The EPI: The destination is clear but not how we get there (part 1)

European Payments Initiative | EPI_Retail Payments Strategy | RPS | PayTechLaw

New information on the European Payments Initiative (EPI) and the EU’s Retail Payments Strategy (RPS)

On 2 July, the 16 banks belonging to the European Payments Initiative (EPI) officially ventured out of hiding and published a press release. Up until then, it had been necessary to piece together the information yourself based on random quotes from a select number of insiders and off-the-record insider information (see our blog post “PEPS-I: Monnet 2.0 or SCT Inst?”). The press release confirms the previously stated dual-pronged approach towards a new bank-owned pan-European payment scheme that is intended to aid in the introduction of the new SEPA Instant Credit Transfer System (SCT Inst): card payments (mobile/wallet and plastic) and wallet-based instant credit transfers (SCT Inst) for C2B and C2C payments. At first glance, the relatively short press release contains very little new information, but if you look closely, there is some interesting information to be read between the lines.

At the end of 2019 there were 21 banks from 8 member states involved. Today, there are 16 banks from 6 countries: Belgium, Germany, France, Italy, the Netherlands and Spain. The press release fails to mention Italy but UniCredit is also involved and is still considered to be an Italian bank as its headquarters are in Milan. 80% of the press release is a copy/paste from the glossy advertising brochures of the 16 banks. It is remarkable that UniCredit is the only bank that managed to present itself as a true European bank (without ties to any particular country). Hat’s off to them for that! Some banks are not involved anymore, including some from Austria and Portugal. The group is dominated by French (6) and German (4) banks which is just one reason why the EPI reminds me of the Monnet project; a similar project that was doomed to failure and was discontinued in 2012.

Few could deny that the ECB is actually the main driving force behind this “banking initiative”. The motivation behind this political project is well known and the reasons have been documented many times: hegemony of the American card systems such as Mastercard and Visa on European soil, potential threats regarding Chinese wallet providers such as Alipay and WeChat, as well as Big Tech (Apple & Google Pay, Facebook’s Libra etc.), European autarky in generating and using payment transaction data and strengthening the global role of the euro.

The European Commission follows precisely the same goal and strategy as the ECB. In antitrust law, this would be called a concerted practice as it is hard to explain how two parties reach the same result completely independently of each other. Are there any alternatives? I am not aware of any prior public discussion. One advantage: This lack of a political alternative at least ensures some planning in the market.

Does this educational concept also remind you of your childhood? My father often gave me advice and with this advice, recommendations. In theory, I had the “freedom” to go against my father’s advice, but this would usually have negative consequences and potentially escalate to the point of him issuing an “order” which if I disobeyed, would be met with a “punishment”. I don’t know what educational professionals call the concept of a “forced recommendation”; in the business world this approach can be described somewhat more positively as a “preventive self-regulation”. The EPI is a good example of this.

In the EPI’s press release, this actual “political” driver is only briefly mentioned in second place for tactical reasons:

In addition, the creation of EPI will support the implementation of the political agenda for both European public institutions and national authorities”. Surprisingly, the main reason for the EPI is not politics but demand in the market: “EPI founders are responding to merchant and consumer communities that have been calling for payment initiatives to take a more pan-European approach.

This demand from market participants must have been mentioned quietly and behind closed doors. Oh well, one does not have to be privy to everything. With regard to the European patchwork, the undefined term “digital payment” is often used.

Existing digital payment solutions are fragmented in Europe and European citizens are still unable to pay digitally everywhere.

This quote must refer to mobile wallet payments. With a traditional debit or credit card you can pay anywhere in Europe (or worldwide, depending on the brand). Presumably, this also refers to the few local mobile payment systems that can trigger a real-time payment (in C2B or C2C). If instant payment really does become the “new normal” (something which is repeated over and over in the industry), such a pan-European system is indeed still missing.

It was not that long ago that people were looking, some of them desperately, for a business case for instant payment schemes for consumer payments which were pushed by providers. The most often-cited example was that of the overworked waitress who did not want to accept separate payments for the restaurant bill run up by a group of friends. However, it is not exactly clear why the balance needs to be paid in real-time rather than the next day, unless the one friend who is settling the whole bill would otherwise be overdrawn in his account or the friends don’t trust each other. Much more convincing is the benefit of a definite real-time payment rather than a bundle of notes when buying a used car.

