EU Strategy for Retail Payments

In 2019, over 48% of cashless transactions in the EU were processed with credit or debit cards. This number is likely to have significantly increased last year due to COVID-19. It may be seen that the European payment solutions with schemes such as Girocard/Giropay (DE), Card Bancaire (FR) or Ideal (NL) will remain extremely fragmented. Such developments in payments at the cash register or in e-commerce may bring disproportionate profit to the global American players such as Mastercard and Visa.

As a result, with its strategy paper, the EU Commission wants to strengthen competition, not only with a European scheme for contactless payments by card or mobile phone. Pan-European payment initiatives are also to be incentivized by adjusted regulations ensuring cross-border interoperability, promoting standardization and facilitating low-threshold and above all non-discriminatory access to existing customer interfaces.
Moreover, the Commission wants to simplify payments outside the SEPA and promote pan-European real-time payment solutions.

Processing of instant payments (by definition in less than 10 seconds, normally much faster) is stated to be one of the most important technical foundations for developing innovative and efficient payment solutions. The corresponding scheme has been active since 2017, but the Instant Payment Standard (SCT Inst) is not yet sufficiently widespread. As of January 2021, only 57% of all European banks are offering such payments. The effective share of credit transfers in real time stood at nearly 8% in the fourth quarter of 2020 and has increased almost a hundredfold in less than three years. Moreover, some participating banks require additional fees from their customers. It can therefore be assumed that after the end of 2021 deadline, the Commission will require mandatory participation for banks and that these payments are made available to customers at the same cost as today’s transfers. This will result in many banks, the systems of which are based on legacy technology and batch processing, to invest massively in order to ensure the necessary 24-hour availability. SCT Inst should be completed with a pan-European standardized QR code and the currently defined SEPA Request-to-Pay (RTP).

This strategy of the EU Commission goes beyond the former approaches. If implemented systematically, instant payments may become the drivers of fully digital and automated business processes at customers, banks and in commerce and affect the current, well-established settlement structures disruptively. For example, customers could access their bank accounts in a secure and convenient way with various payment instruments to release real-time transfers at POS or in the online check-out (see Figure). The transfers could be credited and assigned directly in the merchant’s system. Transactions could thus be processed within seconds with totally different providers and, if necessary, without the established card organizations and enhanced by various additional services. Of course, this scenario cannot be guaranteed. In fact, the implementation can in turn make massive investments in infrastructures necessary. However, use cases may remain limited, as existing solutions will cover a wide range of customer needs in the meantime, and the added value will not make up for the expenditure. There can be no doubt, however, that instant payments will play a central role.

To strengthen the euro as a currency and Europe as an economy, payments transferred to areas with other currencies should be faster, cheaper and easier. Therefore, SEPA should become an international standard that makes it easier for example for the growing group of migrant workers to transfer money to their home country outside the EU and significantly reduce the average costs of global financial transfers, which now make up for around 7%. The Commission requires from itself to declare SEPA standards as an export good and promote standardization beyond European borders.

Both in the EU and in Switzerland, payment transactions are becoming more diverse for end customers. While many transactions in Switzerland are already carried out electronically, a variety of innovations is being introduced to the ecosystems. TWINT represents the first steps already taken in Switzerland towards a national independent solution, even though it isn’t based on instant payments. While the EEA pushes open banking forward in regulatory terms, Switzerland focuses on developments in the market (e.g. bLink). As an EEA member, Liechtenstein is directly affected by the EU strategy, and the players in the Swiss financial center should also review their strategic thrust due to their close interaction with the EEA. It is recommended to analyze potential implications at an early stage and derive possible opportunities for one’s own situation. The change in paradigm, such as instant payments, open banking or a comprehensive interoperability with the EEA, also requires sweeping adjustments of infrastructures and penalizes a passive position of individual participants in the long run. Only if the implementation makes it necessary to rethink own business models (e.g. handling bank data in the context of open banking or the role of acquirers) can Switzerland and Liechtenstein gain medium to long-term benefits from the cooperation with the EU and its Member States as economic partners and establish new business fields.