The European Payments Initiative aims to succeed where similar efforts have failed. Can it create a viable pan-continental system to rival those of Visa and Mastercard this time round?
A year on from its creation, the European Payments Initiative (EPI) remains optimistic that it can achieve its ambitious plans to create a continent-wide payments system in 2022.
More than 30 European banks have joined the project, including Santander, Deutsche Bank and ING. The nations on board so far are Belgium, Finland, France Germany, the Netherlands, Poland (the only EPI member outside the eurozone) and Spain.
“The good news is that we already have critical mass, with seven countries around the table,” says the CEO of the EPI Interim Company, Martina Weimert. “But, of course, there is an opportunity for others to join this autumn.”
While she is confident that the EPI’s first usable applications can be rolled out next year, several participants will have memories of the Monnet Project. Founded in 2008, this had also aimed to introduce a unified payment system across Europe but was disbanded in 2011, despite gaining the support of seven EU member states and 24 banks – a similar position to where the EPI is now.
Dr Corrado Macchiarelli is a global macroeconomics research manager at the National Institute of Economic and Social Research and a former monetary policy adviser at the European Parliament. He explains that one of the big problems that the Monnet Project faced was a “lack of clarity over interchange fees. That really derailed the project.”
Weimert acknowledges that it would be naive to underestimate the complexity of the task at hand, but she is buoyed by the positive feedback the initiative has received so far from the European Commission. “It looks like we can have a viable business model with the EPI,” she says.
With respect to card transactions, the EPI’s revenues will come from interchange fees – capped at 0.2% of the value of a transaction for debit cards and 0.3% for credit cards. For other types of payment, the EPI has “an alternative business model that is not based on an interchange,” Weimert says. “We don’t want to share the details of that yet, but it will offer more transparency for the merchant and cost-attractiveness too.”
A question of sovereignty
Another key difference between the Monnet Project and the EPI is that the political context has changed considerably since the former’s disbandment a decade ago. In May 2018, Europe regained its appetite for a continent-wide payments system when Donald Trump withdrew the US from the joint comprehensive plan of action on Iran’s nuclear programme.
Macchiarelli explains: “While Europe continued to comply with that plan, there was an increasing threat of secondary sanctions by the US. One possibility was that American corporations, such as Mastercard and Visa, could have been forced by the White House to cut access to any European company.”
Visa and Mastercard accounted for 99% of the 97 billion transactions made in 2019 on credit cards and prepaid cards issued across Europe, according to research by Statista. The rise of Chinese payment systems such as Alipay and WeChat Pay, as well as the prospect that more new players would enter the market, also heightened concerns about the European Central Bank’s ongoing ability to regulate payment networks in the EU.
“While the risk of sanctions turned out to be overstated, because they never materialised, there was a sudden realisation that nearly all card transactions in Europe are handled by two US companies,” Macchiarelli says. “From a political viewpoint, the importance of establishing a pan-European payment scheme is a question not only of independence, but also of sovereignty.”
This is clearly an important factor for Cecabank, one of the EPI partners. The Spanish commercial bank says: “Many regions and countries have their domestic schemes and payments solutions, the US being the most powerful. We hope that the EPI will become the European player we’ve been looking for.”
Another factor that could prove decisive in the success of the EPI is its plan to introduce instant payments. Weimert believes that it would be “stupid to miss out on the opportunity” to introduce such a system.
The European Central Bank says that customers should be able to “make payments at the physical point of sale or via ecommerce, including on their mobiles, throughout the EU just as efficiently and safely as they do in their home countries”. The EPI is seen as the key to making this ambition a reality.
An instant payment system will not only offer speed and efficiency; it will also enable merchants to track consumer spending more easily. So says Finastra’s head of international payments, Paul Thomalla, who is also a board member of the UK Payment Systems Regulator.
“Using a platform based on a digital process allows competition and enables third parties to add value,” he says, adding that this would be a far more desirable situation than the current “duopoly of two big US players. The EPI could bring more benefits for retailers and consumers, who have become more familiar with digital payment technologies through the course of the pandemic.”
ING also sees it as a chance to “harmonise the scattered European payment landscape”. Eric Tak, head of the bank’s global payments centre, says: “Consumers can only use their local payment schemes in their own countries, but they increasingly want to use these in the whole of Europe or even globally. Moving to a single pan-European solution will increase reach and usability.”
Although the EPI is often described as a rival to the US duopoly, it appears that some level of cooperation may still be required. Mastercard’s head of European market development, Jason Lane, reports that his company is in regular contact with the EPI in Brussels and is pursuing opportunities to provide the initiative with infrastructure, applications and services.
Ultimately, the EPI may offer Europeans a more convenient way to pay. Weimert claims that the system’s main advantage is that it “bundles all payment use cases in one set-up”, rather than requiring several apps or accounts to make transactions.
With substantial political and commercial backing, the EPI’s payment solution is likely to come to fruition. Whether it can persuade consumers to switch from their current trusted payment methods of choice remains to be seen.