It took only a short time between the search for the demand and the establishment of the instant payment systems which is the nucleus of the EPI. What do economists say in such cases? Every supply creates its own demand (Say’s law).

In any case, it must have been a real delight for both political drivers in Frankfurt and Brussels to learn that their political aim corresponds with the current demand of payment users. The regulator and the market are now moving forward together. This can only end well. And without much delay, the ECB and the Commission both reacted on the same day by publishing declarations with very similar titles welcoming the EPI.

In its press release, the ECB makes no secret out of the fact that the EPI is a direct response to its desire to establish a new payment system that reinforces “the autonomy of the European retail market”. In light of the fact that the German Federal Constitutional Court is already pondering the limits of the ECB’s monetary policy mandate, I ask myself whether the public authority’s push to establish new pan-European innovative “digital” payment solutions in an already well-functioning cashless payment market still conforms to its mandate. Since the ECB already pursues climate targets through its monetary policy, the political answer is probably yes.

I used to be rather naïve in assuming that the payments market was primarily a matter of supply and demand. Today, the market is largely dominated by regulation. After all, in this market our money is moved back and forth digitally. Supervision and regulation are needed to ensure that nothing disappears (at the time of writing, people are currently desperately looking for €1.8 billion). But does this also mean that the question of how we should or can pay in 5 or 10 years’ time is a political question? If so, who sets the political goals? Do we really want to leave this to the ECB as an independent institution which, according to the President of the German Bundestag, Wolfgang Schäuble, is “not democratically legitimised and controlled”? As citizens (and payments users), should we not have a say in this, be able to weigh up the options and give our input for setting the objectives? I fear that ship has sailed.

Back to the ECB’s and the Commission’s welcoming words. The ECB mentions that the EPI has the intention to replace the “national schemes for card, online und mobile payments” with a “unified card and digital wallet that can be used across Europe”. The EPI’s press release does not mention this. It states that the new system will be established “in addition to existing international payment solutions”. Does this mean Mastercard, Visa, PayPal, Amazon Pay & the like? Are there even still “national card schemes” in Europe? At least from a legal perspective, all former national card schemes in Europe, such as Cartes Bancaires, girocard, Bancontact, Dankort etc. are officially classed as “SEPA-compliant”. There are therefore no obstacles for a Europe-wide expansion of these schemes. Every bank in the EU could e.g. join the card scheme Cartes Bancaires as an issuer and/or acquirer. There are therefore only European card schemes that have historical ties to certain countries. Will these systems now be sacrificed on the EPI altar or not? A bit more clarity would be helpful.

A further question is whether the first EPI-step is targeted at the Eurozone? The EPI avoids this differentiation and only talks about Europe, despite the fact that there aren’t any banks from outside the Eurozone in the group of 16 participating banks. The ECB is somewhat more cautious. According to the ECB, the goal is the Eurozone and “eventually the entire European Union”. Even the long-term parents (The ECB and Commission) have global visions for the initiative that currently only exists on paper. The Commission is really euphoric and believes this “ground-braking project” to be “competitive at a global level”. Let’s wait and see. As a first step, the plan is to found an interim company in Brussels.

Further banks and other payment services providers only have until the end of the year to join the EPI as co-founders. However, this invitation is only open to European PSPs. Is a registered seat in the EU enough? Can the European PSPs Alipay (Europe) Ltd. (Luxembourg), Facebook Payments International Ltd. (Ireland) or Google Payment (Lithuania) get involved as founders?

According to the EPI, the “operational stage” will start from 2022 onwards. The Commission is more optimistic and already expects a “fully operational” system at this time.

Of course, Covid-19 cannot be left out as an additional argument:

The Covid-19 crisis has underlined the need for a unified European digital payment solution.

No reasons are provided. Is it not enough that we can already pay everywhere contactless via card or mobile phone due to the allegedly virus-contaminated cash? Why do we need an additional unified pan-European solution due to Corona? In its “Consultation on a retail payment strategy”, which finished in June 2020, the Commission even puts forward the theory that “instant payments are in this context becoming more strategic than ever before.” Why has Corona led to the necessity of real-time credit transfers? In this regard, some further arguments and reasoning is required – at least for me. On the contrary: I was glad that I had paid for my flights and theatre tickets (purchased pre-Corona) with my credit card and PayPal rather than with definite credit transfers without chargeback options. This is why we are taking a close look at the Commission’s “retail payment strategy” (RPS) in our next blog post.

 

Cover picture: Copyright © Adobe Stock / Igor Link

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