The next european payment initiative
Over the last two decades, a number of well-known European companies and institutions have come together to push forward the development of a single payment system for the euro zone. Under names such as Monnet, EAPS or PayFair, banks and payment service providers in particular wanted to join forces to make the locally very heterogeneous payment infrastructure universally available and future-proof with innovative concepts. After all initiatives failed equally, a new attempt is now apparently being made under the leadership of the ECB and the European Commission, with the European Payment Initiative (EPI). Considering various comments and communications from the circle of initiators, one thing seems to be certain – not innovative payment systems are to ensure competitiveness in the future, but rather an enhanced SEPA system ought to protect Europe from it. Although a decision on how to proceed with the initiative was already expected at the end of 2019, things had become surprisingly quiet around the topic in the meantime. At the beginning of April, however, a list of questions from the European Commission has surfaced. It asks interested parties to answer questions about the future retail payments strategy of the EU. As the topic could become relevant again in the short term, it is worthwhile analyzing whether such an initiative is likely to be successful according to our current understanding.
A Pan-European Payment System? Hasn’t there been something before?
One might think, that sounds somewhat familiar, when reading the not so recent news about a new initiative for a single European payment system. How was it back in 2010? Representatives of 24 banks and European institutions are meeting in Madrid to launch the so-called “Monnet Project”. It should be designed to create a new “pan-European card scheme”. The project was launched 2 years earlier by major German and French banks with a feasibility study. This study came to the – very welcome – conclusion that a cross-border payment initiative would contribute to the standardization of the fragmented European payment market and thus to the development of innovative and sustainable concepts. Basically, however, it was simply a matter of not having to give up any further market share to the established market leaders MasterCard, Visa and the relevant FinTechs from the USA and to regain European data sovereignty. However, by 2012 the great ambitions had vanished into thin air and the project was cancelled eventually. Allegedly due to unclear circumstances regarding the regulation of card-related interchange fees.
2020: Payment systems between the dominance of credit cards and new digital currencies
Now 10 years have passed. The international credit card companies have continued to gain dominance in Europe – as early as 2016, according to the ECB, 67.5% of payments by cards, issued in the EU, have been made through the MasterCard and Visa systems. More or less innovative payment methods have sloshed over to us across the big pond and besides private consortia like Facebook, several countries are already working on future-oriented concepts for digital currencies. And what is it that you can read in the news these days? 20 European, particularly German and French, banks have joined forces in an initiative with the goal of developing a “pan-European payment system” based on the SEPA Instant Settlement Mechanism. What is striking is that almost the same institutions are represented as in the year 2010, but instead of a “card scheme”, a uniform “payment system” is now to be created. However, and let us be clear about this, the change of name does not reflect a desirable expansion of the results space. It is rather the regrettable realization that we have missed the moment until which we would have still been able to fight fire with fire (i.e. when the dominance of the card giants could have still been broken with an own innovative card offering).
The EU and the great fear of innovation
With the pan-European Payment System Initiative (short EPI, or formerly known under the working title PEPSI, until apparently a US soda company came across this abbreviation and wasn’t too happy about it), it seems that the local banks want to make a new attempt, initiated and led by the industry, towards an independent European payment solution. In fact, however, various sources suggest that it is not the banks that are the driving force here, but the ECB that is responsible for the recent push, and that the fear of overpowered credit card providers and FinTechs from overseas is once again playing the decisive role. In a commentary on EPI, former ECB board member Benoît Coeuré, for example, warned that “the European authorities see American payment providers in particular as a significant threat to financial stability in the eurozone”. And European Commission Vice-President Valdis Dombrovskis affirmed that “the European Union’s ability to develop cutting-edge innovations in certain strategic technologies will determine the degree of sovereignty of our continent”. And payment transactions count as such a technology. As no comments have been received from the banks involved to date, suspicions are growing that, similar to 2010, the current initiative does not appear to be a technologically driven but rather a politically driven venture.
In contrast, the initiative launched by the German banking industry with the working title #DK, for example, seems to be pursuing the right goal. Here, the payment assets at the POS (girocard, bluecode) as well as in M- and E-Commerce (Paydirekt, giropay, bluecode, Kwitt) are to be integrated into a consolidated system and placed under uniform corporate governance. It remains to be seen to what extent the topic will be approached objectively and in the best interests of the market and customers respectively. However, since it can be assumed that the players in EPI and #DK are the same, it will be exciting to see what dependencies and implications will arise between these two projects and if the parties are able to use them prudently or get bogged down again.
