The future of payments: A European Commission view

“Everything changes but change itself. You cannot step twice into the same river, for other waters and yet others go flowing ever on,” observed Heraclitus of Ephesus (circa 535 – 475 before common era).

This certainty is the live bait that provokes analysts to release imagination and engage in

scenario building to explain how, in their view, the future could look. In that spirit, the European Commission provided an opportunity to forge ahead of actual events at its ‘Conference on emerging challenges in retail finance and consumer policy’, held in Brussels on 18 November 2014 –  writes Javier Santamaría, Chair of the EPC.

Topics discussed included ‘Payments: improving users’ experience and looking into the future’. The Commission called for “fresh thinking” on emerging payment methods as well as new players in the industry (and their impact on incumbents). Participants were invited to reflect about potential developments in the next 5 to 10 years and “what would need to happen in the market and among regulators to make sure the evolution is positive, for all parties”.

In this article, Javier Santamaría, who participated in the conference panel on payments, offers for discussion a methodology of scenario building which allows designing adequate forward-looking strategies in a fast moving environment. He also reports on preliminary conclusions on the future of payments reached at the conference.

The European Commission indicated that “these conclusions will be followed-up by further policy considerations” in the first part of 2015. On that note, Santamaría concludes: thinking outside the box is a valuable exercise. Keeping in mind established wisdom doesn’t hurt either. Regulation – now and in the future – should strive to achieve legal certainty, balance, technology neutrality and a level playing field amongst all players.

The main objective of the conference on emerging challenges in retail finance and consumer policy, organised by the European Commission on 18 November 2014, was “to discuss the topics which, following the financial crisis, are considered to be of high importance in the context of the retail financial services and consumer policy” both at national and European Union (EU) level. In addition, the conference should provide “valuable input” to the work programme of the new European Commission that took office on 1 November 2014. (The detailed conference programme is set out on the event website included in the ‘related links’ below.) The conference gathered more than 200 stakeholders representing the financial industry, consumers, national public authorities, EU institutions, payment organisations and academics. Participants debated the following topics:

• ‘Safer and simpler financial products’: address different product governance policies and the initiatives encouraging financial institutions to offer products which are simple and take into consideration consumers’ interests.
• ‘Behavioural economics and financial services’: explore the ways of making a better use of the insights of behavioural economics in policymaking in the area of financial services.
• ‘What could be next on the EU mortgage credit agenda?’: look at issues related to the mortgage credit which have been raised in the context of the financial crisis, including helping borrowers in payment difficulties and further facilitating cross-border supply of mortgage credit.
• ‘Payments: improving users’ experience and looking into the future’: discuss latest developments in the area of payments, and ones to come, in terms of consumers’ safety, accessibility and convenience.

The topics were addressed in the form of panel presentations, delivered by external experts, and in break-out sessions during which the participants debated in small groups moderated by professional hosts.

The author of this article had the honour of participating, together with Wiebe Ruttenberg, Head of the Market Integration Division in the European Central Bank (ECB) and Luca Cassina, PayPal’s General Manager for Western Europe, in the panel entitled ‘Payments: improving users’ experience and looking into the future’. The panel was hosted by Erik Nooteboom, Head of Retail Financial Services and Payments in the Directorate General Financial Stability, Financial Services and Capital Markets Union of the European Commission. He called on the panellists and conference participants to share “open and visionary thoughts when looking into the crystal ball of the future of payments”.

This author, who also serves as the Chair of the European Payments Council (EPC), invites readers to keep in mind that looking into the crystal ball has not recently been a work item of the EPC. His contributions to the discussion – while reflecting the perspective of a market participant who is also a banker – should therefore, not be taken as the formal EPC position on the subject.

Scenario building in the digital age: a proposed methodology

Social networking and new technologies are the predominant themes when discussing the further evolution of payments.

The speed at which these developments evolve and their impact on society, at multiple levels, also pose new challenges to building future scenarios that may claim to provide at least an approximation to new emerging realities.

By that token, the first question worth considering when brainstorming about the evolution of the payments market – and the appropriate regulatory response – is this: how many market and policy experts predicted the impact of social networks when a few college kids first created these (some ten years ago) or anticipated the advent and implications of the internet-enabled mobile device (before one company invented it)?

