The European Payments Initiative (EPI) has the potential to transform Europe’s payments landscape and replace the current cards system with a system that can be managed from within the EU. But before this can happen, the right foundations need to be built. So, what are the goals of the initiative and what developments will be needed to make it a success?
What needs to change?
Europe’s payments landscape is nothing if not complex, with numerous payments systems that range from domestic payments and cards to high value payments, cheques, and cash. While some of these payment methods have been in place for a long time, others are much more recent. However, all were built and designed before digital was even thought about. In addition, each domestic payment methodology is governed by the relevant government, meaning that different European countries’ domestic clearing systems have local variations and are run slightly differently.
Against this backdrop, it’s easy to see why efforts are underway to simplify the current payments landscape. And in Europe, a further ambition is to gain oversight of the lucrative cards market. Cards are currently worth nearly one trillion dollars in Europe, with close to a billion cards in the EU. But with much of the resulting revenue currently ending up outside Europe, there are plenty of reasons to replace the existing system with something that can be more effectively managed within the EU.
Goals of the EPI
Enter the EPI. The EPI aims to simplify the existing complex landscape and gain more oversight of the payments currently made using cards. The goal is to achieve this by creating an EPI card that will take advantage of the EU’s instant payment systems – namely EBA CLEARING’s instant payment system RT1, and the European Central Bank’s (ECB) real-time payments network, Target Instant Payment Settlement (TIPS).
For Europe, the benefits of this card replacement initiative could be substantial – from gaining more control over data to reviewing the distribution of fees between consumers, stores, issuers, and processers. But achieving this will not be a straightforward exercise.
If Europe is to achieve its goals, the EPI needs to be built on the right foundations. And while the immediate payment rails that will be used by the EPI already exist, there are several other components that need to be put in place before the initiative can succeed – from achieving ubiquity of reach for immediate payments to giving customers access to the right applications:
First and foremost is the need for ubiquity in immediate payments, which is still some way off from being achieved. It is worth noting that immediate or real-time payments differ from all previous payment methodologies in a couple of important ways. For one thing, unlike other payments, an immediate payment is final at the point that you press the button. Another characteristic is that while all previous processing methods were built at a time when payments were effectively analogue, real-time payments have arrived in the digital world.
Immediate payments are certainly gaining momentum around the world. But where the EPI is concerned, one challenge is that this form of payment is not yet ubiquitous pan-Europe. Not every country has deployed immediate payments – and for those that have, the resulting immediate payment systems do not necessarily communicate with each other. Nevertheless, with the right foundations in place, a large region like Europe can achieve ubiquity across its member states and ensure that every citizen has the ability to send and receive immediate payments. Europe’s retail payments strategy, which was released by DGFISMA in 2020, is an important part of this journey.
When preparing the foundations of the EPI, another prerequisite is to achieve enough interoperability between existing immediate payment schemes. In Europe, the two big building blocks of immediate payments are RT1 and TIPS. Work is currently underway to make these two major immediate payment rails fully interoperable to create a fast and seamless payment experience.
Also needed for the success of the initiative is a nudge from regulators and the ECB to tell banks that every citizen must be contactable via immediate payments, wherever they are in Europe. Part of achieving ubiquity is ensuring that every bank can offer every citizen and every company the opportunity to send real-time payments – whether or not they opt to use them. Hence in part the Retail Payments Strategy, which focuses on creating the right conditions to develop instant payments and EU-wide payment solutions that are cost effective and accessible to individuals and businesses across Europe.
The EPI needs to be leveraged by the next generation of infrastructure. This includes developments like Confirmation of Payee, whereby the person making the payment can check that it is being sent to the right beneficiary. It also includes Request to Pay (RtP), which allows the beneficiary to request a payment from the payer without needing to share bank account information – for example, by sending a QR code. While RtP certainly offers value in the retail context, it also has much to offer corporations by making it straightforward to pay vendors.
It’s not just about creating a common infrastructure – suitable software applications are also needed to support the next generation of services and give customers a smooth user experience. For example, the devices people already own and carry with them can be used to achieve strong customer authentication (SCA) for speed at the checkout. In other words, a customer can use a QR code on their smartphone to pay for their shopping as they leave the supermarket. But at this point, while most major banks have developed apps that allow people to send immediate payments, this does not extend to every bank and every country.
In conclusion, there’s no doubt that the EPI is an ambitious undertaking – and there are many steps that will need to be completed before the initiative can succeed. But there is also plenty of appetite to see it through. With the right foundations in place, this is a tremendous opportunity for Europe’s regulators to move from an analogue payments infrastructure to a digital one, gain more oversight of payments, and secure fees inside of the European Union.
About Paul Thomalla
Paul Thomalla, Global Head of Payments at Finastra, is accountable for the development of payments within Finastra and externally. His role is to understand, influence and ultimately help to lead change in payments across the globe. Paul has advised on the UK's NPA, PS2 and PSD3, CRD5, and the role of AI and blockchain in payments and how to regulate them. Paul is a Board member of the UK Payment Systems Regulator Advisory Board and an Executive Committee member of the European Credit Research Institute (ECRI).
About Finastra
Finastra is building an open platform that accelerates collaboration and innovation in financial services, creating better experiences for people, businesses, and communities. Supported by the broadest and deepest portfolio of financial services software, Finastra delivers this vitally important technology to financial institutions of all sizes across the globe, including 90 of the world’s top 100 banks.
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