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Integrating the EU’s electronic payments market

The growing electronic payments market is to a large extent fragmented along national borders. The European Commission (EC) held a public consultation to identify ways to complete its integration into a single market. Responses reflect the opposing views of market incumbents and new entrants, and of payment-service providers and merchants.

Electronic payments market

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Electronic retail payments can be made by cards, Internet and mobile devices (such as smartphones and tablets). Card payments are by far the most popular, accounting for 39% of all non-cash transactions. On average every EU citizen has more than one payment card, while the number of card transactions has almost tripled over the past ten years. Internet and mobile payments, while less common, are growing faster: in the 2010-13 period, the global number of online transactions is expected to double, while the number of mobile payments is expected to increase by a factor of four.

Despite steady growth in the volume of non-cash payments, four in five retail transactions in the EU are still settled with cash. The euro area ratio of cash in circulation to GDP is more than twice as high as that of the U.S. According to a study, in 2008 the total cost of maintaining cash payments amounted to €84 billion or €130 per citizen. The retail payment markets differ across the EU: a 2012 study of 13 Member States (MS) showed that cash (in eight MS) and debit card (in five) transactions were the cheapest payment instruments.  

Legislation in force

European payment services are regulated by the 2007 Payment Services Directive (PSD). It specifies the type of organisations which can provide payment services and introduces a new licensing regime allowing non-banks to enter the market. The PSD also sets transparency standards for customers, who must be informed about charges and exchange rates. The Commission has announced it will propose a revision of the PSD in mid-2013.

The 2009 Electronic Money Directive regulates the market entry and conduct of businesses issuing e-money (digital equivalents of cash). It introduces common standards and brings electronic money institutions into line with the requirements of the PSD.  

A separate 2012 Regulation covers technical requirements for credit transfers and direct debits in euros and deadlines for their migration from national to EU-wide standards.

SEPA and EU objectives

The existing regulatory framework forms the legal basis for the Single Euro Payments Area (SEPA), which is a self-regulatory initiative set up by the European banking industry and supported by the EU institutions. Its objective is to integrate national retail payment markets within the euro area into a single payment market, where cross-border payments are as easy and efficient as domestic ones. An EC-funded study concluded that about 60% of credit-card payments attempted for cross-border purchases fail due to non-acceptance of cards. The ambition of SEPA is to remove technical, legal and market barriers, to increase competition, reduce costs and provide higher quality services to customers. Its full implementation could lead to savings of €123 billion over six years. 

Completion of SEPA and integration of the European market for electronic retail payments are part of the Digital Agenda, one of the seven pillars of the Europe 2020 growth strategy, which aims at a Digital Single Market. 

Green Paper on market integration

In January 2012, the EC published a Green Paper, “Towards an integrated EU market for card, Internet and mobile payments”. The aim was to assess the state of market integration and identify obstacles hindering achievement of its full potential. The Commission also enquired about actions necessary to facilitate further development of the market, which at present is fragmented across national borders.

The Green Paper also focused on the size and variation of interbank (interchange) fees for acceptance of card transactions. Moreover, the Commission called for the identification of obstacles preventing merchants from using payment-service providers established in another country (cross-border acquiring). Respondents were asked to comment on the feasibility of a new concept allowing different payment brands to co-exist on the same card or device (co-badging).

The Green Paper also addressed the consistent lack of transparency in fees and surcharges frequently passed on to customers. Furthermore, the EC argued that technical interoperability and establishing common standards between payment providers and network operators are crucial for further market integration.

The consultation also looked at security risks, which are still a major customer concern in the EU. A 2012 Eurobarometer survey revealed that 38% of EU Internet users are concerned about the security of online payments.

Stakeholders’ views

In June 2012, the EC published stakeholders’ feedback to the Green Paper.  

The issue of interchange fees provoked different reactions, with card schemes and banks viewing them as justified while some merchants and non-bank providers see them as barriers to market entry. PayPal remarked that interchange “does not seem to be open to true competition”. There was a consensus on improving transparency for fees.  

Consumers expected full transparency also on all payment costs while other stakeholders considered costs borne by merchants not relevant for consumers’ choices. According to the European Consumer Organisation, transparency needs to be combined with direct fee regulation.

Most stakeholders recognised that obstacles to cross-border acquiring still exist. The UK government noted that card schemes’ rules on cross-border acquiring “lead to fragmentation”. The respondents suggested that market-driven harmonisation of rules and standards could be a solution. 

Regarding co-badging, most stakeholders agreed that it may be beneficial but should not be mandatory. Visa Europe claimed that “co-badging gives rise to substantial technical difficulties” and it should only be voluntary. 

Further standardisation of card payments divided the respondents. Many suppliers were convinced that standards will evolve naturally while most retailers called for their urgent establishment, arguing that it would be more difficult once the fragmented nature of the market becomes entrenched. The European Banking Federation called for the process to be industry-led.  

A large majority saw no interoperability gaps on card payments. Many deemed the EC’s assessment of the level of interoperability on e- and m-payments to be excessively negative. However, new providers and retailers complained about limited access to existing infrastructure controlled by the incumbents. 

Some card schemes have subsidiaries which also process transactions. In contrast to banks and schemes, non-bank providers considered this bundling a barrier to entry. The Dutch government considers it undesirable for competition, and notes that unbundling “could benefit” Member States.   

While there was a consensus that card-payment security had improved, most respondents suggested additional security requirements for e- and m- payments. The German government stressed that all payment methods should be “subject to the same provisions on data protection, transparency and security”.

European Parliament

The EP has been a firm supporter of SEPA. It reached an agreement with the Council on migrating from national to SEPA payment standards by 1 February 2014.

The Economy and Monetary Affairs Committee voted in September 2012 on a report in response to the Green Paper.It favoured EC-initiated legislative proposals over self-regulation due to the conflicting interests of stakeholders.

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