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This story appears in the May 2009 issue of Cards&Payments.
As if Europe's banks did not have enough problems complying with mandates for a Single Euro Payments Area, they may get some new competition for their payments business–as mandated by a key European Union directive due to take effect later this year.
Besides setting regulations for how banks and other financial institutions conduct pan-European payment transactions as part of SEPA, the Payment Services Directive seeks to level Europe's playing field for payments.
As part of that effort, the directive provides a new class of payment-service providers, called "payment institutions." The new rules, plus proposed changes to a related electronic-money directive, are designed to pry open Europe's patchwork of bank-controlled payment schemes to let in other players, such as mobile operators, retailers, e-commerce companies and funds-transfer organizations.
Many such organizations already run some payment services. But as payment or e-money institutions, such as prepaid-payment card issuers, they could offer payment services without sharing the revenue with banking partners. And they more easily could expand into other types of payments.
For example, Western Union Co. plans to offer bill payment, disbursement of salaries and pensions, and possibly payment on the Internet and through mobile phones, Eva King, director of strategic initiatives and sales support for the funds-transfer organization, said in a statement to Cards&Payments. Mobile operators also could support micropayments for parking or vending-machine purchases, as a few already do, but without the help of a bank or banking license. Or they could enable consumers to transfer funds via their phones, with only limited involvement of banks, if any, to hold funds. The charges and transfers could show up on the subscribers' monthly phone bills.
Moreover, under the Payment Services Directive, big pan-European merchants could decide to acquire their own transactions instead of relying on a bank, or processors such as First Data Corp. or Total Systems Services Inc. could become card acquirers that accept payments for European merchants, says Erik van Winkel, a manger in the London office of Edgar, Dunn & Co. Such third-party processors also could use their multinational reach that most European banks lack.
"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 says. Or, with the Payment Services Directive, "First Data could be knocking on the door of Visa and MasterCard and say, 'I want to be a member,'" he says.
Equal Access
And Visa Europe and MasterCard Worldwide would have to let the company or other newly minted payment institution into their networks, as long as it meets their licensing requirements. That includes demonstrating they are on a sound financial footing.
To do otherwise would violate the directive's equal-access clause, says Malte Krüger, a consultant at Germany-based PaySys Consultancy GmbH. All 27-member EU states, plus Norway, Iceland and Lichtenstein, face a Nov. 1 deadline to make the directive law.
Nearly all of Visa's and MasterCard's licensees are financial institutions.
But John Chaplin, former head of Visa's European processing business and now European payments advisor for U.S.-based First Data, says he is unsure how his former employer will approach the new type of payments players. Chaplin held other posts with Visa before joining First Data in 2005 to help the processor gear up for SEPA.
"They may decide [payment institutions] need to put millions in the bank," he says.
While Visa Europe remains a bank-owned operation, unlike its publicly traded corporate affiliate U.S.-based Visa Inc., the UK-based card scheme will not discourage nonbanks from seeking licenses, says Marc Temmerman, Visa Europe executive vice president. Visa Europe, owned by more than 4,500 European banks, retained its bank-association structure and split from Visa Inc. before the latter's initial public offering in 2008 to position itself for SEPA.
"We certainly don't see that as a problem," Temmerman says. "If you accept there will be new players, that means more competition. We don't think more competition will be necessarily bad."
Visa instead views the Payment Services Directive as an "opportunity" to bring more payment-service providers into the scheme, as long as they can play by Visa's rules, he says.
"A payment-service provider will be a payment-service provider, whether it is a bank, payment institution or e-money provider," Temmerman says. "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 for a certain amount of collateral from payment institutions, based on its assessment of their financial condition.
Regardless of whether payment institutions apply to Visa or MasterCard for a license, they will have to meet the directive's capital requirements. As part of the compromise that resulted in the directive, officials likely will keep those requirements low, to as little as 20,000 euros to no more than 125,000 euros (US$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.
It is too early to say how many companies will seek payment-institution status, say observers.
