Union building: how to create an integrated payments market for Europe
In many respects, the European Union, underpinned by a common currency, is a grand political project with the aim of fostering peace and stability. In other ways it is an eminently practical one, designed to help the European industry compete in an increasingly tough global marketplace.
One desperately needed building block to achieve this is an integrated, competitive and frictionless payments industry across the whole of Europe.
“This would reduce transaction costs, facilitate financial flows, promote innovation and thereby ultimately contribute to lower the cost of capital for European companies,” argues Alexandre Maymat, Head of Global Transaction and Payment Services at Societe Generale. It is a worthy goal.
Yet more than 20 years after the introduction of the euro, Europe’s payments industry remains fragmented, with the players and their regulators - as well as the politicians behind them – operating and thinking still too often on domestic lines. A clear current example is the sanctions being imposed on Russia for its invasion of Ukraine. Although set at the EU level, the way they are being implemented by banks and financial institutions is being governed by national regulators – with differences emerging between European countries.
Another example, regulations for fighting fraud or the lists of persons considered as potential terrorists are not the same in different European countries. This lack of coordination applies even to an apparent success such as the Single Euro Payments Area or SEPA, created in 2014 to enable cashless, cross-border homogeneous payments in euro: in reality, most countries keep specifications that complicate its use by individuals and corporations and its transportation by the banking networks.
Such ‘subsidiarity’ comes at a price. Given the huge, fixed costs of building, maintaining and upgrading payments platforms, their operators need large volumes to generate profits and funds for reinvestment. But where the US has one nationwide IT system for instant payments, the similarly sized EU splits transactions across a dozen separate platforms. And 8 years after the implementation of SEPA, we still have 20 different systems across Europe operating SEPA Credit Transfers and SEPA Direct Debits. You can imagine the cost it represents to refresh them or for a European Bank to connect to each of them to operate its client flows!
One of the keys to improving this state of affairs lies in Brussels. Regulators must ensure that the regulations are applied in the same way to all players, according to the “very sound principle of ‘same activity, same risks, same rules, and same rigorous verification of the application of the rules’”, says Mr Maymat. “In an increasingly fragmented world, this is the only way to guarantee the high standard of compliance that Europe has rightly set itself.”
The industry also carries its share of responsibility, however. That the European banking sector is more fragmented than its US counterpart is simply a fact, with high political barriers to cross-border mergers. But that is no excuse for European banks to focus mainly on domestic franchises, to eschew new thinking and new technology.
Instead, they should pool the different layers of their payment platforms to reduce costs while improving resilience. This is what Societe Generale is doing with La Banque Postale sharing together their card and corporate payments processing in France, for example.
Banks must also cooperate rather than compete in order to capitalise on each other's know-how, share investment and running cost and to accelerate the availability of new services for clients. The strong limitation, to date, of the European Payments Initiative, which is supposed to bring together over 30 credit institutions in a single pan-European card and account to account solution, is not a good sign.
Above all, traditional banks must learn to collaborate with new players – the likes of Worldpay, Stripe and PayPal -- that otherwise threaten to disintermediate them. The recent merger boom among such fintech firms and their sky-high market capitalisations are a clear indicator of where investors see value shifting in the payments sector. The 2021 partnership between Societe Generale and Kyriba, a fintech that outsources treasury management functions for small and medium-sized businesses, is one way forward.
Digital payments represent another major challenge for the industry. They are developing sharply in so far as they offer simplicity, transparency and ubiquity, and the time when all payments will be digital in Europe is arriving fast. But the more the payment is digitalised, the fewer European players we have. We have no major pan European player to operate cross border card payments, there is no pan European player competing in Europe with Paypal.
At the same time, however, clients are – rightly – concerned about how much data they are sharing and who has access to it. It is no exaggeration to say that when you manage someone’s payment data, you know everything about their life, as Mr Maymat points out. To share such information to someone you do not trust can have enormous impacts. Is this really reasonable from a European point of view to allow big non-European players having access to all this data?
In summary, we need homogenous regulation and greater collaboration between banks and fintechs, as well as a push to digitalise.
That will allow the industry, led by the banks, to continue the significant investments it is making to create a simpler, more secure and more transparent payments world. This is a clear prerequisite to allow the development of strong pan European payments players, able to compete on a worldwide scale and to offer us in a secured way, a more homogeneous client experience across Europe.