In this article we ask whether the latest project is any different, and discuss five key battlegrounds that could decide merchants’ fate if it is successful.
What is the EPI?
The EPI aims to create a unified payments solution for consumers across Europe, replacing national schemes for card, online and mobile payments (source). Today, its members comprise 31 European banks and two third-party acquirers, Worldline and Nets, who announced their entrance in November 2020. The banks involved span 8 European countries, although the number of affiliated institutions differs by state (see Figure 1). According to the Global Head of ING’s Payments Center, the initial impetus for the project came from the CEOs of major French banks who were concerned that the functionality of Cartes Bancaires was lagging behind that of international networks – perhaps explaining why France is the only country whose top 5 issuers are all members of the EPI.
Figure 1. Number of EPI Member Banks by Country
The reported process for the project includes the launch of P2P payments by the first half of 2022, a wallet solution by the second half of 2022, and projects linked with card payments by 2024. Stakeholders are expected to have until December to commit to implementing the network over the next 3 years.
Why was it launched?
Welcoming the launch of the EPI in 2020, the ECB noted that 10 European countries still have national card schemes that do not accept cards from other EU Member States, such as Girocard in Germany and Cartes Bancaires in France. Although optimising acceptance of local networks can generate substantial savings for merchants, the ECB sees this fragmentation as lending itself to the initiatives of global players rather than strengthening the autonomy of the European market.
The EPI promises a number of other potential benefits too. It could provide a front-end solution for the SEPA rails, and EVP Margrethe Vestager noted in a recent address that the initiative brings with it the ‘possibility of substantial cost savings to merchants’. However, whether these savings can be realised will depend not only on whether the project is successful, but also on the incentives of actors within it.
Haven’t we seen this before?
The EPI is not the first time that a pan-European payments scheme has been attempted. In fact, three previous iterations point to the threats that its architects could face:
- The Euro Alliance of Payment Schemes (EAPS): EAPS was formed in 2006 with the aim of linking domestic card schemes for EU-wide acceptance. Despite some success, it failed following the exit of Spain and Portugal’s domestic schemes. Onlookers pointed to a lack of brand investment and a plausible strategy for reaching critical mass as potential explanations for its demise.
- PayFair: The pan-European, SEPA-compliant PayFair card failed to achieve sufficient levels of acceptance, despite an agreement on potential cooperation with EAPS in 2012.
- The Monnet Project: The Monnet Project’s EPI-esque visions of creating a pan-European card scheme were dashed when, following a press release in 2011 citing uncertainty around interchange fees as a barrier to bank investment, the end of the project was announced in April 2012.
In each case, the ECB claims that, ultimately, ‘banks’ commercial interests prevailed over a pan-European solution’.
The Big Debate
With such a checkered history, is the EPI any better-placed to realise the dream of a pan-European payments scheme? In this section, we present a bull-vs-bear case in five key areas, asking whether merchants stand to benefit from the EPI in the long-run.
1 – Impetus
Almost a decade on from any previous attempts, the European Commission is currently more invested in the success of a project like the EPI than it ever has been – and with good reason. CMSPI estimates that, since the introduction of Interchange Fee Regulation (IFR) in Europe in 2015, successive changes to scheme fees have increased annual merchant costs by €1.46 billion based on 2019 volumes (CMSPI estimates). The figure below suggests that this, in conjunction with increases to the acquirer margin, has meant that European merchants are now paying more on average for each transaction than they did prior to regulation.
Figure 2. Estimated Average Merchant Service Charge
In her recent address to EuroCommerce, Margarether Vestager noted that looking into increases to scheme fees by international card networks is a ‘priority’ for the European Commission. This follows the submission of evidence by EuroCommerce in collaboration with CMSPI. Against this backdrop, the EPI presents an opportunity to lower fees through generating competition, rather than the cumbersome process of direct regulation.
Although rising fees could mean that the EPI gains more support from the Commission, some are concerned that the project may be a red herring. If the EPI distracts from pressure to reform the IFR, then even in a best-case scenario merchants could see fees continuing to rise in both scale and complexity for the next 4 years. If the project fails, the current energy that merchants have built around addressing card fees will have been directed away from the problem.
2 – Infrastructure
One advantage that the EPI has over its predecessors is infrastructure. In the long-run, projects such as EAPS would have been tasked with raising hundreds of millions of euros in infrastructural investment. Today, however, the SEPA schemes for credit (SCT) and debit (SDD) transfers already have pan-European reach and compliance from many major stakeholders. The SEPA Instant Credit Transfer (SCT Inst) scheme came into effect in 2017, and it is this infrastructure that the EPI plans to leverage for its instant payments arm.