Europe’s dependence on international payment systems
One of the first questions that naturally arises here is whether the fear of losing sovereignty is justified. And there are certainly points that cannot be dismissed. For example, we can observe at the moment that the USA is increasingly seeing sanctions as a legitimate political tool. And this trend is also increasingly influencing European market participants. In the Iran conflict, technological dependencies meant that companies from Airbus to Siemens simply had to stop trading with the Islamic Republic, since the processing of payment flows is handled via the Belgium-based SWIFT messaging network and the supervisory board consists of representatives of major American banks, among others. In Russia, similar conflicts have already led to the development of the national payment system MIR, after MasterCard and Visa briefly stopped providing services to Russian banks when they annexed the Crimea. But there are also concerns in general, of course, when payment flows are processed via networks outside the eurozone. European institutions have no authority over international providers and only limited supervision. However, the issue of security could be much more serious, as a common currency area is of course much more vulnerable to attacks and disruptions from the outside.
But how dependent is Europe actually on international providers? After all, there are domestic card and payment card providers operating in this country, too, who do not depend on the infrastructure of transatlantic companies. For example, if you look at card sales in the seven largest economies in Europe, it is clear that local card systems, such as girocard in Germany or Carte Bancaire in France, dominate. Despite the coexistence of MasterCard and Visa systems in these countries, they have a considerably larger market share. Moreover, there is virtually no competition in the SEPA credit transfer or direct debit area and regional, alternative payment methods such as Klarna, Sofort or Trustly are becoming increasingly important. So, is there no reason to panic?
Well, as mentioned above, even with non-card-based payment methods, a certain transatlantic influence cannot be ruled out. For example, among others, interbank communication in SEPA transactions is handled via SWIFT. In addition, under US supervision, this service provider is also one of the official certification authorities for the global messaging standard ISO 20022, which is considered the new standard for all credit transfers via the TARGET system. The Real Time Settlement Systems of the ECB (TIPS) and the EBA (RT1) are also geared to this standard. As a result, neither traditional nor future transactions in the SEPA network are fully under European control.
And even if local card schemes dominate in the respective countries, the lack of interoperability of regional infrastructures means that the vast majority of cross-border card payments are already co-branded, i.e. made through the MasterCard or Visa system. Not to mention the fact that in the remaining European countries, which do not have their own card network, the international schemes are already leading.
Digital payment solutions will not save Europe
Now one could argue against the fact that the development in payment traffic is increasingly moving towards digital solutions and at the expense of card payments. But apart from the fact that here too the leading providers are so-called Fin- or Bigtechs from the USA, these methods are also predominantly based on the underlying card infrastructure. For example, with the wallet solution from PayPal, a Master- or Visacard is usually deposited next to the bank account, and even with ApplePay a credit card is still necessary until the savings banks have finally managed to make their girocard digitally available. However, it is much more important that, for digital payment methods, the front end is decoupled from the back end. This means that the access to the customer, which is important for every payment provider, is separated from the actual processing service. The card issuer is demoted to a pure technical service provider without access to the so important customer data. Only the original provider of the payment solution then has access to information about the type of transaction, value and individual preferences of the customer. And, as we all know, they are more likely to be located in America than in Germany, Denmark or France. Or even more so in Asia, where with the Tencent all-in-one chat solution WeChat, with integrated payment function, and AliPay, the next major competitors for market leadership in international payment transactions are already in the starting blocks.
Payments: a question of simplicity and cost efficiency, not of nationality
However, fear is and has never been a good advisor, although in the current corona crisis it seems that decision-makers are driven solely by it. This is especially true when it comes to technical innovations. In a world of global trade, it is really questionable what value market participants will attach to an initiative whose declared aim is to strengthen national identity. Don’t get us wrong. Harmonization of the fragmented payments market would be welcome. The multitude of national payment systems and methods is confusing and inefficient. But like all social and economic measures, initiatives in the payment market must be measured against their achievement of objectives. The acceptance of new forms of payment, however, is generally measured in terms of simplicity and cost efficiency rather than by the degree of isolation.
Modern problems require modern solutions, just not in the EU?
While on a global level the abandonment of entrenched paths is seen as a necessary prerequisite for innovation, the European institutions are seeking their salvation in the tried and tested SEPA Retail System with EPI. In the form of the SCT Inst. procedure, at least with the possibility of booking credit transfers and direct debits instantly and along with the commencement of the PSD2, the opportunity to transfer this concept to non-banks (keyword: open banking). But where is the added value for end customers and merchants? Once I as a customer have deposited my card with PayPal, why should I switch to a SEPA-based service? With this I can transfer money instant today and do not need to provide any additional information except an e-mail address. The transaction does not cost me anything and if necessary, my purchase is even secured by buyer protection. When transferring money via the SEPA instant settlement system, however, there is no way to protect myself against fraud. Once the money has been transferred, I can no longer retrieve it.
