The creation of a single European electronic payments market is possible, but may be five to ten years away. This was a broad conclusion of the Focus On Payments discussion organised by Luxembourg for Finance on 10 September. What barriers need to be overcome?
Visitors to China are struck by the commonplace way people make instant payments by mobile devices to all kinds of retailers. There is a stark comparison with the fragmented, apparently half-hearted situation in Europe where merchants have to manage cash, credit and debit cards, nationally-based mobile wallets and cheques. This adds to cost and complexity for retailers and service providers, as well as being a sub-optimal customer experience. Moreover, the likes of WeChat Pay and Alipay in China can offer clients added services such as insurance.
Europe compares well
Yet the online panel pointed to considerable potential and progress towards creating a single payments market in Europe. Indeed the EU compares well to other jurisdictions. ‘Of course the US has great fintechs, with Apple Pay accepted in 60% of retail locations, with Google Pay and Amazon Pay present too. Yet the market is complicated, with 50 state regulations,’ noted Thibault de Barsy (photo), vice-chairman & general manager of the Emerging Payments Association EU.
Cards with chip and pin and fast payments systems are still lacking in the US, and there are more than 16,000 payment and credit card issuers that need to be unified. ‘Europe is not alone in having a fragmented market. Southeast Asia is even more complex, and Latin America too,’ agreed Simon Black, CEO of the fintech PPRO.
‘We see many local champions in Europe, but technical intra-operability is still lacking cross border,’ de Barsy said. He pointed to Nordic countries having a common digital ID system. The Netherlands has enabled account-to-account payments since 2005. Italy has made progress on peer-to-peer systems and many countries have opened to WeChat Pay and Alipay to serve Chinese tourists. Spain has mobile wallet systems and the UK has led the way in open banking. Yet cross-border development is needed to reach scale and maximise efficiency, and that requires common standards and greater business cooperation.
Optimism on EU regulation
A poll of those watching the webinar found nearly 80% believing that EU regulation is fostering the development of the European payments landscape. Only 10% disagreed. The panel shared this optimism. ‘The European legislator is trying to harmonise the market to nurture new payment tools via open banking, with the goal of creating European champions to compete with the best in the world,’ noted de Barsy. The key regulatory moves are the creation of the single European payments area (SEPA) and the first and second payment services directives (PSD1+2).
But there is some way to go. Even though it was introduced in 2015, ‘PSD is just at the beginning and we still have another step to take with the SCA [Strong Customer Authentication] rules set to be published by the end of the year,’ de Barsy said. Black agrees: ‘PSD2 and open banking lay the ground work for more harmonisation, but we still need time for the technology to develop and habits to change.’ He pointed to contactless cards, a technology which took several years to gain broad consumer acceptance. Progress is being made, though, with Black highlighting efforts such as Alipay and Six European Mobile Wallets’ work on an interoperability standard.
Cultural factors are important barriers to working across borders. Cash is still dominant in Germany, where it can often be hard to pay by card. Many transactions are still made by cheque in France. Some countries’ consumers are more open to cross-border e-commerce than others. As for consumer credit, each country has their own cultures and regulations, as well as differing tax laws and approaches to combating money laundering.
The European payments regulatory landscape is unlikely to change over the coming years said Karen O’Sullivan, Head of Innovation, Payments, Markets Infrastructure and Governance at the CSSF. ‘I don’t think we will see regulation as such, but the EBA [European Banking Authority] will conduct market studies and issue guidance on payments and fintech,’ she said.
That said, she sees regulation that will affect payments such as the digital oversight resilience act related to cyber security and AML rules. The European Commission is also working on rules regarding crypto payments and crypto assets. At the local level ‘the CSSF has been issuing circulars rather than hard regulations.’ Most frequently these are targeted at implementing EU and international AML rules.
Time to realise the potential
While recognising that the challenge of creating a single payments market is considerable, but given the benefits of the prize and the desire of regulators to make it happen, partial or full solutions should emerge. As to when a harmonised payments market will emerge in Europe, around 40% of the webinar audience said less than five years, slightly more said between five and ten years, with the remainder expecting it to take more than ten years. No one said ‘never’. De Barsy thought that five years was the likely time-frame, but Black said ten years was more realistic.
‘We are seeing an acceleration of pre-existing trends driven by the pandemic,’ Black commented. However more effort will be needed. Asked whether banks have fully embraced open banking, two thirds of those polled during the webinar said ‘no’. There is ample potential for Luxembourg-based players to lead this growth.