Since mid-2019, around 20 banks from 9 eurozone countries have been discussing behind closed doors a concept for a new European payment system for consumer payments (C2B and C2C).
After a representative of one of the participating banks, the French bank BNP Paribas, revealed a few details in November 2019, this embryo in planning at least has a working title now: PEPS-I (not to be confused with the soft drink), which stands for Pan-European Payment System Initiative. Apart from this, very few concrete details have been published by official channels. What we do know, however, is that the European Central Bank (ECB) is a big driving force behind this plan. In speeches from ECB representatives as well as the Eurosystem, the name is regularly mentioned but without any new information. In fact, some statements have rather added to the confusion. The media (including specialised media) then lost interest in the topic as very little could be reported apart from a few general facts. Initially, the PEPS-I group wanted to announce at the end of last year the results of their feasibility study which would have revealed whether the child would be conceived or whether the plans would be laid to rest. I was informed, however, that the decision had been postponed to the first quarter of 2020. So, all we can do now is continue to patiently wait.
Why do we even need a new Pan-European payment system such as PEPS-I?
In Europe we already have the European “schemes” of SEPA credit transfers (SCT) and SEPA direct debits (SDD) both carrying with them a legal obligation for all credit institutions to participate. While this is correct, credit transfers and direct debits “only” make up 46% of the 90.6 billion cashless payments that are made annually in the Eurozone (2018). In other words: half of the payments are made via cards or e-money (PayPal and the like). Therefore, if you statistically exclude B2B payment transactions (via direct debits and credit transfers), the majority of consumer payments are not based on uniform European payment systems but on a multitude of national and international systems that are involved in intense but healthy competition with each other.
Competition between systems only in card transactions
This begs the next question: Why are card payment systems in competition with each other and why is there no (or very little) competition between the systems when it comes to the payment instruments of credit transfers and direct debits? The question is definitely justified but has been hardly discussed since the beginning of the SEPA plans. The benchmark for SEPA was the facts. In respect to the payment system “cards”, and in contrast to direct debits and credit transfers, the market was characterised by competition between the systems in the individual member states. This factual basis was then regarded as the market organisation for “SEPA for Cards”. In 2005, the European Payments Council (EPC) limited itself to a “SEPA for Cards Framework” (SCF), which was amended in 2009 and then buried in 2015 as it was considered to be “outdated”. The EPC expressly did not have the aim “to create a new EU card scheme”.
On the basis of the SCF, the card systems, which had been national until then, were supposed to become more European and open themselves up to competition by 2010. Some national and indeed successful systems have thrown in the towel. However, most of them have been “SEPA-compliant card schemes” since then. In actual fact, the systems (at least as far as business transactions concluded in person are concerned) should still be called “national”. Cardholders and their acceptance are usually limited to the respective country.
We therefore see a patchwork of systems in Europe. In seven countries (Belgium, Denmark, Germany, France, Italy, Portugal and Spain), there are still “national” card systems such as the “girocard” in Germany or Cartes Bancaires in France, in addition to the international (“American”) card systems (mainly Amex, Mastercard, Visa). In other countries, international card systems dominate the market. As the national schemes have so far not managed to create some form of interoperability through mutual acceptance either bilaterally or multilaterally, cross-border card transactions are carried out via the brands of international schemes (single-brand cards or co-badged cards of the national schemes), at least with regard to business transactions concluded in person (physical POS). In the segment of cross-border card payments, national card systems therefore still don’t play an important role.
National v. international card schemes
Conclusion: In the entire European market, there is competition between international systems in the card business; in seven member states competition is even more intense due to the strong position of national systems. In figures (2018): The average market share of national systems in the above-mentioned seven countries is an impressive 71% (based on card turnover (without cash) in the issuing business). This means that the national systems dominate the market here. Based on the total card turnover in the EU, the seven national schemes have had a stable market share of around 36% since 2015. Without Great Britain, the market share of the national systems in the EU is even 51% (2018). Therefore, the collapse of the card business dominated by European banks, which regulators have feared for years, is not in sight. So no reason to panic. The increasing dominance of “American” card systems as the much-cited reason for PEPS-I is not convincing from a competition policy point of view with regard to the EU as the relevant market.
