Cash, card or competition? - The European Payments Initiative for retail payments

Summary

• A group of 16 major European banks has announced the implementation phase of a new unified payment scheme and solution called the European Payments Initiative (EPI).
• The EPI aims to compete within the single market against established card network schemes, such as Visa and Mastercard, and also to establish a credible challenger within Europe to future digital payment network schemes and digital currency payment solutions.
• The EPI will offer a payments card for consumers and merchants across Europe, together with a digital wallet that can be used for all types of transactions, including, point-of-sale, online payments and cash withdrawals. The initiative also intends to offer instant peer-to-peer (P2P) payments.
• Both the European Central Bank and the European Commission have expressed support for the EPI, however the EPI is likely to face close scrutiny from the European Commission's antitrust/competition directorate-general.
• The nature of such an initiative raises potential antitrust issues where, for example: (a) member banks will be required to work in close collaboration; (b) fees on P2P payments between European consumers are likely to have to be set (for which there are currently no EU fee caps); and (c) any developed scheme must not restrict access to new members and set terms for entry by those new members.

The European Payments Initiative

On 2 July 2020, a group of 16 major European banks from five Member States (Belgium, France, Germany, the Netherlands and Spain) announced the start of the implementation phase of a new unified payment scheme and solution called the European Payments Initiative. The EPI is aiming to enter the operational stage in 2022.

What is the EPI and what does it hope to achieve?

The goal of the EPI is to create a unified digital payments solution that can be used anywhere in Europe. The EPI will offer a payments card for consumers and merchants across Europe, together with a digital wallet that can be used for all types of transactions, including, point-of-sale, online payments and cash withdrawals. The initiative also intends to offer instant P2P payments (e.g. instant transfer of funds from one bank to another between two people using smartphones).

The current EU digital payments landscape

Outside of the international card schemes, digital payment networks among EU Member States are currently fragmented and largely national in scope. In order to offer seamless and efficient digital payments across EU Member State borders, European based banks partner with international card scheme networks including, for example, Mastercard and Visa. In the past number of years, European industry players and the EU Institutions have expressed support for the development of a competing card scheme network within Europe. More recently, members of the European banking industry have expressed concerns at moves by Big Tech companies to leverage their purported data and network advantages by offering digital currency and payment solutions.

Support but also caution from EU Institutions

By its nature the EPI will require close collaboration among European member banks and prospective members as the initiative develops. In addition, the European Commission has enforcement experience dealing with card scheme network providers such as Visa and Mastercard. As such, it is likely that the European Commission's antitrust/competition directorate-general will closely scrutinise the development of the EPI and take a cautious approach where experience may indicate that such markets are prone to the creation of dominant players (where network effects offer considerable competitive advantages), leading to behaviour that can amount to abuse. It will come as no surprise then, that the support of the European Commission and the European Central Bank for an initiative of this type has always been caveated by the fact that members will have to ensure that it complies with EU competition rules, in addition to applicable payment regulations.

Potential antitrust issues from the off

Even at this early stage, the EPI presents a number of potential competition issues that would have to be overcome to ensure the successful implementation of such a scheme. Among these will be ensuring compliance with EU rules on interchange fee caps for card payments (that currently regulate the interchange fees set by Mastercard and Visa within the EU). There are also likely to be challenges in relation to the level of fees charged by banks on instant P2P payments (e.g. instant transfer of funds from one bank to another between two people using smartphones). Currently there are no EU fee caps relating to these types of transfers raising the concern that excessively high fees could be charged. An additional (and quite topical) issue that antitrust regulators are likely to scrutinise is access by new members to the EPI network and, in particular, access to relevant data (in order to leverage the associated value of the network). The European Commission will closely monitor any governance arrangements that could result in the exclusion of new members or the imposition of unfair or unreasonable terms on new members. Recent enforcement activity has indicated that the European Commission is acutely aware of these types of issues. For example, in May 2019 the European Commission opened an investigation into Insurance Ireland (a representative organisation for many insurance companies in Ireland). The purpose of that investigation is to assess whether the conditions of access placed on companies wishing to gain access to Insurance Ireland's "Insurance Link" data pooling system may have had the effect of placing those companies at a competitive disadvantage (relative to current members) on the Irish market for motor insurance. That investigation has not yet concluded.

How does the EPI fit into the EU's Digital Strategy?

The idea of an international European payments system is not a new one. However, the idea has gained renewed momentum in the past year, with both European Central Bank and the European Commission publicly calling for an initiative of this type. In its communication launching Europe's Digital Strategy in February 2020, the European Commission listed (within the second pillar of its three pillar approach – A fair and competitive digital economy) the creation of a framework to enable convenient, competitive and secure Digital Finance, including "a strategy towards an integrated EU payments market that supports pan-European digital payment services and solutions (Q3 2020)." It is a stated aim of the EPI to align the European payments ecosystem of banks, merchants and acquirers / payment services providers, thereby contributing to strengthening of the Single Market and the European digital agenda.

The Implementation Phase and leveraging the SCT Inst.

The implementation phase of the EPI is expected to involve the creation of an interim company in Brussels, Belgium, which will: (a) set out deliverables for the initiative to work towards, including the completion of the technical and operational roadmap; and (b) initiate the implementation work relating to user experience. Member banks have invited European market players, individual banks or banking syndicates, as well as third-party payment service providers until the end of 2020 to apply to join the EPI as a founding member. The EPI will be based on the SEPA (Single European Payments Area) Instant Credit Transfer scheme or SCT Inst[1], and is likely to leverage the Eurosystem’s TARGET Instant Payment Settlement or TIPS system.[2]

EPI press release and founding member banks

The 2 July 2020 press release announcing the EPI can be found here.

Founding member banks:

For further advice or information on the competition law aspects of the European Payments Initiative, the European Commission’s various initiatives relating to payments or the regulation of digital markets now and in the future, please do not hesitate to contact Thomas O’Donnell, Solicitor or any member of the ALG EU, Competition and Procurement team.

Date published: 14 August 2020