Bringing European payments to the next stage: a public-private endeavour

Keynote speech by Fabio Panetta, Member of the Executive Board of the ECB, at the European Payments Council’s 20th anniversary conference

Frankfurt am Main, 16 June 2022

Let me warmly congratulate you on the 20-year anniversary of the European Payments Council (EPC).^[1] Your organisation has been key to the transformation of Europe’s payment system into one of the most efficient in the world, seizing the opportunities offered by the Single Market and the introduction of the euro. Estimates suggest that Europeans pay far less for payment services than Americans do.^[2] And Europe has been a pioneer in establishing instant payments settled in risk-free central bank money on a continental scale.

These results were achieved thanks to the combined efforts of the public and private sectors.

Public institutions laid the foundations for these improvements. They brought stakeholders together to steer progress, first in the Single Euro Payments Area Council and now in the Euro Retail Payments Board (ERPB), which I have the privilege of chairing. They also introduced legislation where necessary, for instance to cap interchange fees for card payments and to limit the costs of cross-border transactions. And they broadened market access and competition.^[3]

The private sector played a key role, too, by fostering innovation and efficiency. And the EPC helped make that possible. By bringing payment service providers (PSPs) together in creating and managing the Single Euro Payments Area (SEPA), you greatly contributed to the integration of European payments.

The progress that has been made is remarkable. And we can now all make credit transfers and set up direct debits^[4] seamlessly across Europe. By ensuring the smooth functioning of European payments, SEPA has facilitated trade across the continent, supporting economic growth^[5], and has strengthened the stability of the financial system. This has helped unlock the potential of the Single Market and bolstered confidence in the euro.^[6]

We are now facing the challenge of digitalisation.

To stay at the technological frontier and satisfy consumers’ demand for immediacy while preserving our sovereignty, Europe must promote digital innovation and efficiency in a way that corresponds to our societal preferences and objectives. We should roll out instant payments and make them the new normal. And we must build a truly European market with unified solutions for card and mobile payments, which are becoming increasingly popular among consumers.

The Eurosystem is leading multiple initiatives here. Above all, we are closely cooperating with the European Commission and European legislators on our retail payments strategy and the digital euro project, both of which seek to foster innovation, safety and strategic autonomy in European payments.

Today I will look back at the progress made in the last two decades and outline the remaining steps that need to be taken to overcome fragmentation on the customer-facing side of payment services. I will then explain how the digital euro could make it easier to achieve the objectives of our retail payments strategy, in particular the creation of a truly pan-European payment solution, the full deployment of instant payments and support for innovation and digitalisation.^[7]

My main message is that, in order to successfully meet the challenges we face, we need the same cooperation between the public and private sectors that has been the hallmark of our success in building the European payments market over the last 20 years. The payment market is developing at a fast pace and we need to jointly feel the urgency to deliver on the needs of Europeans.

The progress made towards a Single Euro Payments Area

European integration reflects a political vision – a continuous effort to bring European countries closer together to secure peace, freedom and prosperity. Completing Economic and Monetary Union and the Single Market is a key part of that vision.^[8] In the payments sector, this requires Europeans to be able to pay seamlessly, and PSPs to be able to operate, compete and innovate across the Union.

Early efforts in this area focused on unifying central bank money.

The cash changeover in 2002 marked a turning point in Europe’s integration. The new euro banknotes successfully replaced the legacy banknotes of the Member States and rapidly became the most tangible expression of monetary unification. Today, euro banknotes are the most popular instrument for in-person payments, although their use is declining as consumers are increasingly paying digitally.^[9]

In parallel, the Eurosystem also made enormous efforts to rapidly integrate wholesale payment systems, which support large payments between financial intermediaries. The transition from the national real-time gross settlement systems^[10] to a European system – with the launch of the TARGET system in successive waves^[11] – created an efficient infrastructure for wholesale payments in central bank money accessible by European banks throughout the euro area. In other words, banks already benefit from a wholesale central bank digital currency (wholesale CBDC).

Euro banknotes and our wholesale CBDC (in the form of TARGET services) have ensured that central bank money in the euro area can be used at both retail and wholesale level.

