Time for big questions… and big decisions
Hervé SITRUK, President and Founder
In the current phase, which we all hope will be the one to emerge from the pandemic, several developments will intensify and strongly influence the world of payments, such as contactless payment and the fingerprint biometric card, Instant Payment, mobile payment, Request To Pay, or the deployment of the ISO 20022…. standard And, most likely, blockchains and cryptopayments.
Some predict a new post-COVID world payment order. In any case, the GAFAs and other BATX are actively preparing for it, and dream of “redefining financial intermediation”, according to the formula of François Villeroy de Galhau, Governor of the Banque de France, with solutions of continuity and others of rupture.
In the continuity phase, we are seeing the emergence of multiple XPay offers with known payment methods such as mobile payment, which are based on solutions provided by banks and the current cashless payment industry.
Other developments will generate disruptions, such as with the diffusion of the first stablecoins like Diem, before the probable ones of other players like probably Paypal, and at the same time new methods of cashless payments, by card in particular, backed by accounts in cryptoactives, as proposed by the international schemes.
All of these offerings draw their strength from their huge user groups or global social networks. And all of them aim to retain either data control, which has been undermined by data protection decisions, or competitive advantages, as with Apple’s refusal to open the NFC antenna of its smartphones to competition, and in particular to competing European solutions such as Paylib or Bizum.
In this very near future, Europe must act quickly, otherwise it will become a spectator of a battle between GAFAs and BATXs, especially in Europe. And it must do so quickly. It must also take advantage of this phase to decide on major debates, which have never been raised with as much force as they are today.
The quick decisions mainly concern the position towards the GAFAs, and towards certain anti-competitive practices that the French Competition Authority has highlighted through a very detailed study published at the end of April.
The key questions are threefold: Should GAFAs be dismantled? How to get them to respect European regulations? How can we fight dominant positions or non-compliance with basic competition rules?
Europe has begun to provide answers to these questions.
Thus, to the first question, Ms. Margrethe Vestager, Vice-President of the European Commission in charge of Competition, indicated that she was reluctant to dismantle the GAFAs: “I am reluctant because we don’t know what would come of it. What is certain is that GAFA would take us to court. That’s a very radical decision we would be taking there! Everything would hang on these court decisions. Nothing would happen concretely. But we need concrete changes now. Thus, there would be no point in engaging in the terrible battle of dismantling the GAFAs, as it would take decades without necessarily having any hope of winning against the huge legal war machine that the GAFAs are capable of lining up, and moreover, it would prevent us from moving forward. Instead, Ms. Vestager proposes to set our own rules in Europe and require everyone to comply with them. That is Sovereignty. And that does not mean isolation, nor does it mean cutting ourselves off from the innovations of the rest of the world. The fact remains that, in payment, and particularly in mobile payment, there are citadels to be knocked down and rules to be established.
But a European regulation would not be enough, as we have seen with the RGPD, the GAFAs protecting themselves by relying on the more lax regulations of certain European states, such as Ireland. And it is this fragmentation of the European market, which would require unanimity to combat circumvention, that has prompted France, Germany and the Netherlands to propose giving more power … to national States and their National Authorities in the implementation of the two draft regulations for the digital sector and services, the Digital Market Act and the Digital Services Act, to avoid a “bottleneck” in the application of these regulations.
Finally, in order to fight against certain monopolies, such as the NFC antenna monopoly that Apple has granted itself for its mobile payment solution, a draft European regulation currently being finalized and expected to be adopted by the end of the year, includes a system of sanctions that should push Apple to a more open and cooperative attitude.
Of course, Europe is not only responding to these attempts with regulations, but also with marketing, in particular with an offer of a wallet that European banks are preparing within the framework of the EPI (European Payment Initiative) project. This project is unanimously recognized as the European priority project for payment, as the Governor of the Banque de France recently emphasized when he declared that “there is no alternative to the EPI”.
Europe has also responded, via several interventions by Christine Lagarde, President of the ECB, to the ambitions of cryptoactives such as Bitcoin by stating that “Bitcoin is not a currency”, and to those of the GAFAs, and in particular Facebook, in issuing “digital cryptocurrencies”, that they would have no place in Europe. And Europe has also responded with the work of the Eurosystem and the Commission on the conditions and modalities of issuing a possible central digital currency, and with the MiCA project of regulation on cryptoassets. Europe is therefore preparing to legally block the road to these players in the field of money and payment, which Facebook has endorsed by leaving Europe with its Diem project. But Europe still has to find European solutions. This raises difficult legal, technical, economic and even societal questions.