SCT Inst may appear to give the EPI an infrastructural advantage, but the technology is not as widespread as hoped. In August 2020, only 62.4% of all PSPs offering SEPA credit transfers had joined the SCT Inst scheme. Figure 2 shows this pattern by country. Although adherence was mandated by November 2020, at the time of the deadline the EPC noted that there was not yet a business case for many market participants to adopt SCT Inst given the required operational changes. Even if the infrastructure were widely adopted, the development of a front-end solution for underlying SEPA rails does not come without substantial funding commitments. Some countries are also continuing to pursue regional or national projects, such as the Nordics’ P27.
Figure 3. SCT Inst participants as a proportion of SCT participants for selected countries
Despite this, there may yet be hope for SCT Inst. In their Retail Payments Strategy for the EU, the European Commission said that they would assess the level of adherence to the SCT Inst scheme and, if deemed unsatisfactory, consider proposing legislation to mandate its adoption by the end of 2021. With fundamental ties between instant payments and the success of the EPI, the Commission has greater reason to pursue a stronger approach.
3 – Payment Methods
The EPI’s ambitions to cover P2P, mobile, instant, and card payments would give it coverage beyond that of national card schemes. The new scheme would compete both in-store and online, and across both credit and debit cards, placing it in direct competition with players beyond Visa and Mastercard such as Apple Pay and iDeal.
However, according to Jean Allix, who worked for the Commission from 1990 to 2016, the inclusion of instant payments may not only confuse the project’s mandate, but even risk killing competition:
"[I]t is said that the EPI wants to also involve instant payments. But we already have the European Payments Council SEPA Instant Credit Transfer (SCT Inst) scheme. An EPI scheme managing at the same time cards and the instant payments side risks killing competition between different payment instruments."
4 – Local Debit Networks
Between 2009 and 2016, the ECB noted a pattern of decline in the number of transactions made via national card schemes in Europe compared to those via international schemes (Figure 4). CMSPI has observed this pattern continuing in countries such as Italy, where Visa and Mastercard’s market share is estimated to have increased from around 10% to approximately 68% between 2015 and 2019 (CMSPI estimates from Euromonitor 2021 data.)
Figure 4. Number of transactions made with national and international card schemes in EU
If the EPI operates alongside national schemes, then it could produce an additional layer of competition. ‘Triple-badging’ could give merchants the choice between routing transactions via the national, international, or pan-European scheme, generating competitive tension on prices.
For merchants, concerns arise if – as the ECB has suggested – the EPI replaces national schemes rather than working alongside them. Today, local schemes effectively compete against Visa and Mastercard in many markets. If the EPI absorbs them in the name of generating competition, then it will need to appear on every card alongside the international schemes just as local schemes do. Without this, in the long-run the European landscape could be characterised by three dominant players – Visa, Mastercard, and the EPI – who interact in just the way Visa and Mastercard do today: in a market with greater competition for issuers than for merchants.
5 – Competition
Many of the claimed benefits of the EPI rest on one outcome: increased competition. Introducing a European competitor to Visa and Mastercard promises innovation, greater choice, and downward pressure on prices. However, if we do not observe these free market dynamics with two competitors, then what guarantees them with one more? For CMSPI’s Chief Economist, Callum Godwin, the answer lies in complementary regulation on co-badging:
"We have seen the merchant benefits of co-badging across the world, most notably in the U.S. and Australia. With Visa and Mastercard currently acting more as parallel monopolies than as a duopoly, only mandatory co-badging with routing choice would ensure that merchants could reap the benefits of a successful EPI."
Callum Godwin, Chief Economist
The U.S. case is an instructive one. In the years prior to regulation, the single message debit market in North America was becoming increasingly dominated by Visa’s Interlink network. Figure 5 shows what happened when, in 2011, the Durbin Amendment required that all cards be badged with at least two competing networks. Allowing merchants to take advantage of least-cost routing for these transactions reduced Visa’s market share by 20 percentage points in 1 year, resulting in greater competition and significant savings for merchants who take advantage of the additional choice.
Figure 5. U.S. Single Message Market Shares (CMSPI estimates)
The EPI aims to create a unified payments system across Europe covering card, mobile, instant, and P2P payments. That could mean a European competitor to Visa and Mastercard, and a potential remedy for years of increases to scheme fees and unregulated interchange. However, many remain sceptical that it will ever succeed. Many key questions remain unanswered; funding sources, the role of local networks, default routing, consumer protections, chargeback dispute mechanisms, consumer adoption strategy, governance, technology, and issuers’ incentives are not covered in any existing plans. Furthermore, although we are a decade on from the likes of the Monnet project, the EPI will still need to address the failings of its predecessors to stand a chance.
Even if the EPI does succeed, its outcome for merchants rests crucially on competition. Mandatory co-badging with merchant routing choice places the schemes in direct competition on every card. A similar provision has offered a solution to this problem elsewhere across the world – and it’s what European merchants and consumers need to benefit from the EPI.