Vice President of the European Commission responsible for Competition Policy
Integrating payments in the EU: A new approach
Conference on Card, Internet and Mobile Payments
Brussels, 4 May 2012
Ladies and Gentlemen:
I am happy and honoured to open this day of debate on card and electronic payments. I welcome the industry representatives and the many experts who will share with us their views on the future of the payments market in Europe. I would also like to welcome the colleagues from the European Commission and the other EU institutions who will animate the discussion – and special words of thanks go to the people who have organised this conference with impeccable care.
Forms of payments alternative to cash and other traditional means are changing the lives of millions of people in advanced and developing countries alike. In Europe, card payments have enjoyed an enormous success over the past twenty years. Indeed, this is good news. Open, secure and innovative payments markets are crucial for the digital economy, which is in turn one of the most promising sectors for Europe’s growth. On top of this, payments systems underpin the smooth functioning of the internal market.
Card payments fulfil these requirements. But substantial changes lie ahead of us, and we are eager to tap the potential of the new, digital payment systems. Unfortunately, payments are one of the main barriers that hinder the rise of e-commerce in Europe. Now that our economies are facing difficult challenges to overcome the worst consequences of the financial crisis, integrating payment markets in Europe is a challenge that we have to meet for the sake of growth in the EU.
This is why my fellow commissioner Michel Barnier and I have taken the initiative to launch the Green Paper we are discussing today. I take the opportunity to thank Neelie Kroes, John Dalli, Antonio Tajani and Olli Rehn for contributing their expertise and views. The Green Paper reviews the main obstacles that obstruct the completion of the internal market for cards, internet and mobile payments and explores possible solutions. Just consider that last year less than one online consumer in ten ordered from sellers in another EU country. The Green Paper is a perfect example of the Commission's dedication to growth and innovation and is fully in line with the Europe 2020 Strategy – especially with the Digital Agenda.
We intend to engage a wide array of stakeholders over the next months. The internet consultation that closed last month and today’s conference are two major steps in this process. Our work has just started, but it is already clear that the interest among stakeholders and the general public is very high. We received over 300 replies to our internet consultation – which is more than we normally get even on broader topics. We’ve also had a number of replies from outside traditional payment circles; for instance, from travel agencies, airlines, railway companies, and telecom providers.
This feedback and our exchanges with the competition authorities in the Member States have given us a better understanding of the sector. And the more we understand the markets for payments, the bigger are our concerns. Despite the self-regulatory efforts of the industry, and the hard work done by the national competition authorities – reflected in the overview produced by the European Competition Network – we continue to see major problems in the payments markets. We should consider the need to design new European legislation that can give a stronger ex ante regulatory framework and more legal certainty to the industry.
Ladies and Gentlemen:
Let me review the main problems we have identified in the payments sector, starting with cost. A sector inquiry we carried out in 2006 found that card transactions cost EU merchants about €25 billion a year. We don't see any indication that these costs have been reduced since. We should understand the merchants who regard these charges as an excessive tax imposed by banks, since the payment service fee rate can be as high as 2% of the transaction value. We are now conducting a study which will give us a better picture of the merchants’ actual costs and benefits of accepting cards as compared to other means of payment. From a different point of view, retail payment revenues are a stable and resilient source of income for banks. The ECB estimates – on the basis of a Capgemini analysis of 2009 – that they account for about 25% of total bank revenues.
Another problem is that payments markets are still fragmented, especially because the industry has not yet agreed on a set of technical standards for the whole of the EU, such as a standard for card terminals similar to the general standards for mobile phones. The Green Paper identified standardisation as an area where there is definitely room for improvement. I understand that it is difficult for the industry to agree on standards that suit diverse and – at times – conflicting interests. This is why the Green Paper asks if it would be better to entrust some of these processes to regulatory or standardisation bodies with formal mandates and timetables.
Finally, the markets are not as dynamic and innovative as they should. There are many new technologies out there, such as using electronic wallets on your smartphone at the point of sale or your online banking to shop on the internet. However – except in a few EU countries – it is difficult for these technologies to enter the market for payments, even if this is exactly what consumers want.
Clearly, there is a lot of work to do to bring Europe’s payments markets in line with the times and with the expectations of businesses and consumers. Just compare this picture with the internet and mobile industries. In those sectors, inter-operability is ensured by harmonised European and global standards and there is more competition; as a result, retail prices for surfing the internet and for domestic and international calls have dropped dramatically. Of course, there have been competition concerns in these industries too: in some areas fees went down only after European legislation eliminated disproportionate and hidden charges. However, the achievements are real.