The end of the pandemic must therefore also lead to the raising of fundamental questions in order to build tomorrow’s European payment system on solid foundations. Because even though the Retail Payments Strategy (RPS) and the draft MiCA, DMA and DSA regulations already address many major issues, and we can only congratulate the European Commission on these important advances, key questions remain unanswered.
In his recent presentation of the ACPR’s 2020 report, the Governor of the Banque de France raised several of them: the profitability of the banking sector, innovation, and banking and industrial consolidation.
On the first point, profitability, Governor François Villeroy de Galhau indicated that “the path to profitability today lies in the continued modernization of the financial institutions themselves, but also in the emergence of a true “single banking market”. This is indeed a priority, and the modernization of the banking payment sector is underway, as illustrated by the Digital Meetings that FRANCE PAYMENTS FORUM regularly organizes.
But this is not enough. A European taboo must also be lifted: the billing of banking services. We can’t both say that bank profitability is a key issue and criticize banks when they charge for their services, as Fabio Panetta (ECB) recently did on the subject of Instant Payment billing, stating “Instant payments are sometimes offered to customers for one euro per transaction. This has to change.
It is certainly normal to denounce excessive billing, when it is justified, and Fabio Panetta is right to insist on the importance of “offering instant payments at attractive and transparent conditions”.
The banks have responded by pointing out the free nature of certain transactions, the risks associated with the irrevocability of payments, the amount of investment involved and the service provided.
In our opinion, the transition from D+1 to instantaneous transfers does not happen overnight with “attractive” billing: this major evolution must be given time.
And we must not forget that the banks are making a major investment to implement the EPI initiative, to digitize payments, and to implement Instant Payment, and this represents a very significant investment. It might have been more appropriate in today’s phase to value the effort that has been made, and then leave it to the competition and the market. And if some providers are more competitive with a total free service, they will win. But then they will have to finance themselves elsewhere, to balance their costs.
If we want banks to be profitable and able to invest, we must remove another taboo in Europe, that of the word “business model” in payments, and even impose that any innovation in payments be accompanied by its business model. And this starts with Instant Payment, whose development must be accompanied by a real business model. And why not already generalize card interchange to SCT Inst, to avoid harmful price competition between payment instruments?
It should be noted that European banks now charge interchange fees of a few tenths of a percent, while their foreign payment service provider competitors, particularly American and Asian, charge fees of several percent outside of Europe (which European businesses often accept in order to capture their customers).
In our opinion, the European Union’s competition policy in this area must be thoroughly reformed in order to provide the means to invest in the terrible competition that is taking place in payments, particularly with the BigTechs, but also with international banks and even with international schemes.
We must also consider the contribution of European interbanking, which is currently considered to be contrary to European competition doxa, and its potential contribution to the development of European banking services in payments, as the French example has amply demonstrated.
On the second point, namely innovation, the Governor of the Banque de France indicates that “Europe is losing momentum at a time when this crisis is triggering an acceleration of digital technologies. However, in the area of payments, Europe is not lacking in innovations, such as those already mentioned, not to mention the EPI project, which is in itself a major innovation and mobilizes substantial financial resources. Certainly, there are areas that need to be accelerated, such as mobile payments, the fight against fraud with the large-scale use of artificial intelligence, end-to-end transaction encryption, crypto-payments, digital banking currencies, and tomorrow with the IoT, and many other innovations …. But, it is difficult and costly to do everything at once…
The last challenge is that of banking consolidation and, it must be added, industrial consolidation in payments. The Governor insists on the stakes of a true Banking Union, which he calls for: “European banks must resolutely unite in the payments sector in order to quickly arrive at a common offer,” especially since certain European banks, such as in Italy, are still dragging their feet and are reluctant to join the EPI project. But, as the Governor emphasized, it is also necessary to “remove the protectionist resistance of the ‘host’ countries” … and to review, once again, the European Union’s competition policy, which is a blocking factor in this area, compared to the rules applied elsewhere in the world. For her part, Ms. Vestager responds to the lack of European industrial champions by saying “we have not provided them with a digital single market, nor a European capital market. The conditions are better now. As the press reports, out of 19 companies created globally since 2009 that have exceeded $100 billion in market capitalization, 9 are American, 8 are Chinese, and none are European. Europe does indeed need to thoroughly review its policy in this area, and the European payments industry can be a major incubator for world-class companies.
Of course, it is difficult to launch such a project without a consensus, and for the moment, there is none, not only between the various players in the payment chain, and in particular with the banks (even if certain banking associations such as the Italian Bankers Association, the ABI, have said they are in favor of it), but also between European, and even global, central bankers. Today, there is a certain inflection, with the acceleration of the work of the US Federal Reserve and the Bank of England, and the announcements of several central banks that are in turn undertaking work on central bank digital money.