For merchants, on the other hand, there would certainly be advantages. A direct credit to the company account is very advantageous for them. Especially in connection with the fact that the customer cannot charge the money back. It can also already be observed that merchants are successfully circumventing the complicated and expensive cost structures of credit card providers in favor of providers with account-to-account (A2A) solutions (e.g. in the aviation industry with IATA as PISP). But ultimately, the end customer is still the decisive factor in determining which payment methods will prevail in the market and so far we have not been able to identify any solution in the market or on the horizon that can compete, for example, in terms of simplicity and speed with contactless payment at the POS to avoid the “party at the checkout”. It is therefore at least bold to assume that merchants will give preference to alternative, locally limited payment methods due to protectionist considerations of the European Commission.
Instant payment systems as a special challenge for banks
And even for the banks, the effects are anything but clear. With SCT Inst. they are moving back into the focus of the transaction. They can offer their customers a payment procedure that is attractive not only in stationary trade but also in e-commerce. But the SCT Inst. procedure also presents them with much greater challenges. For example, although the rules and regulations stipulate the speed of message transmission, the maximum amount of a transaction and the reachability, they do not cover the clearing and settlement mechanisms (CSM). Thus, the provision of the transfer amount on the recipient account regularly coincides with the actual receipt of the money. Depending on the transaction volume, however, delayed and guarantee-based settlement places considerable demands on the bank’s liquidity management. This means that banks must first develop their own approaches in order to be able to offer customers attractive instant payment solutions without taking too much risk of their own.
EPI: The initiative that nobody asked about?
Given the different needs and challenges, the question ultimately arises as to whether individual interests are at least adequately represented in the group of initiators. From the point of view that EPI does not appear to be a technological but a political initiative, it is probably understandable that in none of the reports that have been read on the subject so far do the names MasterCard or Visa appear as partner companies. It is certainly understandable to the extent that one wants to defend oneself against the market power of the companies mentioned. But in terms of creating a new European payment system, it is rather difficult to understand. One would think that the German banks in particular have learned from their mistakes with Paydirekt. Here the implementation of a quite good idea failed because of the inability of the initiators to really involve all relevant market participants in the product development from the beginning. However, neither the key companies of the successful “four-party system” of banks, acquirers, cardholders and merchants are included, nor does it appear that there are any plans to involve well-known European payment service providers. Yet it is precisely companies such as Adyen, Worldline or Nets that ultimately guarantee access to the merchants
But as already described at the beginning, this time the banks can probably not be blamed. Obviously, it is the European Commission and the ECB, united in common cognitive dissonance, who are shouting: “now more than ever”, while the rest of the world is actually already working on innovative concepts. Perhaps one should just listen to the institutions that one is supposed to be representing. An example is the association of over 200 banks and FinTechs in Germany under the umbrella of the Bankenverband. As early as 2019, the members explicitly stated that they see “programmable digital money” as an innovation with the greatest potential to become the decisive key component in the next step of digital evolution. This is particularly true in terms of cost efficiency, simplicity and (listen closely European Commission) competitiveness. In the age of the “Internet of Things” and with 5G in the starting blocks, the fast transmission of XML messages limited to Europe is unlikely to be a competitive advantage in the long term. Then we will talk about payment processes that do not play a role at all today. For example, when an autonomous e-car drives to a charging station and pays for the amount of fuel directly using crypto or digital currency in the future. Perhaps, a bank will then no longer be needed. The money is booked from the payer’s wallet directly into the recipient’s wallet on the basis of a corresponding digital transmission technology.
Regulatory frameworks: the be-all and end-all for a competitive environment for innovative payment systems
However, „this requires the creation of the appropriate regulatory framework,” says Gilbert Fridgen, founder and head of the Fraunhofer Blockchain Laboratory. And the companies of the banking association express the same opinion. According to them, the legislators and regulators should create the necessary basis for digital innovations and the private institutions would already be doing their part to develop a sustainable and innovative currency system. It remains to be seen to what extent the banks are actually prepared to continue sawing on their own branch. However, especially with regard to technical innovations, the creation of a competitive environment that is favored by regulation is probably more conducive to achieving the goal than the cementing of market structures that are not very future-oriented, due to the alleged loss of national sovereignty.