Last year when the European Central Bank said that it welcomed an initiative by some of Europe’s top banks to explore the development of a “rival payment system” to challenge the dominance of Visa and Mastercard and the threat from Chinese and US Big Tech firms. This system used to be known as the Pan-European Payment System Initiative (PEPSI) until the inevitable letter from the lawyers arrived and the name was changed to the European Payments Initiative (EPI) or, as I call it, Le Third Scheme.
Originally backed by twenty French and German banks, the idea was that EPI would build a unified pan-European payment system, offering a card for consumers and merchants across Europe, a digital wallet and P2P payments. The banks backing the project (as of June these were BBVA, BNP Paribas, Groupe BPCE, CaixaBank, Commerzbank, Crédit Agricole, Crédit Mutuel, Deutsche Bank, Deutcher Sparkassen- und Giroverband, DZ BANK Group, ING, KBC Group, La Banque Postale, Banco Santander, Société Générale, UniCredit) are all serious players and can put muscle behind the initiative so unlike so previous attempt at a third scheme, this one has legs.
When it was announced in June, I immediately posted on LinkedIn my “firm prediction based on 23 seconds of detailed reflection”. This knee-jerk reaction suggested that EPI should have forgotten about cards and gone for an app implementing request-to-pay (RTP), a sort of pan-European iDEAL with knobs on. Competing with cards in places where cards work well (ie, shops) seems a waste of energy to. I thought it would make more sense to go after the places where cards are not optimal: mobile and online, person-to-person.
If this thinking is correct, then it’s reasonable to ask why they are bothering with cards at all. Uncharitable people (of whom I am not one) might say that EPI reminds them of EMV, of that time when Europe decided to implement the best possible offline payment system in the world at almost the exact moment that the whole world was going online.
(Card fraud was up again last year, by the way. The only solace for Europeans is that they’ve managed to send a lot of it to America, as the US is about fifth of global card volume but about a third of the fraud).
So. Cards? What is the point? After all, we’re not going contact-less, we are going contact-free! If you want to inspire European super-apps and super-ecosystems around them, then you need to focus on the new platform. A little tongue-in-cheek perhaps, but I was making a serious point with it. Since I published that I’ve had a few discussions with different people around the industry and I can see why (led by the banks in France) EPI decided to make cards part of the longer term roadmap. This is a topic will return to later. Anyway, I set out my three point plan for a third scheme back in June saying that it should be based on:
1. Digital identity (with privacy-enhancing architecture);
2. Digital currency (peer to peer, no clearing or settlement); and
3. Request-to-pay (push payments only, no pull).
That final point deserves amplification. Central to evolution of the payments sector is Request to Pay labelled RTP in the UK, R2P in Europe and RfP (Request for Payment) in the US. This is new and powerful way for payments to work between people, companies and governments. It is way to complement payments infrastructure with a structured message service that gives payees the ability to send a ‘request’ (with details or attachments) rather than simply sending an invoice. For each request, customers will typically be able to opt pay in full, pay a partial amount, request an extension, decline, or contact the payee.This gives a great customer experience and avoids a number of pain points, which is why I am very keen on it.
Request for Interoperability
To illustrate why the transition to request-to-pay (which I will label R2P, to confusion with Real Time Payments) means simpler and cheaper infrastructure, consider the canonical example the absolute everybody uses when discussing it: gym payments. At the moment I sign up at the gym and I give them a mandate that they present my bank and every month they use this mandate to take a direct debit and get the money from my bank account into theirs. Most of the time this works perfectly well but out of the gazillions of direct debits sent out every month some fraction will fail through lack of funds or because the customer changed account or whatever. Dealing with these failures is often a manual and expensive process. Plus, the mandates have to be managed and screened for fraud and so on and so forth.
