It could have been so good: a dedicated European payment system that would have given domestic banks the clout to take on powerful international competitors, especially the payment giants Visa, Mastercard and PayPal – at least that was the plan that inspired the European Payments Initiative (EPI) in 2020. As well as being overseen by leading European banks, it also received the support of governments and central banks; at the end of the day, it was seen as a way to bolster the competitiveness of European financial institutions. Since then, however, the ambitious project has suffered some painful setbacks. In February 2022, the majority of the participating banks withdrew from the project. Among the reasons cited were the project's enormous investment costs and its fundamental direction. The original plan envisaged replacing the different payment cards used in the individual European countries – in Germany, the familiar girocard or 'EC card' – with a standard card. This idea is now off the table and has been replaced by a trimmed-down version in the form of the EPI wallet. In this blog post, you will learn what the new EPI wallet is, how it will work and what it will bring to consumers and merchants.
Participants in the EPI project
The number of participants in the EPI project has now shrunk from 31 to 13, including the financial institutions Banco Santander, Banque Fédérative du Crédit Mutuel, BNP Paribas, Crédit Agricole, Deutsche Bank, Deutscher Sparkassen- und Giroverband, Groupe BPCE, ING Bank, KBC Bank, La Banque Postale and Société Générale as well as payment service providers Nets and Worldline. This smaller number of participants has also reduced the budget for EPI, and plans have now been pared back to a less ambitious level. Rather than introducing a payment card for all of Europe, the use of a 'digital wallet' to store the existing cards of the individual banks is now on the agenda. In the future, this will allow consumers to complete all their everyday payments using this app – at cash registers, online shops or mobile phones.
For this system to function, however, EPI transactions must be processed much faster than standard money transfers. Consequently, the wallet should therefore enable real-time transfers within the Single European Payment Area (SEPA). These will probably be based on the Instant Credit Transfer scheme (ICT Inst) that providers such as giropay have already implemented to allow the transfer of money between private individuals in a matter of seconds.
If the financial institutions are serious about rolling out this plan, they still have quite a bit of ground to cover. That's because roughly one-third of EU payment service providers do not currently offer real-time payments. What's more, progress in expanding these services tends to be slow. Likewise, there is probably quite a bit of work required to encourage acceptance among the general population: since most banks currently demand additional charges for real-time transactions, very few customers use this function daily. The EPI wallet could provide much-needed assistance here by removing these obstacles.
The prospect of a cashless alternative that can be used everywhere is extremely attractive to end users – provided that sufficient numbers of retailers accept the new payment method. This makes it all the more important for the EPI initiative that they are also brought on board. The European instant payment solution can certainly provide several more advantages. Following the announcement by Mastercard that it will cease the Maestro functions of the girocard ('EC card') from July 2023 and issue debit cards instead, many retailers are unhappy about this change. Their primary concern relates to the fees that credit card companies demand for their debit cards, which are up to four times higher than those charged for the familiar girocard. The EPI wallet could create more competition here and accommodate retailers not only with lower fees. The real-time system could also make it much easier to reconcile incoming payments. Based on current practice, the payment process still lags behind the technical possibilities, resulting in delayed transactions and manual processes leading to unnecessary costs.
Boost for Instant Payments
And the initial situation for modernisation is favourable right now. The rather lethargic migration of the European payment system in the direction of instant payments is likely to gain momentum in the coming months because the EU Commission submitted a related regulation proposal in October 2022. According to this proposal, all credit institutions must offer their customers an instant credit transfer scheme. One aspect that banks may find particularly unsavoury is that they will no longer be able to charge extra fees for accelerated payments but will be obligated to offer real-time transactions at the same price as familiar SEPA transactions – which are usually free of charge. Before the Commission's proposal can take effect, it must receive the blessings of the EU member states and the EU parliament. However, one thing is already certain: if "ICT Inst" becomes the new standard. As a result, it is likely to reinvigorate the innovative spirit of the banks and make them more receptive to the EPI wallet.
It will certainly take a little time before the electronic payment alternative is ready – but there is definitely hope on the horizon for EPI. It also turns out that several of the banks that withdrew from the initiative are actively considering re-joining the EPI under these changed conditions.