Zach Meyers / Jul 2021
Several European banks announced last year they would create a European version of Visa and Mastercard, called the European Payment Initiative. The European Commission and the European Central Bank were cheering. They are preoccupied by the lack of a European rival to Visa and Mastercard and, behind the scenes, they had pressured banks to participate.
The initiative reflects the EU’s all-too-common approach to ‘strategic autonomy’: it tries to replicate successful foreign businesses rather than encouraging innovation. This tendency is now on full display in the tech sector, with the payment card idea joining plans to onshore semiconductor manufacturing and to build a European cloud computing platform.
History shows these ideas rarely work out. For example, many similar plans for a European payment card have failed over the last 20 years. While the political pressure to succeed is stronger this time, the business case for a European payment card is still weak. Many European countries’ national card networks have disappeared. Those that remain are losing ground and are less innovative than Visa and Mastercard, which enjoy global economies of scale. A European banking consortium is unlikely to be agile enough to beat them. Nor will they be determined enough: retail banks earn handy revenues on every Visa and Mastercard transaction. Any new European card network will be substantially less profitable: the banks will have to spend billions in investment to get the service up and running, and it will lack the global economies of scale that Visa and Mastercard enjoy. In the meantime, Visa and Mastercard are continuing to innovate. If the European Payments Initiative tries to adopt the same business model as Visa and Mastercard, European consumers will simply end up subsidising a solution that cannot keep up.
Worse yet, the idea distracts from a genuine problem in the payments sector: the need for more competition and innovation in electronic payments. The biggest card networks grew by charging merchants who accepted card payments, and using these charges to provide incentives for consumers to use their cards. Retailers had to accept the associated fees or lose sales. However, EU regulations now impose a ‘cap’ on these fees. This means any new European payment network cannot scale up using the same business model that Visa and Mastercard adopted.
This is why any new competitor to Visa and Mastercard needs to be different. Fortunately, Europe already had a plan to increase competition before the European Payment Initiative. The plan was part of the EU’s Open Banking reforms. It allows consumers to easily pay merchants over the internet directly via a bank transfer, instead of typing in card details. A mobile phone app could provide a similar way to pay in person, without needing to present a card. Both models avoid the costs of the Visa and Mastercard networks. These services have already taken off in some parts of the EU, through services like Klarna, Trustly, Swift, Sofort and iDEAL.
Recent comments from the European Payments Initiative chief executive, Martina Weimart, are encouraging: she has committed to “an alternative business model” that will avoid overburdening merchants with high fees. However, this business model will produce its own challenges. For example, low fees for merchants means less profit for retail banks: many of which will have little incentive to sign-on, encourage consumers to use the new service, and allow the service to scale. The European Commission therefore needs to find better ways to make Open Banking a win-win for banks and merchants – for example, by giving banks more financial incentive for the system to work, and by giving merchants more input in how the system is governed.
The European Payments Initiative, and its participating banks, should therefore ignore the seductive logic of ‘European champions’ and have the courage to offer something different to today’s card networks. If it can encourage consumers to embrace new ways to pay, Open Banking services have an important role alongside card payments, introducing more diversity, choice and lower prices. This is all less exciting than creating a brand new, EU-branded card network – but far more important to the economy and consumers in the long run, providing Europe with less imitation and more innovation.