Can EU banks unite against Visa and Mastercard?
More than a dozen large European banks plan to launch a payment system that would rival U.S. payment companies and technology firms, an idea that hasn’t worked in the past but may have a better chance given the current global health, economic and political crises.
Called the European Payments Initiative, it will initially provide consumers and merchants in the European Union with a card, a digital wallet and a Zelle-style bank-backed P2P payment app.
EPI is both a political move and a coronavirus response. The initiative argues existing European payment products are fragmented, which hurts interoperability and has made it harder to unite digital payment rails at a time when many businesses and consumers are migrating to digital.
The lack of cohesion makes it more difficult for European issuers and technology companies to compete with Visa and Mastercard. Visa and Mastercard control about 80% of the European payment market, with Visa alone enjoying about 66% of the market, according to Statista.
The European Central Bank is supporting EPI, which embodies something the ECB has long wanted — a large payment network that pushes back against major American firms including the card networks and Amazon, Facebook and Apple. The ECB is also concerned about the growth of giant Chinese companies like WeChat and Ant/Alipay, which have made inroads in Europe by partnering with merchants to support payments.
An existing effort to build a European payment system, called PEPSI, is related to EPI's work and has not gained traction due to proprietary concerns among the banks.
“The billion-euro question is if and how the EC and ECB try to advantage PEPSI to give it a shot, without unduly compromising their professed support for liberal markets,” said Eric Grover, a principal at Intrepid Ventures.
The EU has taken a hard line against large U.S. corporations, investigating Apple for antitrust violations and repeatedly criticizing Libra, the Facebook-affiliated stablecoin project that’s expected to launch this year. The EU is also developing a digital currency to support faster disbursement of government funds and to counter the growth of blockchain and cryptocurrency initiatives, which potentially threaten the power of the ECB and large incumbent banks.
Isolationism has become a larger issue for the payments industry in general. China has been slow to adhere to a nearly 20-year-old promise to allow outside companies to process payments inside China. U.S. payment companies have sparred with India over local data storage rules; and Australian banks attempted to collectively bargain against Apple when it introduced Apple Pay to Australia.
Geopolitical issues that aren’t directly related to payment processing have also strained relations between the U.S. and Europe, potentially giving more momentum to an alternative that relies less on U.S. influence. The U.S.-China trade dispute threatens cross-border payments; and differences over government responses to the coronavirus have led to a travel ban, cutting into payment flows and creating more of a domestic travel market within the EU.
EPI is recruiting other banks and payment companies to join as founding members through the end of 2020, and is targeting 2022 for launch. “Initial participation doesn’t look particularly strong — 16 French, German, Spanish, Italian and Belgian banks,” Grover said.
EPI will be the first “consistent” European payment system to integrate SEPA instant credit transfers, which will give clients greater choice among payment gateways, said Carmen Maria Alvarez Diez, a BBVA spokesperson, in an email.
SEPA’s instant credit transfer is a standard supporting plastic or virtual cards that work on EMV terminals but do not use card networks. SEPA cards are designed for PSD2 opening banking in Europe and would also create an alternative to Visa or Mastercard. But participation and how banks use EPI and/or PEPSI will be up to the individual banks.
“EPI participants also are issuers and acquirers under international and domestic payment schemes. It is for each EPI participant to decide how it allocates its investments among different payment schemes and solutions. That is outside of the scope of the EPI project,” Alvarez Diez said.
Visa did not return a request for comment by deadline. Mastercard’s PR office said the company is “open to partnering with EPI and are looking forward to better understanding its long-term vision and Mastercard’s potential role in it.”