I am drawing this parallel also because the new frontier of the payment industry is digital. We already have the technology to do payments with our fixed and mobile devices; all we have to do is using it to innovate. To start with, the industry must explore new business models. We must prevent some of the bad habits developed in the cards sector over the years from spreading to the new forms of payment. At present, about one mobile device in three can access the internet; and I believe that the combination of both technologies can provide new and better systems for mobile payments.
What has been done over the last decade in the payments markets – and what must be improved? A mix of regulation, self-regulation and competition enforcement has been used in the sector so far. At the core lies the Single Euro Payments Area, a project run by the banking sector. The body in charge of SEPA – the European Payments Council – has achieved a lot since it was set up in 2002, but after ten years the project needs to be reinvigorated.
One issue is that the actual take-up of the new SEPA instruments has been too slow. In February this year, SEPA credit transfers accounted for less than 25% of all such transactions in Europe and SEPA direct debits for a meagre 0.4%. These figures show that we have reached the limits of strict self-regulation and that the Commission needs to change tack. One result of our new approach is the end-dates Regulation of last March, which sets February 2014 as the deadline for migrating to SEPA credit transfers and direct debits.
Another issue is the growing diversity in the sector. The payments industry has made an effort to engage consumers, retailers and other stakeholders; but new market players are knocking at the door – such as internet service providers and other non-bank organisations. I think that the industry’s decision-making process is encumbered by divergent interests and can no longer represent the general interests of Europe. To fulfil its responsibilities, the Commission needs to consider whether to step in – and how.
As you know, we are conducting an antitrust investigation into the system that sets the fees for retailers when they accept our cards, which is based on a business model that is not competition-friendly. The fees are still too high and too unequal in the internal market. In normal circumstances the gaps would tend to close, but technical standards and rules applied by card schemes prevent retailers from profitably shopping for lower fees in other EU countries.
The model is also opaque; on the one hand, cardholders cannot see how much merchants are charged; on the other, the rewards built into many schemes encourage them to use the cards with higher fees. As a result, we end up using the more expensive cards, but the retailers fear of losing business if they refuse them. And – like all costs – these too are eventually passed on to all consumers – including those who do not use cards.
Another consequence of this system is that the most expensive schemes are taking over the market; in the UK, for instance, consumers are moving to premium cards with higher service charges for the merchants. Why has it been difficult so far to open the system to competition? Because transactions need to be checked against our accounts and the banks keep account information close to their chests.
So, here is one possible solution. A company that wants to enter the market for payment instruments should be able to verify that there are enough funds in the consumer’s account at the time of the transaction – obviously, provided the consumer agrees. Of course, any new system giving access to bank accounts must be at least as safe and as confidential as the present one. We need to find a solution; I know it’s not going to be easy, but it’s not impossible either. What counts is that safety and other standards are not used as a pretext to hinder competition and block innovative products.
Ensuring a level playing field among existing providers of payment services and new entrants is also a key element in an antitrust investigation we opened against the EPC last September. We want to make sure that certain standards used for internet payments – based on those used in home-banking – do not discriminate against players that are not controlled by a bank. We are of course open to work with the EPC on the details to avoid this risk.
Ladies and Gentlemen:
It is the responsibility of the Commission to set the tone for the integration of the payments market of the future; and today’s conference is part of this process. True to the tradition of EU policy-making, we are trying to involve all stakeholders and the first follow-up steps to the Green Paper will be announced before the summer. We will go through the listening stage with particular care this time, because the decisions we take on payments will directly affect practically everyone living in the EU. Another indication of the special care we are taking is the involvement of so many fellow Commissioners and their services. Payment services concern a number of different policies and we strive to collect the best knowledge and expertise the European Commission has to offer in all of them.
In closing, let me tell you that the future of payments in Europe will probably revolve around the interaction between established and innovative players. Some organisations are already innovating to take advantage of the opportunities offered by the new forms of payment; in contrast, others are dragging their feet.
We do not want established players to stick to traditional models and delaying the adoption of more efficient means of payments – or preventing other players from providing them. The new mix of regulation, self-regulation, and competition enforcement that I am advocating today will have to respond to these new challenges and opportunities if we are serious about protecting the interests of businesses and consumers in Europe.