The initiative – which involves 16 major European banks including Santander, BNP Paribas, Deutsche Bank and more – proposes a retail card scheme for consumers and merchants, a digital wallet, and P2P payments leveraging ECB’s ‘TARGET instant payment settlement’ (TIPS) – a service which enables providers to offer fund transfers to their customers in real time.
The unified payments solution will use instant payments in the form of ECB’s SEPA Instant Credit Transfer, offering a card for consumers and merchants across Europe, which will most likely be co-badged with one of the major schemes for transactions outside the EU, as well as a digital wallet and support of P2P payments.
The ECB has welcomed the announcement, citing fragmentation in the way people pay in-store and online in Europe, with ten European national card schemes with no pan-European interoperability. There is a window, until the end of 2020, for other European market players, PSPs, banks or banking syndicates to join the initiative, with the EPI expected to become operational by 2022.
In this article, we take a look at the benefits of this alignment and the potential issues EPI may need to address, before the initiative can emerge as a credible competitor to the schemes in the payments industry.
An Opportunity for Competition
Whilst the European Commission may view local/national debit card schemes as an obstruction to pan-European integration – its core goal – all the current alternatives are non-European, with the largest of these, American giants Visa and Mastercard, being the most litigated against companies in anti-trust history.
In this context, EPI has the potential to become a new competitor to the schemes, in an industry prone towards consolidation and high profit margins. Considering high barriers to entry, realistically an EPI-type scheme is the most feasible form of competition merchants could hope for. Visa and Mastercard have purchased several smaller companies in recent years, including potential future competitors such as Plaid and Earthport – sometimes referred to as ‘killer acquisitions’ – with no intervention from competition authorities. In this environment, it would appear genuine competition needs to come from a group supported by the ECB and the European Commission.
The new scheme would provide the opportunity to move away from Visa and Mastercard payments, which may be seen as more fraud-prone and costly for merchants to accept.
The key stakeholders for this project – banks, the European Commission, central banks and public authorities, including the Treasury in France – are on the same wavelength to promote European independence in payments. This comes at a time when Europe, as well as its banks, risks being trapped between the American tech giants, Visa and Mastercard, and Chinese tech giants, WeChat and AliPay, determined to advance their footprint and prevalence. The European Commission appears to be taking this seriously: the EC’s Horizon 2020 Research & Innovation Program suggests extensive funding could potentially be available to build the technology required for EPI.
There are lots of options for the technology as well: EPI could build its own platform, or it could leverage technology from one of Europe’s local debit schemes or a third-party processor. This means the target to be fully operational by the end of 2022 may just be feasible.
"It’s just a ruse from the banks to avoid further regulation of Mastercard and Visa. If regulators really wanted a European scheme, they should have kept Visa Europe and/or Europay independent."Mark Falcon, Zephyre
A Repetition of History and the Potential Issues
The idea of a scheme like EPI being introduced to the payments industry isn’t new, we’ve seen it attempted in the past and, so far, it hasn’t materialised as banks have abandoned it due to a variety reasons including excessive cost.
Here are some issues the EPI may need to address:
- Co-badging: A new scheme may merely prove to be another parallel monopoly and be counter-productive if there’s no co-badging, more than one scheme on a card, which has worked well in Australia and the U.S. as it pushes down prices organically due to competition. In an article, Eric Grover, of specialist news publication PaymentsSource, stated EPI issuers will have to cobrand with Visa and Mastercard and possibly also a local debit scheme. From a merchant perspective, this would be help solve cross-border interoperability issues with local debit schemes. Grover also believes if Visa and Mastercard resist the initiative, the European Commission will bring in competition charges. There is also a risk local schemes will be absorbed into EPI, which could be a concern for merchants.
- Fees: We understand the business model of EPI will be based on interchange fees, part of which will be diverted to the benefit of banks in place of Visa and Mastercard. This means merchants will be able to replace scheme fees, but they won’t lose interchange – and the recent UK Supreme Court judgment which found Multilateral Interchange Fees (MIFs) anti-competitive, suggests interchange fees potentially shouldn’t exist at all. Speaking to CMSPI, one merchant source stated they think “the banks are missing a trick”, and should “forego the 30bps interchange-equivalent income and instead offer merchants negotiable rates based on marketing information, which could be hugely beneficial to merchants”.
- Customer journey: A seamless and simple user payment experience within physical stores, ecommerce and mobile commerce, and supported by Strong Customer Authentication (SCA) is deemed a critical merchant requirement. It’s not clear yet on how EPI aims to ensure this requirement is fulfilled.
- Business case. We are unaware of the business model that the banks will adopt in relation to EPI, and whether there is a robust enough and transparent business case within it for merchants or to bring added value to their customers.
- Governance is still a major concern. We don’t know what the final proposed governance structure of the initiative will be and to what extent retailers will be represented or have a voice on the governance board. One of the major issues with EMVCo from a merchant perspective is that it is governed solely by the global card schemes, meaning merchants and consumers get no say about the rules of the card system.
- Features & functionality: We still don’t have a clear idea of what the full scope of the EPI project will be, or the exact features their proposed new payment method will have or how it intends to embrace the benefits offered by Open Banking. For example, will it include payment reversals, notification of payment execution, chargeback dispute mechanisms etc. from the outset? What will settlement look like, will it be single or dual message etc.?
- Bank participation: In order for any proposal to be widely adopted throughout Europe all banks need to participate, therefore we consider pan-European reachability as critical to the success of the scheme. At the moment it is supported by 16 of the largest banks in Europe, but that won’t be enough to achieve ubiquity. It will also be interesting to see if non-EU European countries, such as Switzerland and the UK, will be able to participate in the scheme. Grover of PaymentsSource believes banks have nothing to gain except slightly lower issuer scheme fees and a “pat on the back” from the European Commission.
- Regulatory oversight: Regulators need to take active interest and be prepared to step in and take pro-active measures to address any issues or differences that may arise. It won’t be enough for European regulators to just assume the market is now efficient because there is a native European scheme operating. The market will need constant monitoring and enforcement powers will need to be used where necessary.
- Secure Remote Commerce (SRC)/Click To Pay: Following the EPI announcement, EMVCo announced the globalisation of SRC – now named “Click To Pay”. This is essentially a one-click button to initiate card payments on a merchant’s website. The issue is that Click To Pay will almost certainly require network tokens, which is likely to prevent merchants from routing away from Visa and Mastercard towards other card schemes- including potentially EPI. There is also a concern that the global schemes will attempt to negotiate incentive deals with European merchants to tie them to Click To Pay and preclude them from routing towards the new EPI scheme – a ‘divide and rule’ strategy.
- National unity: The banks currently signed up to the initiative are dominated by the French and German giants. There is only one Italian bank, for example, and there have been concerns that Italian banks may be reluctant to invest in EPI given the heavy investment made in domestic card scheme Bancomat. With no real-time payment functionality and less control, banks in Italy and other countries may be struggling to see the benefit.
The plans announced by the EPI are undoubtably exciting, and a key positive development for the industry with the initiative offering genuine hope of competition for the first time in decades. However, there are many issues, in addition the ones we’ve mentioned, that will need resolving before EPI can emerge as a credible competitor, and prevent its existence from becoming counter-productive. In order to create a successful competitor to Visa and Mastercard, it is vital the whole payments ecosystem is onboard and playing an active role in order to prevent abandonment of the initiative.