Last year the European Central Bank said that it welcomed an initiative by some of Europe’s top banks to explore the development of a “rival payment system” to challenge the dominance of Visa and Mastercard and the threat from Chinese and US Big Tech firms. This used to be known as the Pan-European Payment System Initiative (PEPSI) until the inevitable letter from the lawyers arrived and the name was changed to the European Payments Initiative (EPI) or, as I call it, Le Third Scheme. But what’s the point of a third scheme that is the same as the other two? Maybe circumstances are conspiring to open up the way to a genuine alternative.
EPI is the latest European attempt to build a scale rival to Visa and Mastercard (and perhaps, in the future, WeChat and Alipay). They’ve tried before and it’s gone nowhere. This time it might work because the pandemic will accelerate the transition to contact-free, in-app, omni-channel payments.
Originally backed by twenty French and German banks, the idea was that EPI would build a unified pan-European payment system, offering a card for consumers and merchants across Europe, a digital wallet and P2P payments. The banks backing the project (BBVA, BNP Paribas, Groupe BPCE, CaixaBank, Commerzbank, Crédit Agricole, Crédit Mutuel, Deutsche Bank, Deutcher Sparkassen- und Giroverband, DZ BANK Group, ING, KBC Group, La Banque Postale, Banco Santander SAN , Société Générale, UniCredit) are all serious players and can put muscle behind the initiative so unlike so previous attempt at a third scheme, this one has legs.
(If you are curious to learn more about the history of such “third schemes”, by the way, there was an excellent paper in the Journal of Payments Strategy & Systemsby Ewald Judt and Malte Krueger called “A European card payments scheme: forever a phantom?” which explores why generations of European policymakers had failed to create a pan-European alternative to the American giants and settled on three main reasons, which I summarised as: economies of scale, competition authorities’ pressure on interchange means and finally, and most importantly, the people who run banks couldn’t care less about it.)
My vision for a successful third scheme would be of an infrastructure based on modern technology:”request to pay” and push-only credit transfer across borders whether through the interconnection of national instant credit transfer networks or through their bypassing because of digital currency. I think that such an infrastructure will be cheaper to operate and better for consumers and merchants but I can also see that the dominance of card infrastructure in the short-term means that there is pressure for EPI to include this traditional payment mechanism as part of the scheme. It is not at clear to me, however, if this is really the right focus.
To illustrate why the transition to request-to-pay (which I will label R2P, to avoid confusion with Real Time Payments) means simpler and cheaper infrastructure, consider the canonical example that absolute everybody uses when discussing it: gym payments. At the moment I sign up at the gym and I give them a mandate that they present my bank and every month they use this mandate to take a direct debit and get the money from my bank account into theirs. Most of the time this works perfectly well but out of the gazillions of direct debits sent out every month some fraction will fail through lack of funds or because the customer changed account or whatever. Dealing with these failures is often a manual and expensive process. Plus, the mandates have to be managed and screened for fraud and so on and so forth.
Now imagine an alternative implementation that uses an R2P platform. There is no mandate and instead every month the gym uses R2P to send me a bill that shows up in my bank app. For the first couple of months I might look at the bill and then okay it, but I’ll get bored with that to fairly quickly and just tell my bank that so long as the bill from the gym is less than £50 and it’s only once a month then just go ahead and pay. At any time I’ll be able to go into my bank app and look at the list of these consents and turn them on and off. At some later point, I decide not to go to the gym anymore so I cancel my membership. Now there is no direct debit mandate to terminate and no continuous authority on a credit card to be removed. Instead I just tell my app to stop paying the bills from the gym. End of.
Assuming that R2P is implemented using a rich data ISO 20022 messaging structure, then the service that can be delivered to consumers and merchants is enhanced significantly. Right now if I find myself looking my AMEX bill while going through my QuickBooks ledger and I come across something I don’t recognise (as happened recently when I spotted a charge for £70 from British Airways) I can double-click on the puzzling entry all I like but there is no further data to give to me. If I don’t recognise the merchant, which happens quite often, there’s no way of finding out who they really are. But in an R2P world when I see the a mystery payment and double-click on it, I’ll be able to see the invoice, bill or ticket that I’d forgotten about as well as confirmation of my instruction to pay (which is all secured under the hood using digital signatures). The R2P roadmap has already been set out in the UK and at least one of the traditional payment providers (MasterCard) has already signed up to it. The European R2P roadmap is due out in November and I imagine it will be broadly similar to the UK version. In the US, where it is known as request-for-payment (RfP) and is currently an option for the first phase of FedNow implementation, I hope that a similar, interoperable, standards-based approach will lead us toward global interoperability.
Pie in the sky? I don’t think so, but it’s just my opinion.
The mobile handset is the obvious means to implement secure, authenticated payments. I go to a shop, buy something, wave my phone over the POS, the bill shows up on my phone, I enter my PIN to pay it and the bank instructs [an instant credit] transfer and confirms to the shop.
I wrote that in 2007, by the way, so the emergence of Le Third Scheme seems to me to be overdue! Now is the time for European payments to go over to an app-centric EPI (or a competitor) so the requirements for contact-free operation and omni-channel solutions will converge both off-line and online payments around the mobile phone. If this is true, then the barriers to replacing traditional card infrastructure retail POS become less relevant. This is why I suspect that the transition to instant credit app-only solutions might be quicker than many people anticipate. Perhaps cards won’t be necessary after all.
Pandemic Path Forward
The card imperative has weakened still further over this year, because the pandemic has accelerated trends in the payments space that make other possibilities significantly more likely than before the EPI was initially under consideration. All of this means is that as European payments go over to an app-centric EPI (or a competitor), so the requirements for contact-free operation and omni-channel solutions will converge off-line and online payments around the mobile phone. We are already seeing it the UK, where using QR codes to order in bars and restaurants is becoming the new normal, and I’m sure other countries are seeing the same. If this is true, then the barriers to replacing traditional card infrastructure at retail POS begin to fall away.
This convergence is why I suspect that the transition to instant credit app-only solutions might be quicker than many people anticipate, a suspicion that is emboldened by the number of such services that I see under development on top of open banking platforms in Europe right now.
As smarter people than me have pointed out, the mobile wallet is going to get rid of the card before it gets rid of cash, so there’s no need for Europe to compete on the card rails. It’s better to go around them.