I recently wrote about Italy’s approach to cash acceptance at retailers. Like many observers, I suspect that the merchants dislike of card payments has as much to do with tax avoidance as it does with merchant service charges. Nevertheless, Italian merchants have a point. They need an alternative. But what should that alternative be?
Risk expert Wolfgang Piccoli was quoted in that context saying that “Europe is well aware that Amex, Mastercard and Visa are all American. It doesn’t have a credit card company and that’s a problem”.
But that isn’t the problem. We don’t need another credit card company and it is a fact that Europe has failed to develop an alternative to Visa and Mastercard many times. There are a number of reason for this, but one obvious one is that Visa and Mastercard work very well indeed. Even using new technology such as biometrics or blockchains or whatever it would be something of a mountain to climb to try to create a card payment scheme to compete with them.
No, the problem isn’t that Europe doesn’t have an alternative card scheme. The problem is that Europe doesn’t have an alternative to cards, which is why “Le Third Scheme” should be based on the things that Europe does have: Open banking, instant credit transfer, smartphones and payment institutions.
(With this in mind, I was pleased to see that the European Payment Initiative, the EPI, abandoned its plans for a card scheme — which I always thought sub-optimal — and decided to focus on an account-to-account instant payment solution (A2A) for all kinds of use cases, all through a wallet. There is an interesting synergy here with the European moves to develop a common digital identity service and euro-wallet infrastructure, but that’s a topic for another discussion.)
These technologies and the regulatory structures around them are a practical way for retailers to change the cost-benefit equation around retail payments. Moving to in-app payments in the context of a better customer experience that delivers more data at lower cost. This is one of the reasons why I found the recent announcement from Sainsbury’s, one the U.K.’s largest retailers, they are going to use Checkout.com to revitalise their SmartShop app, so interesting.
The new functionality will allow customers to pay for their shopping without having to visit a point-of-sale (POS) at all. They will instead pay using the app on their smartphones. Taking the POS out of the payment loop makes it vastly easy to offer different and better payment solutions to consumers.
This is not a purely European trend, of course, since some US retailers have already been encouraging shoppers to try various forms of “pay by bank” options as alternatives to payment cards (by, for example, using Plaid to link the retailers to customer’s bank account) and many observers expect to see a significant increase in the use of such options in the coming year.
McKinsey report U.S. growth rates for instant payments of more than 60% (admittedly from a small base) and suggest that “there remains room for a breakthrough that sparks an even higher U.S. growth rate”. That might be sooner rather than later, because I am pretty sure that the impact of FedNow, the U.S. instant payment network which is due to be launched later this year, is underestimated in the retail context. As noted by The Economist amongst others, retailers have every reason to switch from paying card issuers to provide incentives to the card issuers’ customers and instead routing transactions account to account and providing incentives to their own customers.
This is just as true in Italy. Rita Camporeale, Head of Payments Systems at the Italian Banking Association (ABI), has said that the pandemic already accelerated the embrace of instant payments in the country and she has pointed to new use cases emerging among SMEs hoping to improve their cash management practices, initially using the service to move money between their own accounts. As more and more businesses connect to instant payments, the pressure to use them in retail environments will surely grow.
At the retail level, there are already two popular payment methods to compete with cards. Bancomat Pay (run by Bancomat, which operates the domestic card scheme and many of the country’s ATM machines) and Satispay; both offer mobile apps that allow users to connect their bank accounts with their mobile phones in order to make A2A payments. These can be used by merchants as an alternative to cards already and in some markets (eg, Sweden, where more than eight million consumers and 300,000 businesses already use Swish) we can see A2A volumes building.
The speed of A2A aside, there is another factor that might accelerate adoption and satisfy the concerns of key Italian stakeholders, and that is privacy. As Diederik Bruggink and Alessia Benevelli from the European Savings and Retail Banking Group wrote in their interesting paper on Instant payments and cards: Apples and oranges or a possible substitute? in the Journal of Payments Strategy and Systems 15(4): p.398-409, one of the key enablers for a flourishing instant payments sector might be privacy. Using account-to-account payments via wallets, where the transaction details are conditionally anonymous, might address European sensibilities around privacy and data protection and meet the concerns of customers who prefer to keep certain transaction details confidential.
The Path To Retail Instant Payments
I rather agree with Andrew Marshman at FIS who suggests that an open, industry-wide overlay service with interoperable standards could be the way forward, which is why developments around the Single Euro Payments Area Payment Account Access (SPAA) scheme from the European Payments Council (EPC) seem rather interesting. The scheme covers the exchange of payment accounts-related data (eg, between a merchant and a consumer) and the initiation of payment transactions. It is interesting because it leverages investments already made for PSD2 compliance and goes with the grain of the European Commission (EC) legislative proposals around EU “strategy autonomy” in payments.
The SPAA scheme rule book has just been published and makes for good reading because it was developed collaboratively by the retail payment industry and the users as represented by the Euro Retail Payments Board (ERPB). While there is a lot of work to be done to turn these standards into a business, they are certainly an important stepping stone from open banking on towards open finance and eventually open data. The potential for new products and services built on rich data and instant payments is real and significant.
In the future, a retailer’s QR code anywhere in the world might trigger customers’ smartphone wallets to then push the money directly from their bank accounts to the merchant’s bank accounts while keeping their personally-identifiable information safely locked up in a bank vault.
Who knows, perhaps in a few years’ time the customer’s wallet might send central bank digital currency across the internet from her wallet into the retailer’s wallet, leaving banking accounts, ISO 8583 and SWIFT out of the loop altogether.