The last time European banks attempted to build a payments group that could take on the US giants that dominate the industry, they failed miserably.
But when the Monnet Project collapsed in 2011, no one was talking about the commercial threat from US tech companies; and EU politicians hadn’t just lived through the Trump presidency.
Now, with these politicians convinced that a European payments system is about sovereignty, some of the currency area’s biggest lenders have teamed up to launch a new attack on their dominant American rivals.
It got off to a rough start last summer when US soft drink group PepsiCo objected to its proposed name: The Pan-European Payment System Initiative, or PEPSI.
However, major funders remain optimistic about the success of the idea, now known as the European Payments Initiative.
In 2011, “there was no political support at all,” Wolf Kunisch, head of strategy at Paris-based payment processor Worldline, told the Financial Times. Now, “the European Commission and the European Central Bank. . . understand that to have European sovereignty, you must also have European payment systems in place ”.
The realization that an American president could one day decree Mastercard or Visa should no longer do business “with a certain part of the population”. . . it’s too addictive, ”Kunisch said.
EPI is backed by 30 banks and two of the continent’s largest payment processors. Its mission is to create a pan-European payment service making it possible to pay online as well as in stores, to settle bills between individuals and to withdraw money from ATMs.
It is also designed to shatter what its president Joachim Schmalzl calls a US-dominated “oligopoly”. European banks are thinking about their own interests, aware that if they don’t act now, they could be challenged by tech companies like Apple and Google that are increasingly on their ground.
“If we don’t build a European payments player today, it will be either Chinese or American [calling the shots]”, declared to FT Philippe Heim, general manager of the Postal Bank of France.
And Schmalzl, who is also a board member of the German Association of Savings Banks, the country’s largest retail banking group, warns rivals would “increasingly take market share” from banks. European.
Clearer profit motivation
Today, four out of five transactions in Europe are processed by Mastercard and Visa, according to EuroCommerce, a lobby group of European retailers. Across the table, the banks and acquirers behind the PPE currently process more than half of all EU payments.
The critical mass of activity brought by banks such as Deutsche Bank, BNP Paribas, ING, UniCredit and Santander gives weight to the EPI. The Brussels entity has until September to draw up a master plan. If the banks behind EPI then give the green light, the first real applications could be launched in early 2022.
Certain obstacles which made the Monnet 2011 project fail have disappeared. At the time, European banks owned Visa Europe – an independent company until it was acquired by its parent company in 2015 – and were reluctant to create a competitor. Now the motive for profit is clearer.
“If it’s our tool, that means the margin is ours. Because we have seen that with Visa Europe or Visa Inc, or Mastercard at the end of the day, the financial conditions are imposed on us by the big operators, ”said Heim.
Working groups meet every week to try to define the form of the EPI, but major obstacles remain. “It is not the case that the world is waiting for another player who offers [payments] solutions, “Schmalzl said, adding that PPE products” must of course be as user-friendly, if not better “than the offerings of Visa, Mastercard and PayPal.
How to build a clientele
The EPI is also faced with a simple dilemma between the chicken and the egg. For a system to work, you need merchants who are ready to accept payments and users who are ready to make payments. Having both in place at the same time is no easy task, especially since full deployment could take years and a bad start could kill PPE’s chances of success.
As a senior French banker involved in the project said: “It took a decade and a pandemic for contactless payments to really take off. “
A key question is whether German and French banks will be ready to migrate the existing national payment systems – Girocard in Germany and Carte Bancaire to EPI. “Without a credible commitment to do so, EPI will not be able to succeed,” said a German banker involved in the talks.
National pride and fear of replacing established payment systems with an unproven alternative remain formidable obstacles, warn those close to the project.
On the other hand, bankers fear that domestic devices will not have a future on their own. “Girocard suffers from at least a decade of underinvestment,” said another payments expert working for a major German lender, pointing out that the system does not work online or abroad.
A senior official at a French bank agreed, saying if card systems in France did not develop on a European scale, they “would be dead” within the next 10 years. The executive expected the cards to start migrating to EPI in 2023.
“What the EPI needs is someone to take the lead,” the German banker said, as even the coordination between the various German lenders involved is “painful and ineffective”. The need for consensus, they said, takes time and often results in “lowest common denominator” agreement.
“The biggest risk,” said another French inside banker, “is that those involved end up deciding it’s too complicated and decide to leave.”
Competition and compromise issues
The location of EPI’s headquarters in Brussels is an example of the need for compromise that outweighs commercial sense. “This choice looks like a political decision,” said Marcus Mosen, payments consultant and former managing director of German payments company Concardis, adding that for purely business reasons Berlin, Paris or Amsterdam would have been a better choice.
So far, PPE backers have disbursed 30 million euros – a decent sum to finance the initial development of a master plan, but well below the “billions of euros” that Schmalzl deems necessary.
Bankers in Germany and France agree because, as it stands, EPI shareholders will have to bear the potentially high development cost and transition costs, such as contract termination and swapping. cards, for users and merchants.
One way to cover the costs could be to leverage EU funds. “We believe that by supporting infrastructure in Europe, we should not only build roads, but potentially also ‘payment roads’,” said Schmalzl.
However, banks are also concerned that EU funds will come with strings attached.
And while European policymakers have given EPI the green light, bankers are worried about competition resulting from plans for a digital version of the euro.
The digital currency planned by the ECB, itself partly conceived as a means of improving cross-border payments, could compete directly with the EPI and thus eat into bank margins. But as a senior Eurosystem official said: “We have to think about consumers, banks and the whole financial system. So the banks should do their job and we will do ours.
But despite the difficulties, European banks and payment processors are optimistic this time will be different. Although the program currently only has banks from six countries, his relatives are hopeful that others will join him soon, including Italy.
And Kunisch is willing to bet on how PPE will work: “Our real guess is that it will happen. And I don’t really see any fundamental chord breaking coming. But if you had asked me to put 100 € on it, I would put it aside entirely.