To illustrate the point: on 14 January 2015, Andrew Owens of Sungard posted a blog entitled ‘SEPA – did we solve a payments problem that no longer exists?’ (see ‘related links’ below). Discussing the technology underlying virtual currencies, he points out: “If we look at one of the arguments behind the Euro and SEPA, they were established to drive efficiencies across the single market of the EU. Before the introduction of the Euro, different currencies caused significant challenges for cross-border trade. The answer to this was to create a single currency and then a single payments scheme to bring harmonisation across the Eurozone and the end of cross border transactions within the SEPA zone. But as we enter 2015, we could arguably achieve the same and more with these emerging technologies.”

This is not the occasion to debate the policy agenda pursued by the EU institutions since the late 1990s which aimed at creating a single market for electronic euro payments. However, with regard to the important discussion launched by the European Commission on the future of payments, the probability that a new solution which could render mid to long-term predictions obsolete is just around the corner, should be factored into the scenario building exercise. An appropriate methodology therefore, needs to be identified which allows designing strategies in a fast moving environment aimed at ensuring that “the evolution is positive, for all parties”, as stated by the Commission.

To capture how payments might evolve going forward, the following three steps could be considered: firstly, identify current patterns and the factors that will influence the future. Secondly, establish the orientation those elements will produce when considered all together. Thirdly, venture to make predictions on the future of payments (in mature markets).

1. Recognition of patterns.

This step explores four interrelated areas of analysis: the consumer, the society, the technology and the market.

Consumers: today’s digital natives take for granted an environment that offers consumers solutions, goods and services available immediately, anywhere, anytime.

Society: from a societal point of view, new ways of establishing relationships weaken the traditional bonds. People rely on social networks and tend to become more sceptical about the old ways societies are organised. Politics and political representation are seen with certain disdain even though governments and parliaments strive to enact legislation that is presented as protective to consumers. Suppliers as economic actors are becoming less influential in their prescribing consumption as individuals increasingly trust their peers more than their providers. Social networking is changing habits and creating new dynamics in how human groups understand their relationships both internally, in a peer-to-peer environment, and externally, vis-à-vis governments, companies, competing groups, and allies.

Technology: it no longer constitutes a barrier. In fact, its disruptive ingredient is a consequence of its ubiquitous nature. Technology is cheap whether the need is to gather information, to store data, to process algorithms, to communicate or to produce output. We carry with us more technology, processing capacity, communication devices and interactive probes and sensors than ever before. Among other things, this incentivises numerous firms willing to invest and challenge incumbents.

Market: as competition gets fiercer and fiercer, reducing costs becomes a survival demand. Although not the only strategy, unbundling services and providing them as bare offerings at a low price is a very common strategy, deployed to attract masses of individuals who do not look for more and will get their satisfaction elsewhere as services delivered are not ends but means.

2. Establish orientation.

To put the elements highlighted above into context, i.e. establish orientation, it is paramount to provide some coordinates, in a second step. The signals, perhaps evidence, at hand suggest that there are three relevant coordinates to be considered in relation to payments: the volume of non-cash payments will increase significantly, regulation shaping payments will continue to expand and new business paradigms will emerge.

Volume of non-cash-payments: McKinsey foresees a compounded annual growth rate (CAGR) in payments revenue of 8 percent from 2013 to 2018, bringing the total figure from 1.6 trillion to 2.3 trillion US$.¹ The Boston Consulting Group coincide in the rate, 8 per cent of CAGR in revenues from 2013 to 2023, coming from 1,009 billion to 2,137 billion US$². The fact that the figures are not the same should not look odd since the definitions, scopes and methodologies are not exactly the same. We can agree, nevertheless, that the payments business will have a size of above two trillion US$ from the start of the next decade: not a trifle.

What may be even more relevant is that McKinsey also estimates that those revenues will account for 43 percent of total banking revenues (many bankers would be surprised if they realise this). Of course, growth will not be the same across all markets, services and client segments. Both consulting companies predict that it will be higher in emerging markets than in mature ones, it will be higher in the wholesale or commercial segments than in the consumers’ one and it will be higher in liquidity or account revenues than in transactions revenues. It has to be kept in mind that growth in revenues reflects a much higher growth in volumes of non-cash transactions as prices, both fees and spreads, will converge downwards.

Regulation: the expectation is that regulation will intensify its influence on payments as it is adopted at accelerating speed. According to Capgemini there are 34 key regulatory and industry initiatives currently in the pipeline globally; 13 of them were introduced during 2014.³ There are no indications that the appetite for regulatory intervention would decrease in the future.