The question remains: why do we need another Pan-European payment system for consumer payments? For PEPS-I, the answer is based on geopolitical reasons. A rough calculation based on the figures mentioned earlier leads to the conclusion that around a quarter of all cashless payments made by Europeans are made via the American systems Mastercard and Visa.
Payment systems are the backbone of the economy. Such a market share of system offerors outside the EU would threaten European sovereignty regarding infrastructure, technological know-how and not least access to data. The politically motivated interventions by the USA in the SWIFT payment system (Iran crisis) or the forced deactivation of Mastercard, Visa and PayPal as a payment option for the WikiLeaks donation account (2010) show that the geopolitical argument is not all that far-fetched. If data – especially data generated by payments – become the most important commodity of this century, any aspirations to be as self-reliant as possible are even more understandable.
With regard to the topic of “data”, PEPS-I strategists see a further disruptive element aside from the international card systems Mastercard and Visa, which also does not have any European basis: BigTechs. With their mobile wallet solutions (Apple Pay, Google Pay etc.), these giants are forging ahead in the frontend of mobile card payments, thereby displacing banks and card issuers. This means that these “non-European” wallet providers, unlike banks, card issuers and merchants, are able to obtain most data relating to the respective card payments at the POS (provided there is consent from the mobile payer). In this case, the “nationality” of the card system of the card provided does not play an important role anymore. The valuable commodity that is data also gets into non-European hands in the case of card payments under a national scheme.
Bringing payment transactions home
From the point of view of the account-holding bank, the real problem is the fragmentation caused by intermediaries. The card as a payment instrument has significantly contributed to this fragmentation. Many credit cards are already issued as “de-coupled”. The account-holding bank where the account for the monthly credit card statement is held is not the same as the card issuer. In this case, the account-holding bank is even completely cut off from the data of the individual card transactions. If there is a payment transaction and a third-party wallet provider takes the front seat in this payment, the account-holding bank – also with regard to the customer relationship – is pushed back another place. Just like in a theatre, here too, the best places are those in the first few rows. Despite the existence of a few proprietary mobile payment procedures (e.g. on the basis of a direct debit), it can be assumed that mobile payments will be carried out mainly on the basis of previously provided (virtual) cards in the foreseeable future. Only in an ideal scenario (from the bank’s point of view), is the account-holding institution also the card issuer and wallet provider.
This foreseeable fragmentation of a mobile payment could be avoided by connecting the payment directly to a bank account again and not letting it run via a card. It is exactly this approach that banks are trying to pursue in the PEPS-I project. Mobile phones are not connected to a card but to the bank account of the payer and then trigger a credit transfer to the account of the payee (merchant or, in the case of P2P payments, a private individual). As the intention is that the recipient receives the payment within the space of a few seconds, the new instant payment transaction structure of the ECB and the EPC (SEPA instant credit transfer or SCT Inst for short) forms the basis of the PEPS-I plans. The PSD2 has already created the necessary regulatory framework (see “open banking”). If required, the new service providers can trigger the payment for the account holder (payment initiation services) or make it easier for the payee to check that the payment has been received (access information services).
In contrast to establishing a European card system, which would first require the network dilemma to be solved (a critical number of card holders and acceptance points), the payer and the payee usually already have a bank account. The participation in the new payment system SCT Inst is still voluntary for banks today (current status: 51% of the European payment service providers already participate). However, the European Commission has already announced that it intends to force banks to participate through regulatory measures, at least to the extent as the recipient side is concerned (see “reachability”).
Banks are hoping that with the help of PEPS-I, bank accounts will become the essential part of payment transactions again. EPC as the system provider is delighted that a system, which up to now was concerned about there being enough demand, is being pushed into the limelight by PEPS-I. Merchants are expecting significant cost reductions by card acceptance fees becoming redundant. Regulators and geopoliticians hope that American card systems and BigTechs will be pushed back in payment transactions. The only one who still has to play ball are the consumers who increasingly favour card payments. Additionally, there are seven national “card schemes” that have so far successfully managed to hold their ground against the American competition. Should these schemes now be sacrificed on the PEPS-I altar?
