A huge project backed by the European Central Bank and the continent’s major lenders looks to further accelerate the digital transformation of the European payments sector. Burhan Khadbai reports.
Over the past year or two, the European payments sector has become increasingly digital, in response to the coronavirus pandemic. Consumers have moved away from using cash, in favour of digital payments.
This has bolstered the need for further innovation in the digital payments space. One major, and potentially significant, scheme that aims to do just this is the European Payments Initiative (EPI) — a project backed by a large number of banks and the European Central Bank.
The EPI was initially backed by 31 European banks, with the aim of rivalling Mastercard and Visa in Europe by offering a pan-European payment solution leveraging instant payments and cards. However, the plan to create a card scheme was abandoned earlier this year after 20 banks pulled out.
In a statement on March 11, the EPI said it was “adapting its scope and objectives”, but that the remaining shareholders “remain convinced of the strategic value of a unified payment solution”.
The EPI is understood to be now focusing on a digital wallet, in partnership with Banque Fédérative du Crédit Mutuel, BNP Paribas, Crédit Agricole, Deutsche Bank, Deutscher Sparkassen- und Giroverband, Group BPCE, ING Bank, KBC Bank, La Banque Postale and Société Générale.
Coming together
Roberto Catanzaro, group chief strategy and transformation officer at payments firm Nexi, welcomes the arrival of EPI. “Our true competitor is cash, so any initiative that can develop digital payment usage in Europe is very welcome,” he says. “The initial plan of the EPI was to build a new European card scheme — a very ambitious objective. Now the initiative is being refocused on an account-to-account, instant payments wallet for e-commerce payments and peer-to-peer [payments]. It is definitely a space where we are seeing increasing consumer demand and innovation, so this might be a good angle to take.”
Amit Mallick, managing director and global open banking and application programme interfaces lead at consulting firm Accenture, believes that the EPI will benefit the European payments sector in two ways. “First, consumers, merchants and regulators now prefer open, standardised payments platforms, giving providers a clear end market for open payments,” he says.
“It will also level the playing field by allowing interoperability and removing the requirement for a large network of payments relationships to compete,” adds Mr Mallick. “Implementing a culture of collaboration not only benefits payments players themselves, but also has knock-on effects for customers, merchants and end-users up and down the payments value chain.”
He also points to another initiative, ‘P27’, which is a pan-Nordic payments platform that will allow consumers and businesses to instantly transfer funds across borders. The platform is a joint initiative by Danske Bank, Handelsbanken, Nordea, OP Financial Group, SEB and Swedbank and its aim is to build the world’s first real-time cross-border payment system in multiple currencies.
But despite the enthusiasm surrounding EPI, there is still uncertainty over whether it will get off the ground. Funding the project is a particular issue. “To hope that some banks will shoulder all the effort and cost for such a huge project is just unrealistic,” says Frank Breuss, CEO of Nikulipe, a global fintech specialising in solving cross-border payment complexities. “Especially as there is not enough incentive for them to do so, given they have existing revenue streams from US-based card acquiring and issuing today.”
He continues: “With more and more banks leaving the initiative, the project is at risk. To create a unified European payment solution without friction was a political goal; it now needs the EU and the national politics to clearly stand behind this project. It needs clear political backing and proper public funding [before I will be] convinced that the EPI can still succeed.”
Constantly listening to the market and actively involving European stakeholders are key success factors
The EPI is not the first initiative to create a pan-European payment solution — it comes after the Euro Alliance of Payment Schemes and the Single Euro Payments Area (SEPA). The European Payments Council (EPC) is currently working on a new SEPA Payment Account Access scheme, which is planned to be launched before the end of the year.
“Promoting further European payments integration, notably to meet evolving market needs and technology developments is essential,” says Etienne Goosse, director general at the EPC. “Constantly listening to the market and actively involving European stakeholders are key success factors in this regard. Not to forget the need for a close co-operation between the public authorities and the private sector, as both have an important, distinct but complementary responsibility and role in shaping the future European payments landscape.”
Digital growth
If it takes off, the EPI will add to the growing digitalisation of the payments sector in Europe, which accelerated during the coronavirus pandemic. “There has been quite a lot of growth in the European payments market over the past 18 months to two years, rebounding strong after the pandemic lockdowns,” says Olivier Denecker, partner at McKinsey. “This growth has been driven by the acceleration in the digitalisation of the market, mostly from the retail side, where we have seen cash really pushed back over the past year or two.”
Mr Denecker says that in Norway, just 3% of all payment transactions are done in cash.
Meanwhile, Mr Mallick says the use of cash for payments in the UK will drop to 9% by 2028. “For banks and fintechs, this will create even more opportunities for disruption in the payments sector,” he says. “We’re already seeing this play out. Virtual cards, for example, which offer consumers increased personalisation and convenience — continue to move from strength to strength in line with changing consumer preferences.”
