New policies set to take effect this year are expected to increase competition in the European payments market.
As part of the European Union's efforts to create a single, continentwide financial system, the European Commission has adopted the Payment Services Directive, which is designed to open the bank-controlled payment business to nonbanks.
All 27 E.U. members, along with Norway, Iceland and Liechtenstein, face a Nov. 1 deadline to implement the directive, which defines a new class of nonbank providers of payment services, called "payment institutions," such as mobile operators, retailers, e-commerce companies and funds transfer providers.
Many such companies already offer payment services but must partner with a banking company; under the new policy, these companies could be freed from the need to share revenue from these operations with banking partners and could expand more easily into other types of payments.
Erik van Winkel, a manger in the London office of Edgar, Dunn & Co., said that pan-European merchants could acquire their own transactions, instead of relying on bankers, and that major processors such as First Data Corp. or Total System Services Inc. could become acquirers that accept payments for European merchants.
"A merchant, for example, could start issuing Visa or MasterCard credit or charge cards and extend credit themselves not needing a banking permit," van Winkel said. Under the Payment Services Directive, "First Data could be knocking on the door of Visa and MasterCard and say, 'I want to be a member.' "
And Malte Kruger, a consultant with PaySys Consultancy GmbH of Germany, said that because of the directive's equal-access clause, Visa Europe and MasterCard Inc. would have to let the company or into their networks, as long as it meets their licensing requirements.
Marc Temmerman, a Visa Europe executive vice president, said it does not plan to discourage nonbanks from seeking licenses.
"We certainly don't see that as a problem," he said. "If you accept there will be new players, that means more competition. We don't think more competition will be necessarily bad."
Visa Europe, which is owned by more than 4,500 European banks and was spun off by Visa Inc. before the San Francisco company's initial public offering last yea, views the directive as an "opportunity" to bring more payment service providers into the fold, as long as they can play by Visa's rules, he said.
"A payment service provider will be a payment service provider, whether it is a bank, payment institution or e-money provider," Temmerman said. "At the end of the day, we are a global settlement system. We have to maintain settlement [risk management]. People need to get paid."
That means Visa would ask institutions to provide collateral, based on its assessment of their financial condition, to meet the directive's capital requirements.
Those requirements are expected to range from as little as $27,000 to no more than $162,000 of initial capital, plus a minimum of operating capital. But unlike banks, the payment institutions will not be allowed to take deposits or extend long-term credit.
Observers say it is too early to say how many companies will seek payment institution status.
Western Union Co., for example, plans to offer bill payment, disbursement of salaries and pensions and possibly online and mobile phone payment services, according to Eva King, the director of strategic initiatives and sales support for the company's funds transfer organization.
King, who was one of the directive's main authors for the European Commission before joining Western Union, said her company could extend its funds transfer services to small and midsize companies, expanding from its base of migrant workers, the unbanked and other individuals.
But van Winkel said national governments will have some latitude in how they interpret the directive. For example, E.U. member states can decide to allow merchants to surcharge card payments. Most are expected to do so, including the United Kingdom, which has already implemented the directive, he said, while France and Denmark will likely prohibit surcharging.
In addition, some countries might set capital requirements for payment institutions lower than others.
Observers expect several countries to miss the Nov. 1 deadline for passing the directive into law. This could further delay decisions by prospective participants to offer services.
"In most countries, they've not published the procedures. They've not published the fees," said John Chaplin, the former head of Visa's European processing business and now First Data's European payment adviser. At the moment, it's too soon for a company to say, "'I'm going to become a payment institution,' because you don't know yet what that will entail."
Nigel Beatty, a senior consultant at the British consulting firm Aconite Technology Ltd., predicts that even when all countries adopt the directive, First Data likely will not launch a payment service of its own.
First Data relies on banks for business in Europe, and "if they want to get into the ring and play themselves, it would mean they are effectively in competition with their own customers," he said.
In any case, First Data is not waiting for the directive to become law before expanding into Europe's prospective pan-European acquiring market. In January its First Data International unit announced a partnership with the German regional bank West LP to launch First Merchant Solutions.
First Data expects the venture to give multinational merchants a single point of contact and a single contract for all their business in Europe, according to Carlos Gomez-Saez, the new venture's managing director. The goal is for First Merchant Solutions to eventually offer acquiring services to pan-European retail chains, handling all of their European transactions from a single country.