Business paradigms: business models will have to change and new paradigms will emerge. Because of technology, increasing competition, increasing expectations of consumers and the catalysing (sometimes unintended) consequences of regulation, services today look more and more like commodities. This is the core argument in the seminal article entitled ‘The Experience Economy’ by B. Joseph Pine II and James H. Gilmore (see ‘related links’ below). Their business philosophy may be criticised for being overhyped, but few would deny that the only way out from commoditisation must be a renewed impulse in customisation. New paradigms will struggle to leave behind a regular service business and become either an experience business that charges for the feeling customers get by engaging it or a transformation business that charges for the benefit customers (or ‘guests’) receive by spending time there. (If you think about payments, nobody ever said it was going to be easy.)

3. Make the prediction.

In January 2015 the European Commission published the final report on its conference on emerging challenges in retail finance and consumer policy (see ‘related links’ below). It includes material made available by the Commission in advance of the conference as a starting point for discussion, presentations delivered at the event and preliminary conclusions reached.

In this report, the Commission summarised the contributions from and preliminary conclusions as reached by conference participants on the future of payments as follows⁴:

Wiebe Ruttenberg of the ECB “called for a comprehensive reflection, not only focusing on trendy or alternative innovative payment solutions, such as the new Apple Pay or Bitcoins, or on consumer interests, as the needs of the payment world would be much broader, also including [business to business] B2B and interbank issues. According to him, change will be evolutionary, not replacing but building on today’s payment instruments (such as cash, cards, etc.), with profitability being a key driver. Payments will still bear a cost and these costs would have to be allocated in one way or another. To ensure continued innovation, a smooth and standardised infrastructure across Europe would be needed. True new access channels, mobile and speed will play an increasing role. For him, an important element to improve the users’ experience would be to push instant payments with the ability of the payee to access his funds almost in real time.”

Luca Cassina of PayPal “focused on the unprecedented pace of innovation in today’s time (with the accelerated spread of mobile phones, the web or smart phones) which should speed up even more. Technological change would continuously reshape behaviours and needs; the payment space would be flooded with innovative payment solutions, with often high potential for economic growth. Security and consumer trust would be as important as choice and convenience. In his view, to benefit from these developments, the EU needs a future-proof, technology neutral regulatory environment to support innovation. Ongoing dialogues between industry, financial entities, and regulators are critical to ensure that policies and solutions are relevant, effective and apt to allow adoption of smart technologies that are able to reconcile security with convenience.”

The report further states⁵: “In the break-out session participants were asked to reflect about the potential market developments in the next 5 to 10 years, the needs and priorities of the users with the all-comprising question of what would need to happen in the market and among regulators to make sure the evolution is positive, for all parties.” As the group represented a wide range of stakeholders and fresh thinking was welcome, “the input received was quite diverse”. According to the Commission, “three main ideas” were however, shared by most of the participants:

• “Many saw the future of payments in mobile payments, however not only related to mobile phones. There was a general feeling that in Europe mobile payments had still not taken up due to the fact that it was not yet considered safe, common standards were still lacking and solutions were too often confined to the national level.” Addressing consumers’ key concerns regarding security and data protection were cited as the main goals to be achieved through convenient but safe payment solutions.
• “Instant payments should spread, on a peer-to-peer [P2P] (mobile) level but also in the context of traditional bank transfers, with (almost) real time ability to use the funds. While some progress is being made (on P2P notably in Scandinavia) and on instant payments (with faster payments in the UK), it was deplored that solutions were in most cases confined to the domestic level.” (This author thinks that, even though the idea is certainly attractive, it is not clear how to foster market solutions in the absence of well-defined concepts and requirements, an educated estimation of how much the marginal improvement would cost to society and an agreed allocation of tasks to carry out and costs to bear amongst all stakeholders.)
• “Most participants felt that a good mix between regulation, standards and market forces was needed to move the European payments market one step further in the future. Achieving a Single Market in new evolving payment methods should be a priority. Others warned against overregulation and called for a right balance between cooperation and competition. Regular consultations were crucial as well as time to measure the effects of regulation.”

Promoting a secure, competitive and innovative European payments landscape

The European Commission stated that the conclusions reached at its conference on emerging challenges in retail finance and consumer policy “will be followed-up by further policy considerations in the first quarter of 2015”⁶. Considering also the plethora of EU regulatory initiatives impacting euro payments already in the pipeline (see ‘related links’ and ‘related articles’ below), this author would like to stress: thinking outside the box is a valuable exercise. Keeping in mind established wisdom doesn’t hurt either. Regulation – now and in the future – should strive to achieve legal certainty, balance, technology neutrality and a level playing field amongst all players.

Javier Santamaría is the Chair of the EPC.

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