European Payments Initiative: beware of the iceberg

There’s no doubt that the European Payments Initiative (EPI) is an exciting development in the world of payments. But like an iceberg, the majority of the work involved in the project lies beneath the surface – and the industry needs to be prepared to overcome a number of obstacles that may not be immediately visible.

What’s happening?

Europe’s payments landscape includes a complex mixture of payment systems, spanning domestic payment systems, cards, cross-border payments, immediate payments, high value payments, checks and cash. Given the complexity of this landscape, efforts are underway to coalesce some of these different payment methods via the European Payments Initiative (EPI).

In particular, the EU has been looking closely at cards, which is a market worth almost a trillion dollars in market cap that mainly serves the Americas and the EU. Cards have a lot to recommend them as a payment instrument: they are secure, widely accepted, and trusted by consumers. They also have their own well-established protocols in place. But since this market is not controlled within the EU, a substantial part of the resulting fees goes elsewhere – which is why there is an appetite for replacing the current cards system with a system that is controlled from within the EU.

At the simplest level, the idea of the EPI is to replace the underlying plumbing that goes along with cards, and replace cards as we currently know them with an EPI card that uses the existing immediate payment rails. This new instrument will thereby take advantage of the EU’s instant payment systems, namely EBA Clearing RT1 and the European Central Bank’s Target Instant Payments (TIPS) scheme.
Since the immediate payment rails are hosted and controlled inside the EU, this would provide an opportunity to control data in a more effective way, as well as an opportunity to review the way fees are distributed between consumers, stores, issuers and processers.

What about the iceberg?

This all sounds fairly straightforward. But when we talk about cards, it’s easy to forget that beneath the exciting top layer of what is happening with EPI, there is some deeply important plumbing that needs to be put in place if the initiative is to work:

• Adoption of immediate payments. While immediate payments are common in the UK, they are much less common across Europe. The EU is working to drive adoption of immediate payments through its retail payments strategy, which aims to make instant payments both cost effective and accessible for European individuals and businesses. Without this, there can be no EPI.
• Applications. People who use immediate payments may find them to be somewhat clunky unless there is a suitable application in front of them. So banks also need to provide customers with an app that enables them to send immediate payments in a seamless way.
• Interoperability. A further issue is the need for interoperability between the immediate payment schemes through the different EU entities that are creating these core plumbing pieces – namely RT1, TIPS, EBA and the ECB. Work is underway on this topic, as Etienne Goosse, Director General, European Payments Council, explained in a recent video.
• Request to Pay. A further building block of the EPI is Request to Pay (RtP), which enables the beneficiary to request a payment from the payer. While RtP is on its way, it is not yet in widespread use – and without it, the next level of EPI can’t proceed.

In other words, while the benefits of the EPI are clear, there is much that needs to be put in place below the surface, including interoperability, the right applications and RtP. And once these things are in place, merchants and service providers will also face a challenge when changing their methodologies to the EPI system. Given that the necessary rails are in place, and the physicality of the cards will remain the same, this won’t be as difficult as creating a brand-new methodology. But it will still require every store and every service provider to make changes.