The payments landscape and the politicisation of payments regulation in Europe

We sat down with Robrecht Vandormael, Managing Director at FTI Consulting, to examine the payments landscape and the politicisation of payments regulation in Europe

In the last years, the European payments market has seen significant change, driven by innovation and digitalisation, changing consumer behaviour as well as regulation. The pandemic has significantly accelerated the shift from cash to electronic payments. At the same time, traditional payment instruments such as physical cards are increasingly being replaced by virtual payment solutions. These solutions are embedded in devices such as smartphones, watches, etc. and connected to others like cars, fridges, etc. Furthermore, new forms of money such as cryptocurrencies are entering the market. 

How is this change impacting the payments business landscape? 

Payment actors are becoming less visible, yet more important. Traditional payment providers such as banks and card networks continue to have a large stake of the market. However, digitalisation and regulation are offering opportunities to new entrants. Fintechs are developing new products and solutions and, by doing so, taking over parts of the value chain. More recently, the US Big Tech companies have stepped up their game and, by benefiting from significant network economies, they have a strong competitive advantage. 

The European payments market is still largely an aggregation of domestic markets – not least because of regulatory and other (such as cultural) differences between European countries. New payment solutions are often developed for domestic use, and for many reasons (including regulation) it is hard to scale them up beyond borders. This is particularly true for European fintechs who, unlike global players (such as cards schemes and Big Tech companies), do not have an existing global customer network that allows for mass reach. The lack of European players and the increasing opportunity for large networks are closely watched by European governments. 

Why does this matter for European governments? 

In a time of increasing geopolitical tensions, governments want to keep control over their payment systems. This is a natural phase in the maturing digital economy, where cash – the issuing of which is reserved to Central Banks and thus a critical tool for economic policy – is disappearing. Governments are motivated to own or control their payments infrastructure to remain politically and economically autonomous from other regions and the foreign private sector. The European Commission has been outspoken about this. In its recently adopted Retail Payments Strategy, it stated: ‘Once relegated to the back-office, payments have become strategically significant. They are the lifeblood of the European economy.’ 

How does this translate into concrete policy? 

Government intervention in the payments market is not new. The EU institutions have been steering the payments market through regulation and litigation, aiming to foster a competitive environment in which consumer protection is central. Issues like competition, cost of acceptance, transparency and convenience, secure authentication and fraud prevention, fighting the black economy, and data privacy have been top of mind. Finding a balanced approach to those, while putting end-users first, has been the objective for governments for many years. Politics could be changing this. 

Source: 2021 survey, Payments Europe: The evolution of the European payments market: from cash to digital, what do Europeans want? 

The politicisation of payments had led to regulatory intervention to help the development of home-grown players (e.g. European Payments Initiative), regulatory action to encourage the uptake or development of specific solutions (e.g. Account-to-Account payments or Digital Euro), and the pursuit of increased localisation of payments infrastructure – including in the data storage space – all with a view to make Europe more autonomous and less dependant on non-EU players. From a European perspective, this is an ambition that can only be encouraged. Having a strong European industry and ensuring that global players adhere to European values and standards should benefit end-users. Nevertheless, it is important that political objectives that lead to poor end-user outcomes do not take over. 

Are there any lessons to be learned for the industry? 

Payments have become political. Whereas technical arguments used to prevail in policy discussions, political narratives are becoming increasingly important in shaping the debate. Issues such as fraud management and authentication of payments, diversification and cost of acceptance, transparency, data privacy, as well as the innovations which change the ecosystem (open banking/data/finance) sit right at the intersection of regulatory and political discussions. Putting the political dots together to have your voice heard in payments policy is a must. This does not only count for payment businesses – but for all that have payment solutions integrated into their services or products. With the volume and velocity of change in digital payments – in terms of market and policy developments – businesses can no longer look at payments as means to an end and seek to simply build or integrate compliant products. Payments can drive business growth – but politics and regulation can hamper this if you are on the wrong side of the debate. Businesses cannot afford to make the mistake of isolating payments policy from payments politics. 

This interview was first published in our Cross-Border Payments and Ecommerce Report 2021–2022, which taps into the fast-growing cross-border market and provides a comprehensive overview of trends and developments that are pivotal in this space, being the ultimate source of information for ecommerce businesses interested in expanding globally. 

About Robrecht Vandormael 

Robrecht is a Managing Director in Brussels, overseeing a wide range of payments and financial technology clients. He helps them understand and manage complex EU policy and legislative issues that will impact their business, as well as advise them on broader political reputation management to grow or protect their freedom to operate. Robrecht is a member of the European Commission Payment Systems Expert Group, which advises the European Commission on payments policy and legislation. He is also Secretary General of Payments Europe, the association that represents the European and global digital payments industry. 

About FTI Consulting 

FTI Consulting is a global business advisory firm, providing multidisciplinary solutions to complex challenges, and with a worldwide network of more than 6,600 employees in 29 countries on six continents. FTI Strategic Communications helps companies around the world manage change, mitigate risk, and enhance their market position.