Now imagine alternative implementation uses an R2P platform. There is no mandate and instead every month the gym uses R2P to send me a bill shows up in my bank app. For the first couple of months I might look at the bill and then okay it, but I’ll get bored with that to fairly quickly and just tell my bank that so long as the bill from the gym is less than £50 and it’s only once a month then just go ahead and pay. At any time I’ll be able to go into my bank app and look at the list of these consents and turn them on and off. At some later point, I decide not to go to the gym anymore so I cancel my membership. Now there is no direct debit mandate to terminate and no continuous authority on a credit card to be removed. Instead I just tell my app to stop paying the bills from the gym. End of.
Another reason why this might be interesting to consumers and merchants and that of course is the data. Assuming that R2P is implemented using a rich data ISO 20022 XML messaging structure, then the service that can be delivered to consumers and merchants is enhanced significantly. Right now if I find myself looking my AMEX bill while going through my QuickBooks ledger and I come across something I don’t recognise (as happened recently when I spotted a charge for £70 from British Airways) I can double-click on the puzzling entry all I like but there is no further data to give to me. If I don’t recognise the merchant, which happens quite often, there’s no way of finding out who they really are. But in an R2P world when I see the a mystery payment fand double-click on it, I’ll be able to see the invoice, bill or ticket that I’d forgotten about as well as confirmation of my instruction to pay (which is all secured under the hood using digital signatures).
The R2P roadmap has already been set out in the UK and at least one of the traditional payment providers (MasterCard) has already signed up to it. The European R2P roadmap is due out in November and I imagine it will be broadly similar to the UK version. In the US, where it is known as request-for-payment (RFP) and is currently an option for the first phase of FedNow implementation, I hope that similar, interoperable, standards-based approach will lead us toward global interoperability.
As an aside, and as noted in the Financial Times, there is a danger that EPI will have some issues with competition authorities. I thought it was very interesting to hear that the association of trusted third parties (TTPs) in Europe has already been complaining that a “euro R2P” will be anti-competitive. Their reasoning, which does make sense, is that they will be required to deliver their AISP and PISP services using the PSD2 APIs that are in many cases not that great (in terms of quality of service and grade of service) while the banks and their customers will find themselves using smooth and efficient data rich R2P services instead. You can imagine the amounts of money that might be involved in such an implementation if there is a good R2P platform in place for major billers and then it’s hard for the TPPs to come up with other services to add value.
If you want an example of how this might play out in practice consider the example of the British tax authority. They have just issued RFP (for several million pounds) for the provision of just such AISP and PISP services so that they can on the one hand monitor transactions (with consent, of course) to help people to pay their taxes and also to send payments to and from taxpayer bank accounts. Now, as someone who is an individual and an SME, I would find it super convenient if instead of letters in the post and forms to fill out on the web the tax authorities instead used an R2P platform to send me the monthly bill for payroll taxes and social security payments so that I could simply press a button in my bank app to say “yes go ahead and pay”. This would all run smoothly through my bank’s app.
Pie in the sky? I don’t think so, but it’s just my opinion. The mobile handset is the obvious means to implement secure, authenticated payments. I go to a shop, buy something, wave my phone over the POS, the bill shows up on my phone, I enter my PIN to pay it and the bank instructs [an instant credit] transfer and confirms to the shop. I wrote that in 2007, by the way so now seems to be a a good time to try to understand why we don’t yet have push payments at POS, get an update on the current status of EPI and have a more general discussion about what a future third scheme ought to look like.
Summer Time
The workshop was led by my Consult Hyperion colleague Tim Richards and included my good friend Gijs Boudewijn (Chair of the Payment Systems Committee and the European Banking Federation and Deputy General Manager of the Dutch Payments Association), Erik Tak (Global Head of the Payments Centre at ING, one of the EPI member banks) and Marc Massar (CPO at Nets Merchant Services).
I thought that many of the people who came along to Summer Week would be younger than the panellists, so I made a point of giving a brief history of the third scheme to date from the possibly apocryphal story of the Finnish MEP who was unable to use his Avant card in a Greek taverna (thus kickstarting the Commission’s conviction that something should be done) through the days of the European Association of Payment Systems (EAPS, around 2007) through the days of Monnet and the 2011 focus on SEPA (Gertrude Tumpel-Gugerell and colleagues). At that time, I couldn’t see a new bank-driven retail payment system emerging and so I thought that either regulators would push it along or perhaps merchants might pull it along. Either way, not much happened.
