Isolationist politics are creeping closer to the payments industry, with European banks threatening to build a localized payment ecosystem to push back against the major American card brands.
The planned European network, called the Pan European Payment System (or PEPSI), includes 20 European banks and has the tacit backing of the European Central Bank. There's no formal announcement, but PEPSI would be a catchall counterweight to cross-border mobile payment fintechs, challenger banks, blockchain startups, cryptocurrency and the cloud, and other initiatives that the incumbent financial services industry sees as threats.
PEPSI would be a rival to Visa, Mastercard, PayPal, other American payment brands, and U.S.-based data giants such as Google and Amazon. The ECB did not return a request for comment, but multiple European media outlets quoted Carlo Bovero, the head of global cards at BNP Paribas, referring to the initiative at a conference.
European politicians have floated the idea of creating their own payments system before. Just a few months ago, Deutsche Bundesbank board member Burkhard Balz suggested European banks build their own mobile payments platform, citing the influence of Google and Amazon as a threat. What’s new this time is the participation of a large number of banks, with PEPSI reportedly including most of France and Germany’s banking industry as a base, and a group of banks willing to invest in the initiative.
The ECB and PEPSI are hardly alone, as traditional authorities are taking a harder line against alternative payment initiatives, whether it’s Facebook’s Libra, Apple Pay or challenger banks.
The EU is reportedly moving closer to investigating Apple Pay for antitrust violations, and the pushback against Facebook’s Libra project is widespread as politicians in the U.S., Europe and Asia push back against the social network's crypto initiative. This political climate is present elsewhere, with India requiring outside payment companies to store data locally, a move that's drawn the ire of Mastercard. And China often shifts requirements for outside payment companies to do business inside the country, usually in the direction of requiring substantial investments and a local presence.
Central banks around the world are also building digital currencies, again to counter what they see as a threat to monetary sovereignty by blockchain-based currencies such as Libra.
PEPSI’s advocates suggest another indirect threat, with media reports saying Europe needed its own payment system to counter an “upset American president” who may change trade policy with the eurozone in a way that could harm the continent’s banks.
“Certainly PEPSI could have an enormous impact on EU payments if the ECB and EC put their considerable shoulders behind it and if banks seriously commit to a politically driven payment system,” said Eric Grover, a principal at Intrepid Ventures. “EU regulators are viscerally hostile to dominant U.S. payment franchises like Visa and Mastercard. They’re spooked by the prospect of Libra.”
Politics is just part of the battle, as challenger banks have expanded quickly over the past few years, often gaining hundreds of thousands of enrolled customers and drawing funds from fintech investors. There is likely frustration in the traditional banking industry that is fueling the push for an alternative payment system. Incumbent banks have faced an expensive and long path to comply with data regulations such as PSD2 and GDPR, which are seen as favorable to challenger banks and fintechs since these younger companies can take advantage of new mandated data sharing between banks and third parties.
Revolut, which is teaming with Visa to expand geographically, and N26, which just raised $300 million, have both achieved unicorn status and are rapidly adding new markets and scale. Another European fintech, Monzo, says it’s adding 100,000 clients per month, and is developing services such as B2B payments.
These firms started as mobile payment providers, using U.S. card brands to support transactions, and their growth adds to the U.S. card networks’ scale.
“These challenger banks are distinguishing themselves by providing payment services — that’s how they entered the market, as a glorified general purpose reloadable accounts,” said Richard Crone, a payments consultant. “So directly or indirectly, Visa and Mastercard have new distribution channels.”
PEPSI would face an uphill battle, considering most European banks issue Visa and Mastercard, and Apple Pay and PayPal have made major inroads among European consumers and merchants. And international payment networks don’t expand overnight. Reported estimates say PEPSI would cost several billion euros to build a system that would cover about 60% of the European electronic payments market.
“Building a network of last resort is a difficult and expensive endeavor,” said Sarah Grotta, director of the debit and alternative products and advisory service at Mercator. “Getting enough consumers and merchants behind the solution to create the network effect, plus all of the required infrastructure, operating and regulatory considerations is an undertaking that will take many years to develop.”
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