18 October 2018
"Why are there no European companies competing in the battle for global payment solutions?"
Europe is largely dependent on non-European systems, such as PayPal, for cross-border (card) payments. The reason for this is that there is still no European payment system for the whole continent, partly because European banks mainly focus on serving their national markets. In the development of new payment services, this must change, says Yves Mersch, member of the Executive Board of the European Central Bank (ECB). Mersch explains why it is important that Europe is not reliant on non-European payment providers and why he hopes that in the future there will be a global payment solution coming from the eurozone.
Creating the right market infrastructure
Over the past decades, the ECB has tried to create a market infrastructure that contributes to a healthy and regulated basis for innovative European payment services. There was a solid foundation due to the arrival of the Euro in 2002. After that, actions and legislations were introduced such as TARGET (a European interbank payment system that ensures real-time processing of payments), SEPA (an initiative to facilitate international payments between European banks) and PSD (a directive to regulate payment services in the European Union).
Creating the right infrastructure is only one of the conditions for innovation to thrive and developing an integrated payment solution. Collaboration between stakeholders is also essential in order to ensure smooth and harmonised processes throughout the EU, according to Mersch. “The ECB united the national payment markets, initially by launching the SEPA Council and the Euro Retail Payments Board (ERPB). The ERPB has played an important role in the development of the SEPA instant credit transfer scheme, which is now live, with over 1,000 providers participating”, says Mersch.
Europe will become dependent on non-European services
There is a reason why the ECB is trying to stimulate European collaboration and pan-European payment initiatives. Mersch fears that if European banks and fintechs do not start working on pan-European payment solutions in time, Europe will become dependent on payment services from other continents. Mersch: “That development has already begun: PayPal dominates the market for online payments in Europe, while companies such as Google, Apple, Facebook and Amazon already offer payment services. It is a matter of time before the Chinese giants, such as Alibaba and Tencent, also get involved in this battle. I wonder, however, why there are no European companies competing in this sector.”
One of the problems is that banks are resisting the goals of the PSD2. Banks have been defensive when it comes to providing technical access to new and innovative payment service providers. “This limits the ability of European fintech companies to come up with competitive solutions as there is less data available for them to test with compared to American and Chinese competitors”, Mersch explains. “That is why I fear that global giants from outside Europe will use their network power to increase their presence in Europe.”
Non-European cards more convenient
The world of payment cards illustrates this problem, as Europe doesn’t have an integrated, standardised payment card network, where the same card can be used at any payment terminal in the eurozone. For example, the German Girocard and the French Cartes Bancaires generate a significant number of card payments in the two largest economies in the euro area. Mersch: “However, due to significant technical differences and a lack of political will, these two networks remain separate, like most other national card schemes. As a result, it is more convenient to use non-European cards when travelling through Europe.”
Protect the integrity of European payment services
In the area of governance and regulation of payment solutions, Mersch argues it would be much better if a European player comes up with a payment service that is embraced throughout the eurozone. “To protect the integrity of European payment services, we need to work on user-friendly pan-European solutions”, explains the member of the Executive Board of the ECB.
Mersch continues: “What we want to prevent is an integration of payment solutions with non-European countries that goes against European standards. European citizens demand pan-European services that are safe and efficient. Although non-European companies comply with our legislation and use our payment infrastructure, they are not domiciled in Europe. We must be aware that external regulations may affect the operation of these companies and may therefore disrupt payments between European businesses. Unfortunately, in today's geopolitical environment, this risk is not as small as they used to be and therefore must be taken seriously by European policy makers.”
No barrier to pan-European expansion
That is why it is important that European policy makers and payment parties wake up, work together and create the conditions for the development of pan-European payment solutions, according to Mersch. Innovation can start at national level, but there should be no barrier to pan-European expansion. National solutions must therefore ensure that they have a pan-European reach in their original design. Mersch: “In the current era of rapid technological progress, it is economically important to ensure that innovation delivered by banks and non-banks reaches all European citizens.”
To protect the integrity of European payments, European payment providers have implemented their solutions only at national level so far. However, closing this service to the world is not the solution. According to Mersch, it should be turned from a national to a global payment solution. This can be done gradually via Europe because the right infrastructure is already in place. Mersch: “It is now up to European fintech’s and banks to compete with payment providers from China and the US. Time is short.”
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