Similar progress was also needed for retail payments based on private instruments. This was the starting point for the creation of SEPA, which aimed to make retail payments across borders as easy as within national borders.

The first pan-European payment scheme – the scheme for credit transfers – was launched in 2008. Since then, we have come a long way. Households, firms and governments can now make fast and efficient credit transfers and direct debit payments to anywhere in the European Union, and also to a number of non-EU countries.^[12] Every year, over 43 billion payments are made through SEPA^[13], supported by almost 4,000 PSPs that participate in one or more of the four payment schemes operated by the EPC^[14]. Within this ecosystem, the number of cross-border payments has increased significantly.^[15]

The success of SEPA stands out in two ways.

First, SEPA has become a model of successful partnership between public institutions and private intermediaries. It stands as an example of the progress we can achieve in the payments sector when we work together.

The public sector guided the transformation by making it easier for common systems, rules and standards to be adopted. It helped to overcome differences between domestic payment markets, provide a common legal framework and ensure timely progress.^[16]

Equally crucial to SEPA’s success was its ability to rely on a strong coalition of private market participants which united all PSPs around a common vision. Today, the schemes managed by the EPC are used on a daily basis by 530 million citizens and 25 million firms.^[17]

Second, SEPA’s success emphasised the benefits of innovation.

The development of the SEPA instant credit transfers (SCT Inst) scheme is preparing the European payment system for the future.^[18] And the Eurosystem’s TARGET Instant Payment Settlement (TIPS) scheme^[19] enables pan-European reachability^[20] and allows payments to be settled immediately, around the clock and on every day of the year. This has enabled banks and other payment intermediaries to satisfy customers’ demands for immediacy in the digital age. And TIPS is also starting to be adopted beyond the euro area.^[21]

SEPA has thus significantly contributed to an efficient, integrated and innovative payment system.

Integration, innovation and independence: the tasks ahead

But the progress that has been made so far is not enough. In some cases, the creation of pan-European market infrastructures (the “back end”) has not been accompanied by similar progress with the user-facing systems (the “front end”).

We need to implement SEPA for card, online and mobile payments in order to eliminate the residual fragmentation that is hampering or even preventing European customers from using their national payment solutions in all European markets. Not only would this allow us to reap the benefits of economies of scale, it would also help avoid our retail payments market needing to rely on non-European providers to offer pan-European solutions, which is the situation we currently have for card payments.

I therefore welcome the fact that the EPC is contributing to the further integration that is needed in this field.^[22]

This brings me to another challenge we face: innovative digital retail payment solutions are not widely available in all European countries, and even less so on a pan-European basis. In many cases, digital payment solutions have limited coverage, are not based on instant settlement, and are not interoperable across Europe. This discourages people from using them.

And this is a typical problem in payments, where both sides of the market may lack incentives to adopt new solutions.

Take the example of instant payments. Not all PSPs use this payment method, therefore some suppliers may be hesitant to make the significant investments needed for it to be adopted more quickly. At the EU level, 61% of PSPs have joined the SCT Inst scheme^[23], and only 12% of all SEPA Credit Transfer transactions are actually carried out as instant payments.^[24]

On the end-user side, consumers may be deterred from using instant payments as they are often marketed as a premium service with the associated high prices. As I highlighted last year, it costs service providers 0.2 euro cent (€0.002) per transaction to use TIPS, yet instant payments are sometimes offered to consumers for €1 per transaction or even more.^[25]

Both sides of the market – PSPs and end users – may therefore be discouraged from swiftly adopting instant payments, and this in turn prevents network effects.^[26] To address this situation, we need to work on completing the rails by completing the adoption of SCT Inst and making the payment solutions available.

If we fail to meet users’ demand for innovative payments, others will fill this gap. And this may in turn raise more fundamental concerns. For example, we are seeing global technology companies – big techs – taking on a greater role in providing front-end solutions to customers. While these companies may help to improve efficiency, relying too much on a handful of non-European providers and on infrastructures operated abroad could ultimately harm competition, making the European payments market less dynamic, less diverse and less innovative. It could also leave strategic sectors of our economy exposed to influence by market players that do not necessarily share Europe’s societal and strategic goals.