In Italy, Nexi recorded a 122% increase in in-store mobile transactions using smartphones. “We are seeing an increasing trend of people are coming back to physical shops, but with fluid customer journeys intermixing online and offline, such as ordering goods in shops, to be delivered at home and maybe returned online,” says Mr Catanzaro. “Payments are evolving to support this, keeping customer experience frictionless.”
As to whether cash will cease to exist anytime soon, Mr Goosse thinks not. “Today’s payments are accelerating and becoming more and more digital,” he says. “However, we think that cash will not disappear overnight and not all payments will become instant end-to-end in the foreseeable future.”
Antony Cahill, deputy CEO and head of European markets at Visa Europe, agrees. “The payments industry has been rapidly transforming for some time now, so the trends we see around commerce shifting to digital and businesses adapting to meet their customers’ needs, are a continuation of a journey that started many years ago. But what is different today is the speed of change. It is clear the pandemic has served to increase the adoption of e-commerce and digitalisation of payments across the world.
He adds: “Both within Visa and across the sector, what we have seen is that the past two-to-three years pulled forward several years’ worth of digital transformation and change that, until Covid-19 first struck, we were anticipating unfolding over five years or more. And the European payments industry has responded to the unique environment by coming together to invest, modernise infrastructure and bring to market new, safe and transparent ways for the movement of money.”
A digital euro could further accelerate this trend. “When you look at payments globally, most of the technology and standards we are using have been the same over the past 30 to 40 years,” says Mr Breuss. “Just imagine doing global cross-border payments via a digital currency. There are so many more opportunities for innovation and lowering costs.”
Mr Mallick believes that there is still room for further innovation “which will enable the nimblest payments providers to gain market share”. He says: “For example, while digital payments players have traditionally operated in closed networks, the growing pressure for seamless transactions means the prospect of payment networks opening up and interacting becomes more attractive for providers, merchants and consumers alike.”
Regulatory review
The regulation of the European payments sector is also a hot topic, with an outcome of the Payment Services Directive (PSD2) review due soon. PSD2, which came into force in 2018, is an EU directive that sets requirements for firms that provide payment services.
“In 2018, PSD2 redefined things for the payments sector,” says Floortje Nagelkerke, partner at law firm Norton Rose Fulbright. “Prior to PSD2, we saw that there was a lighter touch from a regulatory perspective towards payment institutions, compared to other financial institutions. But now there has been a rise in the number of payment institutions, and the volume of transactions these institutions are processing is having an impact on financial markets. There is, therefore, a lot more regulatory scrutiny now when it comes to the payment sector, which especially impacts payment institutions and electronic money (e-money) institutions.”
The European Banking Authority proposed more than 200 changes to PSD2 in June, in response to the European Commission’s call for advice.
“Some of these proposals are ground-breaking, such as the merging of PSD2 and the e-Money Directive, moving from open banking to open finance — which would see access to payment accounts data expand to include access to other types of financial data — and addressing new security risks for customers, such as social engineering fraud,” says Nikolai de Koning, senior associate at Norton Rose Fulbright.
Prior to PSD2, we saw that there was a lighter touch from a regulatory perspective towards payment institutions
Security is something Mr Goosse also sees as a major challenge facing the European payments sector. “Security efforts should never abate, as no ultimate victory can be claimed,” says Mr Goosse. “Therefore, we consider the monitoring of security threats and fraud prevention as critical ongoing activities requiring the close co-operation of all industry actors, including public authorities.”
However, he adds that while regulation is largely effective in achieving its stated goals, it does sometimes lead to “unintended consequences”. “With this in mind, it is important for public authorities to ensure a regulatory level playing field among players and payment instruments, technology neutrality of regulation and more regulatory/supervisory harmonisation across Europe, as well as to allow fair and sustainable business models for market players,” he says.
Mr Mallick expects the outcome of the PSD2 review to lead to further evolution of open finance and embedded payments, with regulators, payment service providers and banks working more closely with big tech, payment fintechs and non-financial services players “to ensure consumers are protected and payment sovereignty isn’t compromised”. He adds: “As new products and services come to market, so too will regulatory interventions intended to manage that change.”
Visa’s Mr Cahill notes the development of complex cross-sectoral regulation, which impacts the payments sector indirectly, such as around digital and cyber resilience. “It is important that careful thought is given to how these different levels of payments regulation interact with each other to reduce duplication or complexity for the industry,” he says.
He continues: “Ultimately, I think European policy-makers, regulators and industry are all aiming for the same thing: clear and well-thought-out regulation, which protects consumers, promotes competition while providing an environment that encourages and facilitates competition and innovation. We remain open to any policy-maker and regulator who would like us to contribute to that process.”
