The transformation of Europe's retail payments landscape

When Germany’s Bundesbank convened an online banking and payments conference at the end of 2020, it featured a big-hitting line-up from Europe’s economic and financial policy-making elite. Two issues dominated the discussions: the launch of a digital euro and the autonomy of the EU’s retail payments systems. Across both topics, references to sovereignty, autonomy and strategic choices punctuated the speeches of leaders ranging from Christine Lagarde, president of the European Central Bank (ECB), to Francois Villeroy de Galhau, governor of the Banque de France. Their message was clear: Europe’s fragmented retail payment landscape, dominated by non-European players, was no longer sustainable in an increasingly digital world.

The challenge facing the EU is real. At present, the single market is characterised by a patchwork of essentially domestic retail payments systems. Although many offer real-time payments, they suffer from a lack of integration across borders. Progress has been made in some domains, including credit transfers and direct debits, but harmonisation in other areas, including card payments, has remained elusive. This means that large, non-European players with the requisite scale, including international card network operators, have filled the gap. Policy-makers view this situation as undermining the cohesion of the single market, but it is also contributing to a sense of geopolitical disquiet. 

Lack of control

As Mr Villeroy de Galhau noted at the Bundesbank conference: “Our European ecosystem has become critically dependent on non-European players, [including international card schemes and big techs], with little control over business continuity, technical and commercial decision-making, as well as data protection, usage and storage.”

It is a view shared by the European Commission which, as part of a September 2020 retail payments strategy, highlighted the need to develop EU-wide solutions in order to decrease dependency on global payers. The relative absence of European payment giants has, until now, posed a problem in this regard. “I see the European payments landscape as [poorly integrated] right now. It’s still coming together, but I think the major problem that exists in Europe is that we really don’t have a big star player which would be strong enough to develop a cross-border business at scale,” says Marius Galdikas, chief executive and chairman at ConnectPay, an online banking service provider for internet-based companies headquartered in Lithuania. 

Harmonise and modernise

The solution to this problem might already be on the horizon. In July 2020, a group of 16 leading European banks announced the formation of the European Payments Initiative (EPI). Its objective is to establish a unified payment solution for consumers and merchants across Europe, incorporating a payment card and digital wallet, covering person-to-person, in-store and online payments, and cash withdrawals. As such, it represents an ambitious statement of intent and one that is broadly supported by the EU’s key decision-makers. 

Indeed, the EPI is the latest incarnation of longstanding efforts to both harmonise and modernise the region’s payments architecture. “The difference with EPI is that it’s trying to drive down cost and improve customer experience, and it’s being driven by the banks,” says Dean Wallace, director of consumer payments modernisation at ACI Worldwide. 

“They can see the benefits for themselves, for the merchants and for consumers, of bringing together card needs and digital needs by leveraging things like the Payment Services Directive 2, instant payments and requests to pay in order to drive European consumer payments modernisation. The fact that it is bank-led is exciting. And the ECB, as you would expect, is totally on board.”

Roadblocks

Nevertheless, the EPI’s development will not be easy. Retail payment systems across Europe are in a diverse state of evolution. In some markets, for example, banks and consumers are well ahead in the digital adoption stakes. In others, cards or even cash, remain dominant. This means that financial institutions’ back-end infrastructures, as well as the payment cultures that they cater to, are on different points of the development curve. 

Torsten Hagen Jørgensen, Nets Group

“The first wave of digital payment development was very much about positioning the web, followed by mobile, as the primary payment channels,” says Torsten Hagen Jørgensen, chief executive of issuer and e-security services at Nets Group, a digital payment services and technology solutions provider.

“This was relatively easy. The current wave, in several regions across Europe, involves the expansion of use cases and the integration of other experiences. As features are added to mobile payment offerings, and as payment volumes increase, it places growing demand on banks’ back-end infrastructure. For many European banks and issuers, the race is now on to get their infrastructure in place to adapt to this new wave of digitalisation. This is where I think we can play a role.” 

Beyond this, the rollout of the EPI will also require changes to the physical infrastructure underpinning Europe’s retail payments networks. “The biggest problem is putting something into the hands of the end user, which is a plastic card or digital wallet. Doing so will mean changing merchants’ infrastructure, such as card payment terminals, along with ATM terminals and point-of-sale systems. All of these things would have to be changed for EPI to work,” says Mr Galdikas. 

Meeting an ambitious goal

At present, the EPI has an ambitious time-to-market, as it is expected to go live in the first quarter of 2022. A three to four year migration phase is envisaged, covering the implementation and update of key infrastructure. As a function of this process, large payment technology groups are likely to play an outsized role. Nets, which became a shareholder of the EPI interim company at the end of 2020, is a case in point. 

“Nets has been at the forefront of digital innovation for a number of years in the Nordics, says Mr Jørgensen. “As we expand across Europe, we can offer a lot of knowledge about what it means to operate in a fully digital payments environment.”

The company’s tie-up with Italian payments group Nexi, in a $9.2bn deal, announced November 2020, has created Europe’s largest payments group. “The announced merger with Nexi makes it possible for us to move forward with our ambition of becoming a European payments champion,” he continues.

If Europe is to meet the needs of its digital payments future, developments of this kind will be important. This is particularly true, given that the launch of a central bank digital currency (CBDC) appears increasingly likely. Indeed, a digital euro can be expected in some form over the next two to four years, according to comments Ms Lagarde made towards the end of 2020. In this sense, the EPI and its Europe-wide wallet function are seen as a natural fit for the rollout of a CBDC.

As Mr Villeroy de Galhau noted during the Bundesbank conference: “There is no contradiction, as sometimes feared by commercial banks, between considering a euro CBDC and supporting EPI. We may probably need both, and build complementarity.”

By devising a public-private partnership for the dissemination of a retail digital euro of this kind, some of the possible impacts on Europe’s banking sector would be alleviated. It would also offer consumers and merchants a centralised system for deploying and engaging with the digital currency. 

Nevertheless, questions remain over the benefits of digital currencies for the end user in markets with advanced payment systems in place. “What’s important for the modernisation of consumer payments is the customer experience. We’re creatures of habit and we’re used to doing things in a certain way. If something new comes along you want to know that it’s better than what existed before,” says Mr Wallace.

For now, however, all eyes will be on the immediate development and rollout of the EPI. With a strong political wind in the initiative’s sails, it is likely to be a transformative moment for the future of European payments.