To keep up globally in digital payments, the EU needs open banking, not the EPI

As payments have become more and more strategically significant, the pressure to create an EU champion to rival US companies and replicate the success of Brazil or India has grown significantly.

Brazil and India are already ahead through payment systems like Pix or UPI, whose fast adoption has dwarfed any alternative payment system in Europe. This adds pressure on the EU to come up with its own solution. Today’s payment services in the EU remain, by and large, fragmented and dependent on non-European companies.

The market demand for a serious alternative to the card duopoly exists. Merchants want cheaper payments desperately. EU merchant organisations estimate that merchant service charges - scheme fees, interchange fees, and acquirer margins - increased by EUR 876 million between 2015 and 2020.

Consumers in turn will adopt new payment methods that are convenient, familiar, and secure.

One solution, according to some, is to devote significant economic resources and political capital to the European Payments Initiative, as a way to develop a payments system based on local infrastructure.

The EPI’s objectives are laudable and worthwhile, but it is not the right approach to solving today’s fragmentation.

The EPI would be an expansion on the national payment schemes model of today. National payment schemes, like Bizum in Spain, Swish in Sweden, or Synch which is being developed in Ireland, can have some success domestically especially where alternative payment methods are lacking. But they often stumble when trying to expand across borders. For example, look at the recent challenges of P27, which tried to become a pan-Nordics payments network. This model cannot solve the fragmentation problem that plagues European payments.

The EU has had a cross-border instant credit transfer system since 2017 - SEPA Instant. But adoption has been very slow: it makes up only 15% of all euro credit transfers. What it needs for mass adoption is a way to turn it into a payment method that merchants and consumers alike can use to make purchases.

Open banking is exactly that. It turns account-to-account transfers into a payment method that can be added to the merchant checkout screen, to compete with US big tech wallets or card companies - at much lower cost than cards. It is the foundation of a homegrown payments architecture that is open, interoperable, and European.

It’s no secret that EU banks have been unhappy with the costs required to implement PSD2’s open banking APIs, without a direct return on investment.

But open banking has been much more than a regulatory burden. It has been a driver for digitalisation, with many banks upgrading their own internal infrastructure as they put in place the required connections to payment accounts. The banks that saw it as an opportunity to deliver new and better services to customers are the ones with the most satisfied customers.

Now, the EU is updating PSD2. Among these updates are improvements which will create a much more seamless and convenient experience for the consumer, which is fundamental to encouraging adoption.

There’s also a huge opportunity in the commercial space to create “premium” open banking services that go beyond the compliance requirements and offer both banks and other players an attractive return on investment. The European Payments Council’s SEPA Payment Account Access Scheme (SPAA) will create a first-of-its-kind multilateral model for premium payments and data services, which any EU bank or payments provider will be able to use.

The two main ingredients for a European account-to-account payment network are there: Europe-wide instant euro transfers which are coming via the Instant Payments Regulation, and open banking connectivity to turn them into a dynamic payment method - which can be improved with the review of the payments regulation (PSD2).

This mix will deliver a new, open, homegrown payments infrastructure that will challenge card schemes.

For a real-world example of how that might look in practice, look at Pix, Brazil’s instant payments system launched in 2020. Open to fintechs and third parties, Pix saw transactions grow larger than both credit and debit card payments combined, to 8.1bn in Q1 2023. In contrast, there were 4.2bn credit card payments and 3.8bn debit card payments in that same period of time.

In the EPI model, large incumbents continue to dominate payments and competition is stifled. Card dominance persists, and it eventually leads to the same inertia that made it necessary for the EU to intervene through PSD1 and PSD2 to level the playing field.

In the open banking model, smaller and newer players like payment institutions are allowed to compete fairly. Innovation spreads and real-time account-to-account payments are adopted en masse throughout Europe, offering a compelling alternative to the card duopoly.

The EU can become a world leader in payments by doubling down on its open banking project. Otherwise, it will continue falling behind countries like Brazil, India, or the US which are already a step ahead.