The question of whether the fragmented European payments market, with distinct and disparate payment habits across countries and regions, is finally at the point of converging is one that is becoming a hot topic. A recent round table held by the Centre for the Study of Financial Innovation attempted to give some answers.
With several countries, each with their own cultural and economic factors driving different payment habits and methods, is there such a thing as a European payments market? Are sub-regional groups emerging in different places or are there purely national markets? And regardless of the differences, is there a trend of convergence emerging?
A recent round table event in London, held by the Centre for the Study of Financial Innovation (CSFI), hosted several leading payment players from all over Europe in an effort to answer some of these questions, and to gauge whether payment innovation is helping or hindering the move towards the Single European Payment Area (SEPA).
As the discussion took place under ‘Chatham House Rules’ in order to encourage free and frank discussion, CI cannot identify any participants by name, but there was plenty to take away from the discussion.
The event began by examining whether the European payment market is converging or diverging. One participant stated that a recent UK Treasury survey on financial inclusion for immigrants in the UK found that even on a purely national level, there are some stark differences in the way people pay.
“The results were very surprising. For example, in the Polish community, people have bank accounts but as soon as they get paid they draw their cash out and pay for everything in cash.
“In the Turkish community, they store everything in gold, and the Brazilian community won’t have bank accounts at all. It was very interesting in that even at a very low level the difference in nationalities was much greater than I would have thought.
“The Treasury survey showed that people by and large rated convenience as a more important factor for making a payment than cost.”
Consumer choice paramount
Another participant stated that this is because costs are to some degree invisible to the consumer.
“Although we may think we get our payments for free, in fact it’s the banks that pay for it, an average of €30 [$40] a year per person. The cost of cash alone is €130. When we look at the debit and credit infrastructure, it sort of pays for itself because the banks organise it themselves in a very cost-effective manner, and the main money they make from the products they sell is from corporate customers.
“The whole debate should be about what does the customer want? Do we want to waste all our time and energy coming up with solutions that appeal to everyone? People want choice, they demand choice, and they are completely irrational about it and will do what they like.”
Another participant added: “We have got 40 percent of the population across Europe who are committed to cards who are very happy with them. But we also have 60 percent who we haven’t yet given adequate reason to seriously use cards. There are a series of small barriers to be overcome and to be addressed, but there’s no single silver bullet.
“In fact, the number one reason given by consumers for not using cards rather than cash is that the card is not with them – they don’t have it in their wallet.
“Secondly, there is a belief that particular retailers did not want to accept card payments. It is only in some explicit circumstances that the retailer would not accept cards. But those are the two main reasons why consumers are not using electronic payments.”
On the question of whether innovation is helping convergence, one participant said: “Innovation is at the core of it, and it’s innovation in its broadest sense – it is not one single technological advance that is going to do it, it is not one single piece of infrastructure – it is looking across the entire innovation spectrum. It is also product development, it is harnessing new technologies, and it is being more innovative in the way that we communicate to consumers.
“It is not a single group or product that is going to drive the future of our business. It has to be all of the players together, harnessing their efforts.
“The regulators have their role to play, so do the retailers. We do believe strongly that without innovation, without a constant review of the way that we do things, there is a real risk of stagnation.
“And part of the risk of that stagnation comes from the biggest challenge of all, and that is the consumer.”
Convergence happening – but slowly
Participants agreed that there are four key aspects for the development of payments in Europe: convenience; efficiency; security and trust.
These aspects may vary in importance by degrees in different markets, but they are constant. However, there are some encouraging signs that while Europe may still be fragmented on national lines, consumer attitudes to payments are changing – and at a rapid pace.
A recent payment study released at the beginning of 2010 by Visa found that in 2002 in Germany, 65 percent of respondents said they preferred to pay with cash for everything they bought – that had halved by 2008. The numbers in Spain have gone from 69 percent to 33 percent, and in Sweden, down from 61 percent to 18 percent.
But this led another participant to ask while this may represent a degree of convergence in people’s attitudes, did it mean the same for the market as a whole?
“They are all moving at different speeds and from different start points but they are all moving in the same direction,” answered another participant.
