The ambition to create a European alternative to Visa and Mastercard has fallen flat after 20 banks (from Spain, Germany, Finland, and Poland) withdrew from the project, forcing the remaining 13 (mainly French) banks to abandon the initial plan to create a rival card payments network. The European Payments Initiative (EPI) will now be refocused on developing its second component, a digital wallet and instant payment system.
Europe keen to reduce reliance on Visa/Mastercard duopoly
European banks have long been frustrated by the dominance that the card networks, namely Visa and Mastercard, have enjoyed in Europe. The proposal from the Eurozone’s major banks was to implement a digital payments scheme that doesn’t rely on the Visa/Mastercard duopoly. The initiative, known originally as PEPSI (Pan-European Payment System Initiative) and later renamed EPI (European Payments Initiative), was intended to utilize account-to-account (A2A) payments as a backbone of this alternative payment rail with the likes of SEPA (Single Euro Payments Area) and iDeal already well established in Europe. EPI was looking to follow in the footsteps of India’s UPI (Unified Payments Interface), which despite only launching in 2016 has become one of the preferred payment choices for Indian consumers: all transactions are conducted account to account.
The hope was for EPI to emulate UPI and become a standard in payments for European consumers and merchants across all types of retail transactions including in-store, online, and peer-to-peer payments and cash withdrawal. However, the project hit problems in November 2021 when the EPI appealed for public money, with private backers not prepared to provide all the funding required and merchants not ready to pay for it. The EPI is the second major payments initiative to unravel in 2022 after the demise of Meta Platform’s Diem project in January. The blockchain-based stablecoin payment system failed to gain regulatory approval, and its assets were subsequently sold to Silvergate Capital.
EPI 2.0: Digital wallets
The EPI project has not been abandoned entirely: the focus is now set to be on developing a pan-European digital wallet instead. Digital wallet adoption has been steadily growing for a number of years, but the COVID-19 pandemic accelerated the trend for online and in-store payments. Omdia’s Digital Consumer Insights 2020 survey (a study of 12,000 consumers across 12 key geographies) reported that 80% of respondents were using mobile payment apps. This has seen merchants’ number-one priority shift toward increasing acceptance of new payment tools (such as digital wallets), according to Omdia’s ICT Enterprise Insights Merchant 2021/22 survey, with 40% of European merchants including it within their top three priorities.
Digital wallets are the ideal platform for cryptocurrency, with the EPI able to play a key role in the widescale adoption of crypto. The European Central Bank (ECB) recently approved a new oversight framework for electronic payments, which will include coverage of stablecoins and other crypto assets. The ECB also announced in July 2021 that it is actively looking into creating a digital version of the euro. Europe has long been exploring central bank digital currencies (CBDCs). The Riksbank, the Swedish central bank, is perhaps the most advanced and is currently running an e-krona pilot. Banque de France, the Swiss National Bank, and BIS Innovation Hub have also successfully completed a cross-border wholesale CBDC experiment that explored cross-border settlement of tokenized assets on a distributed ledger technology-enabled platform.
Cross-border interoperability is king for EPI
Interoperability with existing payment systems is the absolute minimum requirement for the European Payment Initiative, but the real benefits lie in cross-border functionality that works for global transactions. For cross-border payments to become ubiquitous, EPI members need to agree on common standards. These standards could build on the principles of decentralized cryptocurrencies that operate today and seek to provide a global monetary system that is efficient, flexible, and accessible but affordable.
European banks have already recognized the need to upgrade legacy core banking systems, and they must now turn their attention to payments by stripping out the inefficiencies and adapting to the new business models that open banking, cryptocurrencies, and digital wallets are creating. Although it is a major setback for the EPI project to lose more than half its members, if the project pivots and is able to accelerate the implementation of the digital euro through an EPI wallet with interoperability in-built to its core, it may still be able to fulfill its mission of creating a unified payment solution tailored for Europe.
Market Landscape: Digital Wallets (August 2021)
2022 Trends to Watch: Payments (December 2021)
“CBDC timelines accelerate as governments get tough on crypto” (December 2021)
Philip Benton, Senior Analyst, Financial Services