Of course, it is also difficult to launch such a project without giving ourselves the means not to compete with banking projects, and in particular the EPI project, which must remain a priority, by thinking about the first use cases. Finally, it is essential to involve not only the banks, but also the governments, national parliaments and the European Parliament in such decisions, and of course to explain the project to the general public. This eventual issuance of a digital currency by the ECB is indeed a project as important as the issuance of the euro was in its time, and it requires the same level of preparation and communication, and a timing over several years. But to do this, we must be clear about the objectives and the means. And we must take the opportunity to ask ourselves some fundamental questions before embarking on what we must call a breakthrough scenario.
Among the many questions that arise with regard to central bank digital money, the first is whether it is really the role of the public authorities to issue money. One might be surprised by this question, but it is the one raised by the supporters of Decentralized Finance.
This question was recently taken up by John Cunliffe, Deputy Governor of the Bank of England, in a very remarkable speech with the provocative title “Do we need public money? in which he asked the question: “Does it matter if the public cannot access public money? Since the state no longer provides water or electricity directly, why should it provide money? John Cunliffe points out that if the issuance of money were to be left entirely to the private sector, it would have to be the result not of chance, but of a well-considered decision.
Rest assured, Sir John Cunliffe is in favor of keeping the public sector involved in the issuance of money and in the issuance of an eventual central bank digital currency, what some are already calling the “Britcoin”, and he asks the commercial banks not to shirk the disruption that a central digital currency could cause. In short, he is sending the British banks back to their business model and their financing, without much ado. But he admits that this major issue must be debated, in order to reach a new consensus in which Parliament and the British people must be involved. Europe, in turn, cannot avoid such public debates.
Another question concerns the future of cashless payments in the face of the emergence of digital central currencies, or even “stablecoins. This is an ongoing debate that we have already addressed, but it is becoming a major and urgent one. Is the future of scriptural currency incompatible with the development of digital currencies? Will these currencies render obsolete the considerable investments that banks are currently making in cashless payments and the digitalization of payments?
Our feeling is that, just as cash has not prevented the development of cashless payments, the tremendous revolution in cashless payments currently underway will not prevent the development of another parallel payment channel, based on blockchains. Because many players, financial or otherwise, want this to happen worldwide, and they have colossal financial and technical resources at their disposal, and Europe alone cannot stand in the way and live outside of the developments affecting the rest of the world. Even though cashless payments still offer many major advances and have strong advantages, another “rail” is being built alongside it, and it would probably be dangerous to ignore it.
Finally, as mentioned above, several commentators have pointed to a very recent shift in the positions of certain central banks, notably the FED and the Bank of England, in favor of issuing a central digital currency. This shift is justified, according to the FED, by the growing role that private digital crypto-currencies could quickly play, the ongoing migration to digital payments, the plans of some major economic players in their economic and monetary zone to use foreign central digital currencies to execute international payments, and recent developments regarding banking exclusion due to digitalization.
Another inflection is that of the G7 countries, which agreed in early June to strengthen their cooperation on the subject of central bank digital currencies and stablecoins. Thus, the Finance Ministers and Central Banks of the G7 countries decided to work together on the implications of the issuance of central bank digital currencies on public policies and to establish common principles, with the objective of publishing their conclusions before the end of this year. They also decided to strengthen their cooperation in order to regulate the issuance of stablecoins and to establish common standards in this area. Finally, they decided to continue their joint work to implement the G20 roadmap on international payments. This shows that the issue of digital currencies is now considered a priority and that international cooperation has entered an active phase.
Europe is certainly not standing back from these changes, but it must urgently try to come to a conclusion on the new contributions and use cases of digital currencies, and on the means to quickly create a crypto-payment industry, both banking and non-banking, that will be able to compete, when the time comes, and probably soon, with the initiatives that we see emerging across the Channel, across the Atlantic or in Asia.
To be clear, the objective is not to transfer activity from banks to central banks or to perpetuate cash in a new dematerialized form. Nor is it to lower our guard in terms of issuing currency or fighting fraud. If new entrants want to enter the payments market, they will have to abide by the same rules (what the Anglo-Saxons call the level playing field) as the banks.
Therefore, we must eagerly examine these issues, and FRANCE PAYMENTS FORUM will contribute to the debate. However, we must not overlook the considerable progress that has already been made in the world of cashless payments. As mentioned above, the world of cashless payments is currently undergoing a silent but major revolution.
Therefore, how can we not be convinced that innovation and creativity are not only the prerogative of the FinTechs, despite their dynamism, nor of the BigTechs, despite the formidable resources deployed, but that the payment industry as a whole, with its spearhead of cashless bank payments, continues to undergo a thorough renovation to provide new services, strengthen security and reduce costs.