Another participant outlined some of the national differences witnessed across Europe.
“In the UK, the national payment plan has put forward the suggestion to end cheque usage by 2018, but in the Netherlands no one even knows what a cheque is – they have not seen them for years.
“In the UK, some people think it is odd that some supermarkets have stopped accepting cheques, but the Dutch consumer association is asking whether in five years’ time supermarkets in the Netherlands can stop accepting cash. These markets to me seem wildly different and do not seem to be converging at all.”
However, there does not seem to be much consensus as to what the real problem is. Is it that the entry point into the channel is different?
“We will only get more choice and more payment devices,” said one participant. “We can not go back in history. The only thing we can try is to remove some of the cost-carrying elements, such as fraud and so on but you can only do that by force.”
Degrees of innovation
One common theme that has emerged across Europe is the move towards debit, but some participants questioned whether this was influenced by the abolition of cheque usage in some countries.
“Effectively people have moved towards a plastic cheque,” said one.
Another participant said: “Cheque usage has been reducing year after year, but in some countries it is rising. We are just in the middle of a recession and in some countries cheque usage has been picking up.
“It is a very simple method for individuals and small companies to manage their costs. I put a cheque in the post and post-date it so that the money does not come out of my account until a certain date. That way I fulfil my payment obligation and enjoy ten days of cash.
“There are a number of different trends that we have seen across Europe, and the only single successful payment convergence initiative that we have seen so far is the euro single currency. Apart from that, SEPA so far is happening but incredibly slowly.
“We have SEPA credit transfers, SEPA direct debit will be happening soon, but SEPA for cards is nowhere to be seen. The Payment Services Directive [PSD] is a great example of the disparity across Europe. The PSD was meant to create a level playing field to enable SEPA to happen.
“There are different macro trends, but Europe tends to move in the same place directionally, with different speeds and different bumps along the way, and with different reactions to the economic climate. ATM withdrawals in Europe behave differently depending on the economic cycle, differing levels of consumer confidence and so on.
“We see that in developed markets, like Western Europe, there is a correlation in the number of electronic payments per inhabitant, number of cash payments per inhabitant and the level of the unbanked population. As soon as you move out of the top euro 16 countries, the disparities become much wider. It takes 10 years to 15 years for a payment innovation to reach the ‘problem child’ stage.”
The example of prepaid cards was used to demonstrate this point.
“Prepaid cards have been around in the US for about 20 years,” said a participant, “but they still account for a very tiny percentage of overall non-cash payments. In Europe they have been around for 12 years, and they were worth 0.003 percent of non-cash payments in 2007.
“Is it a ‘problem child’ product? In some countries like Italy it is very well established, but in other markets they are nowhere to be seen. Or they exist only in some flavours like closed-loop gift cards.”
However, another participant said: “But prepaid cards are not a step forward, are they? Prepaid cards are a step back. They are closely associated with the black economy, with tax evasion, money laundering and so on.”
But this assertion was firmly rebuffed by another participant who said: “Are you talking about interoperable prepaid cards, or closed-loop cards which are fit for purpose and do the job?
“Prepaid open-loop is a disaster because it has been designed by credit and debit card people on a debit and credit card model for electronic cash. But it is supposed to be electronic cash, so it is a design fault – we in the industry have made a mistake because we tried to design something we think should exist instead of thinking about precisely what we are trying to achieve.
“If it is convenience, if it is usability, if it is to replace cash, it has to have the functions and features of cash. Cash is good because it has got an anonymity attached to it and has immediate settlement, and it has that convenience. For me the prepaid card is vastly over-engineered for the segments of the market it has been designed for.”
Who or what is driving SEPA?
The discussion then moved onto how much political factors are at play when it comes to accelerating convergence, and exactly whose convenience regulators are really working for.
“We expect the consumer to realise the benefits, but as an industry we need to be looking at who is actually influencing the decisions,” said one participant. “As an industry we need to look at who we are trying to persuade to adopt these products and how is the language we use addressing that. In what direction are we coming at this from?
