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Vice President of the European Commission responsible for Competition Policy
Building Europe’s future payments market
Next Generation Cards and Payments conference
Brussels, 12 October 2011
Ladies and Gentlemen:
I would like to thank Dominique Buysschaert for his kind invitation. This conference is the perfect opportunity to share with you my views on the contribution of competition policy to the progress of the payments industry, and in particular to the completion of a Single Payments Area in the EU.
But first, let me start from a broader perspective, since we are not living in ordinary times. The current banking and sovereign-debt crisis threatens our growth prospects and the stability of our financial markets. It is the most serious challenge that the EU has faced in decades. As President Barroso reminded us in his State of the Union speech, what is at stake is the future of the Economic and Monetary Union and perhaps the very existence of the EU as we know it.
Our current challenges stem from the decisions that have been taken – and those that have not been taken – as a response to the new horizons that opened when the Economic and Monetary Union was established. During this difficult period, we have learned that the economic pillar of the Economic and Monetary Union must be urgently reinforced if we want to achieve a sustainable exit from the present crisis.
At a time when the outlook for our economy is so uncertain, and there is so much anxiety among economic actors, it is our job to find every possible means to boost growth and create jobs. What to do?
Few things would help businesses and employers in Europe more than completing the Single Market, giving them a large and easily accessible area in which to grow and prosper. And it is an established fact that seamless and efficient payment systems for the whole of Europe are an essential element of economic integration.
A single payments area is also necessary to give a boost to the Digital Agenda; a strategic policy initiative where Europe is yet to tap all its potential. The Digital Agenda is one of the flagship initiatives of the Europe 2020 strategy, our main reference for the actions needed to reverse the slowdown and take the path of sustainable growth. And, indeed, better electronic forms of payment are one of the targets of this Agenda.
Beyond the elimination of technical barriers for intra-European operations, we must bring more transparency, more competition, and more innovation to the payments market in order to achieve its necessary development. Today I will argue that regulation, self-regulation and competition enforcement at EU level should team up to spur the evolution of the industry in order to meet the expectations of businesses and consumers alike.
I will address three main areas of action:
I will start with what we can do to better integrate Europe’s payment markets. The euro is powerful element of economic integration and has undoubtedly helped us tap the economic benefits of the internal market. It has promoted trade across the Single Market and brought us more vibrant markets across the EU. And it will continue to do so for a long time. In particular, our common currency has cut transaction costs and increased price transparency.
But the progress of integration in cards and electronic payments has not been as fast as previously foreseen. Today, cross-border transactions within the euro area continue to be more difficult and often more expensive than national payments. These unnecessary transaction costs put a burden on our potential for growth.
Consumers, merchants and firms could reap enormous benefits if it were easier to make an electronic payment from one EU country to another. E-commerce is a clear area where progress could be made. At present, only 9% of EU consumers shop cross-border over the Internet; in contrast, an average of 40% use it to shop within their respective countries. A market consultation that the Commission has recently carried out shows that payments are one of the main barriers for the growth of e-commerce. Inadequate payment systems are effectively forcing our companies to operate in worse business conditions than their global competitors.
A number of innovative electronic payment initiatives do exist at Member State level, but they are struggling to expand outside their national markets. So far, all major recent global initiatives are non-European; for instance, PayPal, Google Checkout, and Amazon Simple Pay are from the US; while Alipay is an online payment platform launched in China in 2004.
So, an integrated, efficient, and innovative electronic payment system is essential for the European Single Market. It is key for the development of electronic commerce in Europe but also – and perhaps even more so – for the much wider brick-and-mortar commerce.
Ladies and Gentlemen:
At the core of this integration effort is the Single Euro Payments Area – or SEPA – the self-regulatory project run by the banking sector to make cross border payments in euro as easy and efficient as domestic ones. SEPA covers the main traditional retail payment instruments – such as credit transfers, direct debits and payment cards – but in principle it can also foster innovation and prepare the ground for the forms of payment of the future.
The Commission has supported SEPA. The initiative has achieved some appreciable results and I congratulate the banking industry for these. In particular, SEPA created common mechanisms for intra-EU credit transfers and direct debit transactions that makes cross border transactions as easy as domestic ones. However, the take up of traditional instruments has been too slow. In August this year, SEPA credit transfers accounted for only 20.1% of all such transactions in Europe and direct debits for a negligible 0.1%.
A number of hurdles remain for the development and integration of cards, mobile and internet payments. Since its first products became available on the 1st of January 2008, we have not seen any substantial development of new payment methods or the lowering entry barriers for new players in that field. My conclusion is that we have probably reached the limits of strict self regulation in the development of a Single European Payment Area; now we need to change tack and, most of all, speed.
We need to adopt a different and more comprehensive approach through regulation, self regulation, and competition enforcement. Work has already started at the European Commission. In December last year, we proposed regulation that would impose an end date for the phasing out of national systems and for the transition to SEPA credit transfers and direct debits in euros. The proposal – currently under discussion at the European Parliament and the Council – would create the clarity and predictability that the banking industry has been requesting for years.
