Suddenly the key EU’s stakeholders (ECB/EC) are talking again about technical payments interoperability and new payments networks. Many may ask why, for they have struggled over 10 years to fully understand EU market dynamics. Surely, the regulators simplistically ask, we can make our 28 domestic networks more efficient and create a common infrastructure to enable any scheme and any payment acceptance across the EU?
So let’s examine some of the key reasons why this vision is unlikely to be translated into a credible strategy for EU cards.
Six Key Retail Payments Interoperability Issues
Fig 1: Six Key Retail Payments Interoperability Issues
First barriers. Europe implemented interoperability over 30 years ago using Visa and MasterCard cobranding. However, most accept this model is reaching legacy and needs to be reworked. Few, if any, of EU’s largest non-bank acquirers have invested in domestic debit acceptance because of the high interface costs. Meanwhile, country acquirers retain an advantage through local scheme membership and ‘on us’ discounting. So barriers still remain to full interoperability.
Second, what do the users want? In most nations 95% of payments are locally issued, accepted and acquired, and are debit card based. Most consumers want reliable home card acceptance and cross border when they travel and shop online. Merchants, corporates and banks have similar requirements. The exceptions are the small number of Pan EU merchants, acquirers and banks who perceive benefits from common systems across multiple geographies. Also larger merchants want lower ICS processing costs as they adopt Interchange ++ billing. Finally, as a result of the planned Cards Regulation, some national debit schemes need to extend their acceptance outside their home markets.
Third, what is the supply side of Europe’s networks? There are few credible providers with reach and full ACS features and the ICS are the only credible players. Both have powerful modern networks with EU and worldwide reach and API’s. Both compete aggressively and potentially may expand their role if they separate their brand and processing.
Fourth, is there a business case for a new network? Debit and credit card cross border volumes are modest at 1,750m-1,850m per annum (4%-5% of total) and have a revenue opportunity of €25m-€35m of which 98% is currently contracted to the ICS. A EU network is thus not sustainable on the basis of cross border card volumes alone. So, winning volume and making a business case is a key issue for any new entrant network provider.
Fifth, is the need to resolve the “sovereign” EU Debit Scheme issue. Sadly, the early SEPA Cards Framework interoperability concepts partly encouraged three schemes to exit the market. Fearing a duopoly, the EC and ECB have pressured banks to build EU Debit. But if a credible scheme emerges, national schemes may consolidate. Is this what local stakeholders want? New schemes are now emerging in Bulgaria and Poland for cards, and in Finland and Malta for ACH. A recent paper by John Chaplin, Andy Veitch and Jürgen Bott[1], which surveys 25 national debit card schemes, suggests that they are low cost, better controlled and deliver most benefits. So, any interoperability vision should seek to defend local debit and avoid further market exits.
Sixth, is the pressure to retain local settlement (cards and ACH) and to avoid offshore or centralised solutions? Fear of loss of local control is a key factor limiting a new Pan EU network or card scheme.
So what are the options for the EC/ECB to enable their vision for the EU? Five challenging scenarios are proposed.
Summary of Scenario Benefits and Issues
Fig 2: Summary of Scenario Benefits and Issues
Scenario 1 is based on improving the status quo, continuing with ICS co-brands plus increased support for domestic schemes. Planned regulation of consumer brand/scheme selection, merchant steering and the dematerialisation of borders would be dropped. Interoperability concepts would be shelved and a “sovereign” debit delayed. EPC/EPASOrg and SEPA Card Clearing (or similar) standards would be mandated and the ICS would focus on winning cross border volume. This scenario is attractive for domestic debit brands and clearing and settlement would be protected. But the new Regulations are already committed. Cherished stakeholder SEPA concepts would be delayed. Processing would be less competitive and some barriers remain.
Scenario 2 would focus on stimulating network competition. Both ICS would be encouraged to multi-brand with open API’s and interface with ACH’s. Both would service national EU debit card and electronic cross border acceptance. The end objective would be two powerful utility networks supporting multiple card schemes plus all forms of electronic payments. The key advantage would be no costly new network, but some would argue, more competition may be needed.
Scenario 3 would introduce a SEPA Payments Hub as a gateway into each national market. The hub would be multi-purpose (Card/ACH) cross border only, multi-scheme and currency, and support all types of payments to real time standards. Issuers and acquirers would access the hub for cross border transactions via a common API. The advantage would be real time processing for all cross border card/ACH transactions and retention of domestic settlement. The downside is cost (perhaps €50m-€100m) and a complex risky development. Also, not all markets would fit the model and limited efficiency savings would result.
Scenario 4 would be based on a Universal Payments Central Switch to completely replace national clearing and settlement for debit and ACH delivering to Faster Payments standards. The benefits would be substantial. A world leading low cost network, and the elimination of EU’s spare processing capacity. However, a monopoly could result which could displace commercial processors. Also, a high risk and complex build project. Solutions would still be needed for worldwide card acceptance.
Scenario 5 is market demand driven, encouraging Fintech to innovate and build new network constructs. The Gateway PSP sector could interface with all national card and ACH processors through a common API. Acquirers, banks and corporates would then be enabled for cards acceptance and ACH settlement. Also, ideas such as the PSD2 mandated bank account access API and overlay concepts could result in entirely new models for Pan EU clearing and settlement. However, processing has struggled for 10 years to deliver network interoperability solutions with so far, few results.
Analysis of Scenario Options
Fig 3: Analysis of Scenario Options
So to sum up, revised calls for EU cards technical interoperability is a difficult concept to deliver without collateral damage. Of the solutions, an ICS deal or a Cross Border Hub have attractions. The EC/ECB are still trying to understand the forces at play in the markets! The message is that practical network solutions must reflect reality and recognise that 95% of payments are local. Technical interoperability visions have to be founded on three principles: national market first, cross border second and Pan EU centralisation not yet!
[1] National Payments Schemes: Drivers of Economic and Social Benefits? 2014
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