“And we are going to have to produce very finely-nuanced messages for a very complex set of products. Maybe we have something to learn from other industries. When we look at the European level, who is actually driving the SEPA agenda, particularly when it comes to cards? Is it the European Commission, the European Central Bank, the European Payment Council?
“Because if it is not political objectives driving this, do the people of Europe really want interoperable payments when on some level they have that already?”
This assertion led to participants to examine the development of SEPA and who it will really benefit.
“It started as a vision of the United States of Europe to increase the competitiveness of Europe as a whole by achieving critical mass,” said one participant. “Banks are slowly migrating but companies are ignoring it.”
“But we should not have to talk to companies about it,” said another. “Banks should talk to their corporate clients about what additional services they can offer.
“Even companies who do not operate across borders should have some need for international payments.
“People should not even have to know what the PSD is, and that is the whole problem, because banks in all honesty could not get their act together.”
However, another participant came to the defence of the banks: “The problem is that SEPA is a two-legged stool, and that is not the fault of the corporates and not the fault of the banks. No large corporate is going to spend $50 million rebuilding their cash management system for a system that is only two-thirds built. SEPA will happen and will take off once it is finished. SEPA’s not finished.”
One of the more contentious points of the discussion came when participants questioned how to move SEPA forward.
“We live in a democracy and that is the problem,” said one. “If you go to China initiatives are done and dusted in a very short space of time, because there is no democracy.”
But another participant interjected: “I’ll take a democracy any time, thanks very much.”
Encouraging behaviour change
“We cannot convince customers to adapt new payment methods. We have to go with what the banks want to do,” said another.
“We cannot hurry clients along, we cannot say to people to stop using cheques because they are very expensive and not efficient.
“I think we would waste so much time and effort if we try to convert people to different behaviours because I think it is the beauty of being a European. Consumers are emotional, they are tied to things they are used to. Some people want to try something new, others do not.”
But how do you encourage that change in behaviour?
“Incentives are very important. There is a schizophrenia at the European level around the use of American international companies and that’s just a fact. They [European regulators] want a European solution for the Lisbon agenda, and you cannot get away from that cultural dimension,” said a participant.
Another added: “Whether you like it or not, we are all Europeans. When you look at it as the EC does, as the European parliament does, they look at the price differentials as an indication of inefficiency in their single market, and that is the reality.
“If you are charged a different price in one country, you cannot aggregate and switch volumes and negotiate prices out of the UK and into the European level.
“There is a market dysfunction in the single market. From a citizen’s point of view, I do not think they really care that much. It is a matter of getting what you want in the most convenient way provided there is not an exceptional price differential.”
“Frankly SEPA for cards is going absolutely nowhere – it is perhaps going backwards very fast. The EC lobbed a grenade, or more likely a nuclear bomb, into the SEPA Cards Framework (SCF) recently when they declared that every implementation standard that was going to be applied to the SCF would need to be freely available to everyone else.
“No one is going to have any confidence in these standards if they cannot apply some level of charge. This comes back to the point of leadership. Who is actually leading this and who is bringing leadership to this landscape where we are trying to introduce new solutions?”
Another participant said: “The SCF is a good example of how all these things should be converging.
“But when the EC calls for this kind of thing, is that because they actually want it or is it just to avoid Visa and MasterCard?”
“My personal belief is that I do not believe there is the level of awareness about how the market operates around Europe at that political level, but as a sector we need to take some of the blame for that in terms of not educating the people that are regulating the sector,” said another.
“It is the regulators that are pushing SEPA and the PSD and I am not saying either of those are wrong, but they did come out of Brussels,” said another participant.
“They are costing billions and it is coming from the regulators. In fact, it is one of the biggest issues facing the banks today, and they risk not having any money left over for innovation.
“The majority of our infrastructure and expense budgets are being chewed up by these regulatory requirements. It is not a complaint as we have to do these things. We are supportive, but the reality is that they are not bank endeavours, they are regulatory endeavours.”
As the discussion drew to a close, participants broadly agreed that there is certainly an element of convergence currently occurring in Europe, but that different markets are moving at different speeds. And ultimately, it will be down to consumer preference to influence the market’s future direction.