Back in 2019, the Eurosystem launched a comprehensive retail payments strategy to involve the private sector in achieving an integrated, innovative and independent European payments market.^[27]

Among a number of private initiatives launched to meet the objectives of the retail payments strategy, a group of major euro area banks have established the European Payments Initiative. Their aim is to create a unified payment solution for European consumers and merchants alike.^[28]

This reflects an awareness that the fragmented nature of the European market makes it difficult to compete with large international players when it comes to digital payments, and that only by joining forces can intermediaries reach the necessary scale to offer competitive pan-European payment solutions.

But it has also become clear that coordinating such cross-border projects represents a formidable challenge. Agreeing on a shared approach to migrate from established domestic payment solutions to a European standard inevitably presents obstacles, given individual countries’ legacy payment systems and preferences. This makes it difficult to involve all euro area countries from the start, and the entire European Union in the end.

The ability to overcome differences and achieve pan-European scale is exactly what made SEPA so remarkable. SEPA’s success shows that obstacles can be overcome if public authorities and private partners work together towards a common goal.

These considerations raise the question of whether public authorities should step up their role once again, working even more closely with European intermediaries to achieve our strategic goals for retail payments.

Close public-private cooperation around the digital euro

At the same time, the ECB is facing the growing challenge of ensuring central bank money remains available and usable for retail payments in an increasingly digitalised world. And this is the primary reason why the Eurosystem is exploring the possibility of issuing a digital euro to complement cash.

For a digital euro to be successful, everyone should be able to use it for digital payments throughout the euro area. It would provide a pan-European means of exchange, just like cash, in line with people’s expectations.^[29] We are currently investigating how a digital euro should be designed to be a convenient and efficient means of payment for end users and merchants while responding to Europe’s societal preferences, for instance on privacy.^[30]

We have been clear from the outset that we see financial intermediaries having a crucial role in distributing and promoting the digital euro.^[31] By design, the digital euro will not crowd out existing private financial instruments. Rather, it will preserve the coexistence of central bank money and private money, supporting innovation by private intermediaries.^[32]

Our digital euro project may therefore provide a suitable opportunity to establish the public-private cooperation that is needed to build the pan-European private retail payment solutions of the future. This would combine the comparative advantages of the Eurosystem in relation to large-scale payment infrastructure with the expertise of private sector partners when it comes to distributing payment products and interacting with end users.

And this could bring two fundamental benefits.

First, it would allow us to achieve the required scale and scope by enabling PSPs from all euro area countries to participate and all key use cases to be included.^[33] Intermediaries could build a range of innovative payment and financial services on top of the digital euro.

Second, the Eurosystem – in close cooperation with the European Commission and co-legislators – would bring a strong European dimension that all stakeholders could get behind. Given the great diversity of the stakeholders involved, it is necessary to involve all of them and to carefully balance their needs and interests.

A successful public-private partnership, building on an attractive value proposition for consumers, merchants and PSPs alike, could support the objectives of our retail payments strategy. It would help us integrate the European payments market and further digitalise the European economy. And by building on European infrastructure and governance, it would support Europe’s strategic autonomy in payments.

Conclusion

Let me conclude.

Over the past 20 years, the European payments market has become more integrated, more innovative and more efficient. The successful transition from a fragmented payments ecosystem to a Single Euro Payments Area contributed to the smooth introduction of the single currency. And it was the combined knowledge and efforts of both public authorities and private intermediaries that made this possible.

This cooperation is more important than ever today, as we face renewed challenges stemming from the digitalisation of our economies and our financial systems.

The Eurosystem is working on several fronts to meet these challenges, most notably by exploring the possible introduction of a digital euro and by implementing its retail payments strategy. In the coming months, we will step up our interaction with the private sector to explore the links between these two crucial projects. Combining our strengths and working together towards a common goal remains the best way to build a modern, efficient and inclusive European payment system for the future.