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The European Payments Initiative (EPI) has pulled away from cards after half of its shareholders quit, which nobody is surprised by, but what comes next for the EU’s payments strategy?
It is a truth universally acknowledged that the European Commission was and still is gunning for the EPI to be a success.
Over the last few years the world has seen the likes of Donald Trump, Brexit and now Russia’s invasion of Ukraine, and the EU has arguably never before felt so much pressure for sovereignty and autonomy.
The EPI was seen as a mechanism by which EU could wrestle back control of its payments agenda and reduce its reliance on US payment giants such as Visa and Mastercard.
In the EU’s 2020 Retail Payments Strategy, the European Commission said: “There have recently been a number of encouraging developments. For example, on July 2, 2020, a group of 16 European banks launched the EPI project with a view to offering a pan-European payment solution by 2022. The Commission and the European Central Bank (ECB) had given this initiative their political support from the beginning and welcomed its launch.”
However, it was not meant to be, and last week it was reported that the EPI has given up its plans to pursue a pan-European competitor to Visa and Mastercard after two-thirds of its member banks quit the project, including Germany’s Commerzbank and Italy’s UniCredit.
"It was very difficult to predict how and if the EPI would have succeeded. I wasn't surprised as, since the beginning, this has been an ambitious project, and it hasn't always been clear what the business case is,” said Pierluigi Cuccuru, open banking specialist at De Matteis Law.
There was a strong political drive to create this scheme but that was not sufficient to prompt radical changes, he said.
"I was surprised and not surprised,” said Robrecht Vandormael, managing director at FTI Consulting, commenting on the news. “I was surprised by the timing of this announcement as so far, EPI has seemed keen on developing a business model for a card scheme.”
Yet from the start, he continued, it has always been considered an enormous challenge for participating banks to develop a joint project. “It needs a lot of investment, and while it still has a lot of government support, we saw that Spanish and Dutch banks became increasingly detached and sceptical, while the French, Belgian and only certain German banks were still keen on advancing with it.”
"The fundamental issue with the EPI is that it involved a bunch of different banks who have their own ecosystem,” agreed Kjeld Herreman, director at Azzana Consulting. “Each country has a different focus domestically, with some focused on wallet solutions, and others on cards. The EPI had to be able to satisfy all of them, resulting in an overinflated roadmap having to please a lot of stakeholders."
Large investment
The EPI project has emerged as a wallet solution like PayPal rather than a card scheme that could compete with Visa and Mastercard, he continued. “There have been a lot of attempts at setting up a pan-EU card scheme and now that this has happened, on the one side, there is a disappointment considering the momentum but on the other side, the economics are very difficult, as this includes an investment of upwards of €1.5bn."
It was these sky-high investments that triggered concern among shareholders.
“When it became increasingly clear that there wouldn't be any subsidies going to EPI, it was at breaking point,” according to Vandormael.
Previously, the EPI had made calls to the European Commission and member state level authorities for more support, whether financial or political.
One thing that the EPI’s chief executive, Martina Weimert, pushed for last year was a “regulatory pause”.
Weimert, although an experienced payments expert in the consulting field, had been considered a lightweight by some, with sources having said during her tenure that she lacked the skills needed to bring together the banks.
"There was a hazy understanding of the business model,” said Mikko Rieger, a Finnish payments consultant. “There was no real indication that it would work from a profitability standpoint, and it had a significant upfront cost and not sufficiently well-developed payback possibility."
He continued: “EPI has until the end of April 2022, I understand, to see if it will exist and I give it a 40/60 chance of continuing. The question now is whether we look at other alternatives."
To implement this idea, a lot of actions and input from various stakeholders is needed, said Cuccuru. “This requires a unifying force. Perhaps a stronger leadership should have led the project, and it should have government supporting it at a higher level."
What are the alternatives?
With the demise of the EPI’s card plans, there is still the lingering question of just how payments in the EU can claw back sovereignty.
Going forward, a wallet solution may be cheaper but it will bring its own challenges.
"It could be something that starts in the French market and expands from there, but wallet solutions need a large reach. The only country that has that is France where the majority of banks are involved and there is a network effect,” said Herreman.
Beyond that, potentially Belgium could give it some momentum, he suggested. “Acquirers, merchants and issuers are going to need confidence that there is a market for it before they invest in this solution."
For Herreman, there are a few options going forward that could be considered by the EPI.
"There are three consequences that are possible now. The first of these is regulatory, mandating the development of the EPI or a similar scheme, which would perhaps be ECB-led,” he said, albeit with the caveat that this is extremely unlikely. “Rather, we could expect the European Commission to do something that shifts the economics.”
For example, by helping with the cost of the EPI through investment, or by further reducing interchange fees to zero and taking away the lucrative issuing revenues from the existing schemes, he speculated. “This has been discussed before, but the banks persuaded the commission to hold off while they created the EPI."
Yet, perhaps a more grassroots approach is needed. Rather than the top-down path that the EPI has taken thus far. This would involve domestic solutions, such as giropay in Germany and France’s Cartes Bancaires, becoming interoperable so that consumers are not limited to making domestic payments as is currently the case.
"It is great that there are domestic solutions in Europe and that these have largely been a success,” said Herreman. “What these systems lack is interoperability, and I was hoping that was where the EPI would go, and become a switch for domestic schemes that would allow them to be used cross-border."
Localised mobile payment schemes mean that the possibility of interoperability is still there, which a significant portion of the population has already adopted, and this is more cost-effective as the investments have already been done, suggested Rieger.
For Rieger, this could be achieved through so-called islands such as the P27 expanding across borders. “However, there needs to be cross-border governance established,” he pointed out.
Others are not so sold on the possibility of interoperable domestic schemes, however.
“The interoperability of domestic schemes has not taken off and I don't think it will in the future,” said Vandormael.
There would be less interest from the banks to do so, as they can rely on international schemes to manage cross-border transactions, and the dual-branding of cards works well domestically, he pointed out. “Instead, the future focus will be on building alternative payment solutions that could complement cards."
In spite of the EPI’s future hanging in the balance, Brussels has so far maintained a business-as-usual approach to the whole thing.
“We need EU projects like the EPI, offering home-grown payment options,” said EU financial services chief Mairead McGuinness during a speech last week, while her contemporary at the Banque de France, Denis Beau, said that the country’s central bank “actively supports” the project.
