EU pushes for rival to Visa and MasterCard

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Despite the insistence of the two ‘incumbents’ that increased competition in payment services would be a costly waste of time, the EU institutions are pushing for the creation of a European payment scheme to complement those provided by Visa and MasterCard.

The European Central Bank (ECB), which has a strong influence on payment systems within the EU, supported the Commission by speaking out in favour of a new European system last week during the Eurofi conference in Nice, one of the main financial services meetings of the year.

“Visa and Mastercard are not enough,” stated Jean-Michel Godeffroy, director general for payment systems at the ECB, adding that more competition in the European payment market is needed.

Banks looking for certainty

But the European banking industry, which would be expected to take on the cost of setting up an alternative to Visa and MasterCard, is also demanding more legal certainty from the Commission so it can develop a sustainable business model for its own payment scheme. 

The best-case scenario for banks would involve retaining the current system of multilateral interchange fees (MIFs), under which banks pay each other charges for carrying out a range of services, which they then levy on their customers.

The Commission has always maintained a hard line against MIFs – particularly in relation to payment card activities – arguing that they unfairly penalise consumers. MasterCard has been threatened with fines because of the fees it charges (EURACTIV 20/12/07), while Visa is awaiting a new decision by the Commission following the expiry of an exemption period it had been granted at the beginning of 2008 (EURACTIV 27/03/08).

But an announcement by the EU executive earlier this month could be interpreted as a sweetener for banks. Brussels said it would allow MIFs for a temporary period so as to facilitate a smooth transition towards the second phase of the Single Euro(pean) Payments Area (SEPA) – the introduction of an EU-wide direct debit scheme (EURACTIV 05/09/08).

This softer stance on direct debit MIFs may well provide the added certainty European banks have been looking for. 

High costs and questionable benefits?

However, it is not entirely clear how a new EU scheme would benefit European consumers. The ECB’s Godeffroy underlined data protection aspects, on which the EU generally tends to be tougher than the US.

For its part, Visa stresses that investing in a new payment system would merely be a waste of energy and money. It says this would be better spent on the more pressing issue of increasing the use of cheap electronic money, gradually replacing cash.

More pressing issues?

Payment card representatives are happy to underline the overall economic advantages that a non-cash economy can offer. 

Among other benefits, they argue that a non-cash era would put an end to the black economy which proliferates with banknotes and which, according to a study from the University of Leuven, accounts for almost a third of some EU countries’ GDP. 

The European institutions tend to agree with the benefits of a transition to electronic money. Indeed, Brussels estimates that payment costs amount to roughly 3% of the EU’s overall GDP and are driven mainly by cash-related expenditure.

Jean-Michel Godeffroydirector general for payment systems  at the European Central Bank (ECB), underlined that "Visa and MasterCard are not enough" for the European payment market. 

According to him, the fact that both companies seem influenced by American decision-making is also a cause for concern. "Who holds the data of Europeans?" he asked, adding that recently "the corporate structure of Visa and MasterCard has changed to respond to problems in the US. In Europe we were not happy with changing the models".

But Visa Europe President  and CEO Peter Ayliffe insisted that the EU's intention to stimulate competition in payment schemes was a bad idea: "If you want to compete globally, you need scale and efficiency. Having 3, 4 or 5 payment systems in Europe is not in the interest of consumers."

He further added that "banks have already invested heavily in the current schemes. Spending money on further ones would prevent other key investments, such as in contactless or m-payments [mobile payments]".

Reacting to praise for the idea of a cashless economy, EPP-ED MEP Jean-Paul Gauzes, the European Parliament's rapporteur on payments market reform, stressed that the actual replacement of old money with electronic payments would have to win much wider support than at present. "Citizens still perceive the utility of cash. Using coins and notes is not seen as expensive," he noted. 


 

Leading French and German banks began talks with the European Commission at the beginning of 2008 on how to establish a new payment scheme in Europe that would compete with Visa and MasterCard.

In the meantime, European banks launched the first phase of the Single Euro(pean) Payments Area (SEPA) to extend the opportunities offered by the common European currency to electronic and non-cash payments. At the moment, such cross-border transactions are only possible in Europe under a range of different national schemes, which makes them more complicated and less reliable.

The first move was the standardisation of credit transfers across Europe in January 2008. The second phase involves the launch, at the end of 2009, of a common instrument for direct debits. Direct debit payments are transactions that are executed by a bank automatically at the customer's request – for example, monthly rent paid to the same bank account. This second step will only take place after the full implementation of the Payment Services Directive, which constitutes the crucial legal framework for the implementation of the foreseen measures (Links Dossier). 

The final phase of SEPA's entry into force will be the introduction, by the end of 2010, of a European credit card, featuring a microchip and a common security system. The issuing companies will remain the same, but the requirements for the new cards will be harmonised across Europe (Links Dossier).

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