The PEPS-I two-pronged strategy
This expectation is pretty unrealistic and that is why PEPS-I has adopted a two-pronged strategy. The intention is to connect the national systems. The Portuguese card Multibanco should be usable in Belgium with merchants who accept the Belgian card Bancontact and vice versa. The aim is to achieve this interoperability through a new common European acceptance logo. The clearing and settlement of cross-border payments between the national systems will then also be carried out on an “instant payment” basis. The target of this attack is the segment of cross-border card payments which is still firmly in American hands today.
Maybe the creation of interoperability via an additional acceptance logo is intended to be the first step to the long-term goal that is a new European card system which merges the existing national systems. However, in the card business a new payment system is not at the top of the agenda of the PEPS-I strategists. Maybe the fiasco that was the Monnet plan is still too recent in the banks’ memories.
For those of you who have not been in the card business for that long: Monnet was an ambitious plan by European banks to create a new Pan-European card system. The plan was first discussed in 2007 in the so-called “Falkenstein Round” by German and French banks. Later (2010), banks from a further six EU member states were included. In the end, there were 24 banks, some of whom now also sit around the PEPS-I table.
If I now flick through my “Monnet” folder, which has turned slightly yellow, I notice that the motives for this plan are also identical to those named in relation to PEPS-I: the threat posed by American card systems, the fear of national card systems not being able to survive, as well as European governance and data sovereignty. In the case of the Monnet plan, the ECB was also the main driving force. You could use the old PowerPoint slides for PEPS-I again today. After just five years, in April 2012, the end of the Monnet plan was quietly announced in a brief press release.
So why did Monnet fail back then? The European Commission was named as the main culprit as it torpedoed the business case due to the impending Interchange Fee Regulation. In hindsight, the decision may have been a bit premature. Despite (or perhaps because of?) the reduction of interchange fees through an EU-wide regulation (IFR 2015), the (loss-making?) card business can still celebrate high growth rates.
PEPS-I is therefore no Monnet 2.0. The planned interoperability will not cause opponents to tremble. And card holders will probably not care too much which card brand they are using to pay for their restaurant visit when holidaying abroad. Also, outside of Europe, cardholders will still have to rely on the American brand.
With regard to the geopolitical PEPS-I goal of a “hegemony significantly above 50%” of European card systems, the card scenario still looks like a pretty blunt weapon. The other PEPS-I scenario (currently more of a vision) of substituting plastic cards and digital cards with mobile instant credit transfers appears logical, at least theoretically. In practice, however, the following prerequisites must be met:
- mobile payments have to replace plastic card payments in business transactions which are conducted at the physical POS;
- payments via mobile phone (or another online device) are not carried out on the basis of a (virtual) card but trigger an instant credit transfer.
The first requirement appears to just be a question of time for many people keeping a close eye on the market. However, the second requirement is somewhat questionable. Why should a consumer voluntarily prefer an instant credit transfer over a card payment (without being “nudged” or this decision being linked to fees)? People who recently booked a holiday with the now bankrupt Thomas Cook will appreciate the chargeback option of a credit card payment compared to an irrevocable instant credit transfer.
Oh yes, there’s something else. Monnet failed due to its business case. What does PEPS-I’s business case look like? There are no interchange fees for credit transfers. Will this be enough? In all likelihood, one also has to consider the generation and marketing of data as an additional source of income so there is an added benefit for the banks.
For the SCT Inst scenario the ingredients are already there. The new Pepsi advert shows a young woman kissing a tin of Pepsi. The slogan is “for the love of it”. Actually, the ingredients are not that important. The main thing is that the consumers like the taste of the PEPS-I drink.
P.S.: Hopefully the PEPS-I plans will see the light of day in the first quarter of 2020. If you do not want to wait that long, you can get some more information about PEPS-I in the December issue of our PaySys report. If you would like me to send a copy to you, just drop me a short e-mail at firstname.lastname@example.org
Cover picture: Copyright © Ekaterina Brumm, PaySys
Great Innovation if the banks get their act together and SCA is made simple. Retailers, wholesalers, state payees & any other third party who pay the bills to accept payments should be able to accept real time/instant payments at the point of sale. No card schemes to control them, no acquirers putting up or creating new fees due to caps, no fund settlement days later and no charges to consumers either Germany. Easy. I wonder who can help make that happen………