The payments landscape and the politicization of payments regulation in Europe
We sat down with Robert Vandormaelgeneral manager at FTI Councilto examine the payments landscape and the politicization of payments regulation in Europe
In recent years, the European payments market has undergone significant changes, driven by innovation and digitalisation, changing consumer behavior as well as regulation. The pandemic has dramatically accelerated the shift from cash to electronic payments. At the same time, traditional payment instruments such as physical cards are increasingly being replaced by virtual payment solutions. These solutions are integrated into devices such as smartphones, watches, etc. and connected to others such as cars, refrigerators, etc. Additionally, new forms of money such as cryptocurrencies are entering the market.
How does this change impact the payments business landscape?
Payment players are becoming less visible, but more important. Traditional payment providers such as banks and card networks continue to hold a large share of the market. However, digitization and regulation provide opportunities for new entrants. Fintechs develop new products and solutions and, in doing so, take over parts of the value chain. More recently, American Big Tech companies have stepped up their game, and by benefiting from significant network economies, they have a strong competitive advantage.
The European payments market is still largely an aggregation of national markets, not least because of regulatory and other (such as cultural) differences between European countries. New payment solutions are often developed for home use and for many reasons (including regulation) it is difficult to deploy them across borders. This is especially true for European fintechs which, unlike global players (such as card schemes and big tech companies), do not have an existing global customer network allowing for mass reach. The lack of European players and the growing opportunity of large networks are being closely watched by European governments.
Why is this important for European governments?
At a time of growing geopolitical tensions, governments want to retain control of their payment systems. This is a natural phase in the maturation of the digital economy, where cash, the issuance of which is reserved for central banks and therefore an essential tool for economic policy, disappears. Governments are motivated to own or control their payment infrastructure to remain politically and economically autonomous from other regions and the foreign private sector. The European Commission has been candid about this. In its recently adopted retail payments strategy, it said: “Once relegated to the back office, payments have become strategically important. They are the cornerstone of the European economy.
How does this translate into concrete policy?
State intervention in the payments market is not new. EU institutions lead the payments market through regulation and litigation, with the aim of fostering a competitive environment in which consumer protection takes center stage. Issues such as competition, cost of acceptance, transparency and convenience, secure authentication and fraud prevention, tackling the underground economy, and data privacy have come to the fore. Finding a balanced approach to these, while prioritizing end users, has been the goal of governments for many years. Politics could change that.
Source: Survey 2021, Payments Europe: The evolution of the European payments market: from cash to digital, what do Europeans want?
The politicization of payments has led to regulatory intervention to help the development of local players (e.g. the European Payments Initiative), to regulatory action to encourage the adoption or development of specific solutions (e.g. account-to-account payments or the digital euro), and the pursuit of increased localization of payment infrastructures – including in data storage space – all with the aim of making Europe more autonomous and less dependent on non-European players. From a European perspective, this is an ambition that can only be encouraged. Having a strong European industry and ensuring that global players adhere to European values and standards should benefit end users. Nevertheless, it is important that policy objectives that lead to poor end-user outcomes do not take precedence.
Are there lessons for the industry?
Payments have become political. While technical arguments have prevailed in political discussions, political narratives are becoming increasingly important in shaping the debate. Issues such as fraud management and payment authentication, diversification and cost of acceptance, transparency, data privacy, as well as innovations that change the ecosystem (open banking/data/finance ) are at the crossroads of regulatory and policy discussions. Gathering political points to make your voice heard in payment policy is a must. This is not only true for payment companies, but for all those who have payment solutions integrated into their services or products. With the volume and speed of change in digital payments – in terms of market and policy evolution – businesses can no longer view payments as a means to an end and simply seek to create or integrate compliant products. Payments can drive business growth, but politics and regulation can get in the way if you’re on the wrong side of the debate. Businesses cannot afford to make the mistake of isolating payment policy from payment policy.
This interview was first published in our Cross-Border Payments and E-Commerce Report 2021-2022which taps into the fast-growing cross-border market and provides a comprehensive overview of the trends and developments that are essential in this space, being the ultimate source of information for e-commerce businesses wishing to expand globally.
About Robrecht Vandormael
Robrecht is a managing director in Brussels, overseeing a wide range of payments and fintech clients. He helps them understand and manage complex EU political and legislative issues that will impact their business, as well as advises them on wider political reputation management to develop or protect their freedom of action. Robrecht is a member of the European Commission’s Payment Systems Expert Group, which advises the European Commission on payments policy and legislation. He is also Secretary General of Payments Europe, the association representing the European and global digital payments industry.
About FTI Consulting
FTI Council is a global business consulting firm, providing multidisciplinary solutions to complex challenges, and with a global network of more than 6,600 employees in 29 countries on six continents. FTI Strategic Communications helps companies around the world manage change, mitigate risk and improve their market position.