(If you are curious to learn more about the history, the Winter 2013 Journal of Payments Strategy & Systems — Vol. 7, No. 4, p. 344-358 — there was an excellent paper by Ewald Judt and Malte Krueger called “A European card payments scheme: forever a phantom?” which explores why generations of European policymakers had failed to create a pan-European alternative to the American giants and settled on three main reasons, which I summarised as: economies of scale, competition authorities’ pressure on interchange means and finally, and most importantly, the people who run banks couldn’t care less about it.)
The Third Way
Looking forward, I outlined what I supposed to be the endgame. My vision is of an infrastructure based on “request to pay” and push only credit transfer across borders whether through the interconnection of national instant credit transfer networks or through their bypassing because of digital currency. I suggested that such infrastructure will be cheaper to operate and better for consumers and merchants. I think it’s fair to say that the panel agreed with me that this would be the inevitable direction of travel, but that the dominance of card infrastructure in the short-term would mean that more traditional payment mechanisms (ie, cards) would need to be part of the scheme.
I’m actually not so sure about card imperative because I think that the pandemic has accelerated trends in the payments space that make other possibilities significantly more likely than before the EPI was under discussion. In my keynote presentation to the Summer Week, I talked about these trends. Early on in the pandemic my colleagues and I did a lot of research to see how it would impact our customers and our customers’ customers. We looked at a lot of speculative forecasts, we looked at research and analysis from quite a wide range of organisations in the financial sector and beyond, we spoke to a number of people in the industry and we took part in a fair few discussions and debates on the topic. As a result of this, we identified a number of strategic areas where stakeholders in the payment space should be developing or revising their strategies and where they should be planning for some changes to take them through and beyond the COVID-19 crisis.
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First of all we can see the transition from contact-less to contact-free payments. I’ve spoken about this before at MPE and characterised it as the transition from “checkout” to “checkin” models of retail payments. The pandemic has not invented the need for this transition but it has certainly accelerated it as people’s natural reluctance to touch money, cards and terminals (in fact, their sensible reluctance to touch anything that is not their own) has meant that mobile, app-centric modes of commerce have become common. Whether it’s ordering a beer in the pub, coffee in the airport lounge or a piece of cake at our local garden centre, it’s all done using apps and (currently) QR codes now.
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Secondly, alongside the transition to contact-free modes of operation, is the push for omni-channel solutions. It already easy to see what this is, because it doesn’t matter whether you are buying something on the web, over the phone, in person or by any other mechanism, the payment will be driven through the mobile phone.
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Third, the issue of cashlessness is intertwined with the transition to omni-channel mobile solutions and contact-free modes of operation. But as we have already seen in some other countries (Sweden is always used as the example) the transition to cashlessness if it is not planned, if is not part of an actual strategy, results in the marginalisation and exclusion of certain groups. Thus, the pandemic has made us think seriously about the role of cash, the cost of the cash infrastructure, the use of cash throughout society and what strategies society might choose to adopt as cash drops out of use from certain groups.
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Finally, and often overlooked because of the situation in Europe, the issue of government stimulus to the economy has meant that in many countries large swathes of the population have been required to obtain either bank accounts, mobile money accounts, digital wallets of some kind and so on in order to obtain government stimulus money. This made the distribution of government stimulus money more efficient more effective and has introduced many people who were previously trapped in a cash economy to the benefits of electric transactions of one form another. Given that this is hardly likely to be the last pandemic, bringing government into the discussion with banks and others makes a lot of sense.
All of this means is that as European payments go over to an app-centric EPI (or competitors) so the requirements for contact-free operation and omni-channel solutions will converge off-line and online payments around the mobile phone. If this is true, then the barriers to replacing traditional card infrastructure retail POS begin to fall away. This is why I suspect that the transition to instant credit app-only solutions might be quicker than many people anticipate. Perhaps cards won’t be necessary after all.
[An edited version of this piece first appeared in Forbes, 20th September 2020.]
Snippings 