Europe Fights Back On Payments

Summary

• Europe banks have fallen way behind other countries, like the U.S., in terms of their payments systems and are now trying to catch up with those that control their markets.
• The problem is that the banks and others that have joined together to build a competitive "European" alternative seem to be shooting to keep up with the current market-structure.
• The future financial world is going to be very dependent upon how the payments system evolves so it is important to see what the Europeans are trying to do.

Photo by Turac Novruzova/iStock via Getty Images

The European Payment Initiative, or, EPI, is an organization of more than 30 of European’s largest banks and credit card processors aimed at taking on the United States oligopoly that dominates payments on the European continent.

The whole area of payments systems, to me, is going to be one of the major areas of contention throughout the world and we are only starting to see how the battles are going to take place.

Europe wants to be able to take on the major “card” players that handle most of the transactions on the European continent.

Right now, card payments are predominately processed by US-based companies.

“Four in five transactions in Europe are handled by Mastercard and Visa….”

The argument being made by Joachim Schmalzl, the chair of the EPI for this effort is that this is detrimental to Europe consumers because they face “relatively high fees” and there are rising questions about the protection of customer data.

Otherwise, the Europeans would like to become a part of the game and have some control over where payments systems go in their own geographic realm.

Those behind the initiative include Deutsche Bank, BNP Paribas, ING, UniCredit, and Santander.

Regulatory Support

The European Commission supports the effort as does the euro areas five financial regulators. In addition,

The European Central Bank is also giving support for the effort.

The unified effort is being taken because

national solutions cannot be scaled across European borders,” and the effort of the EPI “is to harmonize the best national initiatives and then roll them out across Europe.”

Nobody (in Europe) on its own can compete with the U.S. credit card giants.”

The feeling is that the only way the American credit card giants can be taken on is by combining resources and moving on.

Sill, getting customers to change the payments system they use will be a massive challenge.

Massive Changes

But, this is just one part of a massive change that is taking place within the financial system, globally. The world is not standing still and one has to question the EPI movement about whether or not it is moving on into the future or just trying to keep up with the way things are.

This EPI move is to attack the inroads that credit card companies have made into the European business community. The specific targets of the European effort are PayPal, Mastercard, Visa, Google, and Apple.

But, this does not touch all that is taking place in terms of digital payments, something that must include a far wider range of competitors than just the five companies listed above.

For example, you have the fact that “digital payments are just around the corner.”

You have JPMorgan, Chase & Co. opening a brand new digital bank in the UK with the objective to open a similar bank in Europe following the success of the UK bank.

The spread of information technology is coming to dominate everything in the financial area and the key to this spread is the ability of the platforms or networks to achieve massive scale. And, spread of this technology is speeding up and not slowing down.

The Plan

The EPI has until September to put together its plan. The objective is to launch “a system for electronic real-time payments between consumers” early in 2022.

If the backers of this effort decide to move after reviewing the September results, a lot of money will still need to be raised. Europe can provide the money if it is felt that the new scheme has a change.

Note that a similar effort was made earlier in 2011 and had the backing of 24 European lenders, but it did not have the necessary backing. The business model developed, also, did not have universal support.

Most analysts believe that the biggest hurdle the new system will have is to attract customer loyalty, something the others participants in this market already have. It seems to me that the barriers to a new startup in this space are substantial.

Future

Just from the information I have seen on this effort, I don’t have much confidence that this project is going to go too far. It seems like there is a lot of money being invested in what has been.

And, this may be the result of who is pushing for the initiative, legacy banks, and regulators and government officials. And, the push is against the “establishment” and not against the “newbies” that seem to be attracting a lot of attention…see here and here.

There is so much going on in the payments space that is pushing out the envelope, that the EPI efforts seems to be way behind where the game is currently being played. But, this is generally where the big, “legacy” organizations tend to play.

Investors, I believe, need to keep their eyes a little more closely attuned to what is going on at the “edge.” That is where the future is going.

Furthermore, in this day and age with all the disruptions going on in the world the movement of technology is picking up speed, it is not slowing down. The focus needs to be more on the future rather than on what the current “oligopoly” controls.

In this respect, it is not “bad” to look at what the existing organizations are doing so as to be aware of those that are lagging the market and are not taking the appropriate actions to catch up or to innovate around. But, one needs to keep an eye on what is going on at the “edge” so as to know what the existing organizations are missing out on.

Given what we now it is hard to imagine that the EPI will produce something that is able to overcome the scale that the “oligopoly” has now achieved. Without that scale, forget it.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[j. hughes]

@John M. Mason
Dr. Mason,
Although I do not always agree with what you write, you are a true visionary when it comes to the New Modern Corporation and the advantages of scales.
A religious person might compare it to the bible. The legacy companies being the old testament and the Modern being the new. It won't be stopped even if they crucify you.
Jim

[Peter Peeters - old]

There is a tuff competition in the European financial market, especially in the banking market. Many banks missed the boat in saving costs and reorganizing. They first have to fight to survive. The banks who did their job like for example the Dutch ING prefer to gain market share.