Europe is taking proactive steps to change the way the continent pays. Recent years have seen the introduction of EU-wide measures such as PSD2 and SPAA with PSD3 expected soon. Meanwhile, 16 European banks and 2 acquirers recently announced their intention to launch the European Payments Initiative to create a new payment network for the Union.
At the heart of this active effort from the EC, other governing bodies and players in the financial services industry is a recognition that the financial infrastructure of the continent is key to not only existing goals such as financial integration and cross-border business, but the long-term economic sovereignty and competitiveness of the continent as a whole.
These new schemes could be seen as a direct challenge to the hegemony of existing US-based payment schemes, especially those based around cards. Key to this shift is the fact that the payment needs of Europe are fundamentally different from the US and that a successful payments future for the EU requires a homegrown, sovereign payments infrastructure.
While existing rails such as SEPA and Instant SEPA interbank payment infrastructure have created the foundation for change, the system still requires a practical front-end layer to bring this functionality to retail payments – and a wider audience.
Understanding the digital payments landscape
For a long time, payments have been dominated by credit and debit cards – and here the US has a major advantage in terms of market share. Even homegrown efforts, such as the Eurocard, have been absorbed into the US-hegemony. The latest research demonstrates their ubiquity:
However at a local level, the European landscape shows a lot more variation due to the large number of domestic schemes in place, as data from Statista shows:
- In Germany, Girocard had a market share of 75%, whereas Visa and MasterCard each made up around 13% and 11% of the market.
- In Italy, Bancomat cards made up 45% of transactions, whereas MasterCard and Visa each held a market share of approximately 20% and 34%.
- Local scheme Bancontact holds an 80% market share in Belgium.
The fragmentation of the EU payments market makes it a more suitable target for consolidation. There is greater incentive to collaborate on a shared initiative, especially in the face of a potential market expansion from either incumbent leaders, such US card companies, or expanding tech firms such as Amazon and Apple, which have been increasingly active in the financial space.
Why Europe requires unique digital payment solutions
As a Union of 27 countries with their own financial systems and infrastructure, Europe has always been distinct as an economic entity.
The introduction of the Euro in 1999 was the first step to harmonising the financial collaboration between countries at the macro and micro level – but in the era of digital payments, there is a need for a greater focus on not just the currency, but also the digital links and systems used to move capital in the retail space, which brings new challenges related to adoption and innovation.
The use of cash is declining worldwide, accelerated by new technology and the COVID-19 pandemic.
One key area where Europeans have moved ahead of the US is direct bank payments, also known as account-to-account (A2A) payments, which account for 14% of transactions in Europe, compared to 8% in the US. While the EC may now move forward with its own plan for a digital Euro, they’re also focused on bringing account-to-account (A2A) payments to the fore, helping businesses and consumers send payments directly with fewer intermediaries, reducing costs and lead times.
The US has historically lagged in the adoption of secure digital payment controls. Many of these controls, which are now just being embraced in the US, have been in place in other countries, including in the EU, for decades. The EU has clashed with US businesses on key issues such as data privacy and antitrust regulation, issuing stiff fines to international tech leaders who fail to comply with stricter EU controls.
New payment infrastructure plans aim to align the interests of financial institutions with the financial future of the bloc, ensuring bespoke solutions that match the needs of the EU payment market, including EU’s stricter regulations around data protection, ethics and technological standards, keeping consumers safer.
Payment sovereignty carries both political and practical weight for legislators. International providers will always make a trade-off between global trends and local needs, such as balancing investment in emerging and mature markets, with shareholder returns as a guiding principle over public good.
This creates less incentive to build bespoke solutions that match the needs of EU payment market For regulators, maintaining standards and functionality requires the ability to control and regulate payments on a domestic level, without depending on external providers.
Looking ahead to the European digital payments revolution
The new plan from authorities for European A2A payments puts digital at the heart of the change, with the goal of giving consumers more choice, flexibility and control in how they manage their transactions.
This has two key elements:
- Opening data access: Building on the PSD2 initiative with further stipulations for FIs to open up financial data to third parties and competitors to enable more choice for consumers in how they use their information.
- New payment rails: EPI aims to create a consistent, cross-continent payment network that leverages on existing interbank clearing and settlement infrastructure and can harmonise and expand payment rails between member countries for a faster, more convenient payment experience.
Together, these will create a unique, Europe-focused payment system that can protect the continent’s long term interests, with payment experience at the heart.