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The European Payments Initiative (EPI) has reportedly given up its plans to pursue a pan-European competitor to Visa and Mastercard after two-thirds of its member banks quit the project.
Earlier this month, the EPI revealed that only 13 of its 33 shareholders remained behind the project that is aimed at creating a pan-European solution for instant payments and cards both for euro and non-euro markets.
Banks that decided to stay on board confirmed “they remain convinced of the strategic value of a unified payment solution ready for commerce leveraging especially instant payments and want to go ahead”, the EPI website says. These members include Deutsche Bank, Santander, Crédit Agricole, Nets and Worldline, and others.
“Therefore, the EPI Interim Company is now adapting its scope and objectives to this new dimension.”
Media reports speculate it means the EPI will drop its plans to create a card network and will instead focus on a digital wallet using instant payments.
The banks' decision to withdraw from the EPI does not come as a surprise to those following the recent developments of the project.
Major European banks announced in July 2020 their support and development programmes for the EPI following pressure from the European Commission and the European Central Bank (ECB).
Their initial goal was to be ready to launch EPI products in the first quarter of 2022, but over time, there have been growing concerns and scepticism about whether the project will ever take form.
By last November, it became apparent that there are frictions between the different banks, with German and French banks pushing for it and Spanish and Dutch participants being more tentative.
Shortly before Christmas, German media revealed that at the latest EPI meeting, only ten institutes backed the project, eight spoke against it, while the rest remained indecisive as to the future of the initiative.
Subsequently, at a late February meeting, 20 banks pulled out of the initiative and the EPI is now forging ahead with limited “scope and objectives” tailored to the limited number of participants.
PKO Bank Polski, one of the banks quitting the EPI, told VIXIO it took the decision to withdraw “after a detailed analysis of the necessary costs and potential benefits of joining the EPI and evaluating prospects of development of this initiative”.
However, the bank does not exclude participating in the future in the payment system created by the EPI, the spokesperson added.
What’s in it for banks?
For a payments ecosystem to work, all players have to have an incentive and be able to benefit from taking part in the system.
The EPI is intended to set higher European standards that consumers can enjoy across the EU, and offer a cheaper service for merchants.
However, this set-up poses the question of what is the incentive for banks to switch and fund the EPI network.
When a card payment is made on the Visa or Mastercard network, merchants must pay their acquiring bank to receive card payments. A merchant fee is distributed between the acquirer (acquiring fee), the card networks (the scheme fee) and the banks (interchange).
The interchange and scheme fee component is typically set by Visa and Mastercard, which compete with each other to offer the best revenue incentives for their customer banks.
Hence, if the EPI succeeds, banks will likely lose revenue, said Zach Meyers, senior research fellow at the Centre for European Reform.
This set-up has created several challenges for the EPI, Meyers told VIXIO.
First of all, since the 2015 interchange fee regulation, card payment fees are capped within the EU. This means that Visa and Mastercard have the benefits of being incumbents, but newer card networks cannot charge more to encourage cardholders to use them.
Therefore, the EPI “would have required a very large capital investment from its participating banks, to have any chance of building scale”, Meyers said.
In addition, although the EPI would only have worked within Europe, where fees are limited by the 2015 regulations, Visa and Mastercard have an advantage of potentially charging more for international transactions.
This could mean that the EPI may have found it difficult to compete with or undercut the card giants’ prices, which might have come at the expense of functionality and innovation, or else, require even more investment from banks to counteract, according to Meyers.
At the same time, a significant objective was to make the EPI cheaper than Visa and Mastercard for merchants to accept. However, the only way to achieve that is by making the system less profitable for banks than Visa and Mastercard.
“In the end, although there was political pressure for banks to back a European solution, it is more profitable for banks to continue to rely on Visa and Mastercard, rather than spending vast sums of money on a business model that looks unlikely to succeed,” according to Meyers.
The European champion
The pan-European card network was aimed at solving two problems.
First, the EPI could have addressed concerns by European policymakers that consumers are relying too much on US payment networks and help build up European autonomy, Meyers explained.
Second, there is concern that, despite regulation, Visa and Mastercard’s fees are still too high and the EPI could in theory have provided a cheaper option.
“However, there is not really a good use case for another card network,” Meyers noted.
“Visa and Mastercard have a global scale, are far ahead of smaller networks in their innovation, and — as the need for fee regulation shows — competition between card networks can make prices go up, rather than keeping them down,” he explained.
On the other hand, newer forms of payment, such as digital wallets based on open banking, offer more promise, according to Meyers.
“They do not require huge investment because they can run off the internet; they do not need banks to cooperate (so the fact that banks may lose out on revenue is not fatal to the projects); and they can be cheaper because they use low-cost bank transfers instead of card-based payments,” he added.