We also need to launch a reflection on the best instruments to move forward with initiatives in card payments and innovative electronic and mobile payment systems. And we are also working in this area.
One central issue will be a reliance on more competition-friendly business models. At present, the payment-cards sector is dominated by the interchange-fee model. The model is profitable and expanding; worldwide point-of-sale interchange fees have been estimated at almost €50 bn in 2006; an increase of 140% from 2000. In the EU, retailers estimate that interchange revenues amount to over €13 bn and the cost of total merchant fees is about twice as much.
The high profitability of this model might be hampering the development of more innovative or efficient payment methods for users. Is the interchange fee the only possible or even the best option?
First of all, it can be argued that the interchange-fees mechanism creates a distorted system of incentives. Demand in the payment-cards market is determined by the cardholder who pays with the card, but the price is charged to the merchant. In this system, the banks create incentives for consumers to use high-fee cards which retailers are reluctant to turn down for fear of losing business.
In addition, because consumers and merchants value the most widespread cards, credit-card companies compete primarily for the number of cards issued rather than on merchant fees and attract issuing banks by offering higher interchange fees. These are then charged to merchants who, in many instances, cannot refuse card payments in their stores.
On top of this, there is a wide geographic variation of fees, which suggests low market integration. For instance, in Belgium the interchange fee for a debit card transaction of €50 is likely to be 10 cents; but in Poland it can be as much as 80 cents. The difference may seem small, but for an average retailer it can easily add up to more than €200,000 per year for the same transactions. It is hard to see any justification for this added cost.
Of course, this does not mean that collective interchange fees are unjustified in themselves; it is rather their level which is a matter of scrutiny. As a matter of fact, I have accepted the pledges and commitments offered by MasterCard and Visa Europe to cut interchange fees while still maintaining them. The principle we have applied is that fees can be set up to the amount of the cost savings that retailers make when they accept cards instead of cash payments. This is a reasonable benchmark, and one that prevents banks from taking advantage from the fact that retailers effectively cannot refuse cards.
Eliminating unwarranted rents also reduces the incentives to protect a system against new and potentially more efficient payments for users. In fact, new players – and particularly non-banks players – are finding it difficult to enter the European market for cards.
There are two reasons for this. First, new card payment systems offering cheaper payment services cannot provide issuing banks with the revenues they request for issuing services – the benchmark being of course the prevailing interchange fees for current payment cards schemes. Second, even payment systems that do not require a card – for instance over the internet or through mobile phones – need the cooperation of the banks in order to access and verify payers’ accounts. This cooperation does not always take place.
As a result, innovation in European payment markets is already lagging behind what exists in other parts of the world. I intend to reflect on how to remedy this situation. Work already is ongoing on the magnitude of the MIF in order to make the system more functional and transparent. I hope that all the stakeholders will contribute to this aim.
Before I close, I would like to turn to another very important factor that hinders the emergence of a single market for payments: the lack of technical and security standards.
Standards are the most effective way to achieve interoperability. They can also foster competition by making a market more open and accessible. But they can also be used as a protective weapon to restrict opportunities for new companies that intend to enter the market – and we have to make sure that this does not happen.
The European Payments Council – the organisation behind the self regulatory implementation of SEPA – is also the banking industry’s standardisation body for payments. Last month, we started antitrust proceedings against the European Payment Council in response to a complaint regarding certain standards that they are developing for electronic payments. These standards are needed for secure online transactions; they allow different e-payment schemes to talk to each other and are based on services that are familiar to all of us – such as home-banking.
The complaint alleges that these standards discriminate against players that are not controlled by a bank. We are looking into the case and we will reach a conclusion after our usual, thorough analysis. For the moment, let me tell you this. Banks keep our accounts, but this fact in itself doesn’t mean that they can always offer the most efficient and most innovative payment services. Banks have a role to play in the market for payment services. But they have to introduce new, more efficient even though potentially less profitable systems.
By its nature, technological change makes goods and services more efficient and more affordable. This does not necessarily mean a less profitable market. Particularly with new communication technologies, volume can compensate for margins. If banks do not understand and accept this, organisations other than banks – more innovative and technologically adequate – will inevitably end up occupying the space. And we must contribute to this process for the benefit of our citizens. The market – that is, the consumer – will eventually be the arbiter. The responsibility of competition authorities is to make sure that vested interests do not turn the market for payment systems into a fortress.
I will conclude. I’ve been telling you about barriers in the market for non-cash payments and the need for more transparent and cheaper transactions, new technologies, and new business models. I have been telling you what competition control and regulation can do to help market players make the future happen.
When this crisis is over, the landscape for banks and other operators in the financial markets will bear little resemblance with the terrain we are familiar with. Nobody knows what this future landscape will look like in every detail; but I can safely predict that financial services will be better regulated and more transparent. Hopefully, it will be also more innovative and adapted to the new challenges ahead. The ultimate goal is to allow people to pay for their purchases throughout the EU as cheaply and as easily as our technology allows.