legislation has been focusing on promoting digital payments, this is motivated by their benefits from the regulator’s viewpoint, such as reduction of money laundering opportunities, increase of payments transparency and simplicity, decrease of tax evasion, reduction of cash management costs, etc.
Two main interventions by the European Union stand out in its effort to promote digital payments: the PSD2 and the IFR.
The PSD2 (The Second Payment Service Directive) has been approved by the European Parliament in 2015 and must be implemented by each state before the end of 2017. The directive introduces new payment service providers (PSPs) and eliminates barriers between the different EU markets, by enforcing homogeneity in regulation3. This should increase competition, thereby reducing costs for the final user.
The IFR (Interchange Fees Regulation), which became effective in June 2015 for all member states, imposes a limit to the Multilateral Interchange Fee (MIF) equal to 30 bps for debit cards and 20bps for credit cards on all four-party circuits4. The purpose of the regulation is to incentivize the acceptance of digital payments. In fact, it is expected that the reduction in MIF will have, in the long run, a corresponding depressing effect on the Merchant Service Charge, making it less expensive for a Merchant to accept a card payment.
Finally, technological development is opening up alternatives for the technical execution of electronic payments, such as:
• Near Field Communication: wireless bi-directional connectivity for contactless proximity payments;
• Beacon: extension of the Bluetooth low energy (BLE) technology, allowing for long rage communication between devices (one-to-many);
• QR Codes: bi-dimensional bar code technology which allows payments by scanning (the code can be either a link for the merchant to the customer’s wallet or a link for the customer to pay through a dedicated APP);
• Instant payments: electronic payment solutions characterized by interbank clearing / immediate transferring of funds and 24/7/365 availability (only solution which allows for both C2B and C2C transactions).
For all the above-mentioned reasons the situation is now extremely favorable for the provision of digital payment services.
Many players took advantage of it and new business models emerged, such as Digital Wallets, P2P Instant Payments systems and Payment Initiation Solutions.
Digital Wallets are platforms developed by payment circuits or PSPs which aggregate data (credentials, codes, …) for several of the users’ payment cards in order to allow for identification and payment operations (e.g. Apple Pay, Android Pay). Alongside them, P2P Instant Payments systems were developed by banks and PSPs, allowing for instant payment peer-to-peer between users (both consumer-to-consumer, C2C, and consumer-to-business, C2B) through account-to-account transactions (e.g. Satispay, Jiffy, MyBank). Finally, Payment Initiation Solutions developed by banks or Third Party Providers started to diffuse, giving direct access to the user’s current account and permitting the disposal of funds through bank transfer, with the benefit of being instantaneous, as opposed to the processing time of usual bank transfers (e.g. Sofort Banking)
Following these trends and much like payment cards have been dematerialized and stored in digital wallets, Telepass5, has decided to extend the payment information from its OBUs into a phone App, releasing Pyng in 2015.
Pyng allows Telepass clients to pay for mobility-related services in Italy, specifically parking, at no additional costs, maximizing flexibility and safety. Currently the service is only available in a handful of main cities but Telepass intends to develop it and extend its geographical reach. Moreover, in line with the current digitalization trends, the Company is considering opportunities to extend its payment offer by including more services in the mobility-related arena.
Telepass is facing a tremendous opportunity now that the payment industry is entering a more mature stage. We can leverage in our strong market position in order to be ready with our new full digital platform payments in the first half of 2017.
1 Analysis Abi-Gfk Eurisko, 2013
2 “Financial Cards and Payments in Italy”, Euromonitor International, November 2015
3 Revised Directive on Payment Services (PSD2), European Parliament Directive, 8 October 2015
4 Regulation (EU) 751/2015 of the European Parliament and of the Council on interchange fees for card-based payment transactions, 29 April 2015
5 Telepass is the leading European provider of automated tolling systems, which today, with nine million devices in circulation, accounts for around one third of the European market and leads the way in the sale of payment technologies and systems for transport-related services.