Western Union's King, who was one of the directive's main authors for the European Commission before the company hired her, also says Western Union could extend its funds-transfer services to small and midsize companies, expanding out from its base of migrant workers, unbanked and other individuals. But even without the new payment services, the directive will help enable Western Union to operate under fairly uniform rules across Europe and will allow it to broaden its base of agents to those in retail outlets, petrol stations and other new outlets.
The directive will aid other nonbanks seeking to expand into the European payments market even more than Western Union, which has its own banking license.
In February, the company announced it would buy the funds-transfer business of Ireland-based Fexco Money Transfer Ltd. for $159.5 million, increasing its presence in at least seven European countries.
Still, if the business case was so compelling for payment services, more mobile operators, merchants and others nonfinancial institutions likely already would have joined with banks to offer services. And this is not the first time the EU has tried to open up the payments market.
Earlier Effort
The EU's original e-money directive, adopted in 2000, resulted in only 20 companies offering stored-value payment services. As of August 2007, just 1 billion euros in e-money were in circulation.
Officials had been counting on more companies, both banks and nonbanks, to take the plunge into e-money to convert a larger share of Europe's cash-heavy economies to electronic payments. That is one of the driving forces behind SEPA in general.
The commission blames the failure partially on a badly written document, which defined e-money only as value stored on cards or other devices. The proposed changes would allow companies to also offer prepaid products with the value also stored remotely on servers.
And the proposal also will lower the capital e-money companies would need to put up to 125,000 euros from 1 million euros, much lower than for banks offering credit or debit card payment. Like payment institutions, e-money service providers cannot extend long-term credit or take deposits, beyond the value consumers put into their payment accounts to make purchases.
The commission predicts the changes, if adopted by the EU Council that consists of ministers from each of the member states and by the European Parliament, eventually will increase the number of e-money institutions to 120 and the amount of e-money in circulation to 10 billion euros. Observers do not expect the council and parliament to adopt the changes until 2011.
The council of ministers and the parliament approved the much-larger Payment Services Directive in 2007, hammering out a hard-fought compromise among member states.
Creating the new payment-institutions class is only a part of the directive and the national laws that will follow.
As the legal underpinning for SEPA, EU officials say the new national laws are vital to harmonizing rules for payments, such as cross-border direct debits. This would enable European consumers, for example, to pay their rent or utility bills each month out of a single bank account, no matter in which European country the service provider resides.
The directive also increases the transparency of the payments on fees and eventually will require institutions to complete payments within one day following a payment order.
So while the directive opens up new possibilities for payments to such companies as funds-transfer organizations or e-commerce payment schemes, it also requires them to follow regulations they had not previously faced, notes Edgar, Dunn's van Winkel. Banks also face a raft of new rules.
But national governments will have some latitude in how they interpret the directive. For example, member states can decide whether to allow merchants to surcharge card payments. Most are expected to do so, including the UK, which already has adopted the directive into law, says van Winkel. But France and Denmark likely will prohibit it.
The directive likely will not give member states discretion over whether ATM operators can surcharge. That will be allowed across Europe, he believes.
In addition, some countries might set capital requirements for payment institutions lower than others.
These potential differences could risk the harmonization of payment rules the directive seeks to promote, van Winkel says.
Deadline Pressure
Observers expect several countries to miss the Nov. 1 deadline for passing the directive into law. This could further delay decisions by prospective payment institutions to offer services.
"In most countries, they've not published the procedures; they've not published the fees," says First Data's Chaplin. So it is too early to say, "'I'm going to become a payment institution' because you don't know yet what that will entail," he says.
Even when all countries adopt the directive, First Data likely will not launch its own payments service, predicts Nigel Beatty, a senior consultant at UK-based consulting firm Aconite Technology Ltd. First Data relies on banks for business in Europe.
"If they want to get into the ring and play themselves, it would mean they are effectively in competition with their own customers," Beatty says.
In any case, First Data is not waiting for the directive to become law before beginning its foray into Europe's prospective pan-European acquiring market. Its Europe-based branch, First Data International, announced in January a partnership with German regional state bank West LP to launch First Merchant Solutions.
First Data designed the venture to give multinational merchants one point of contact and one contract for all their business in Europe, says First Data's Carlos Gómez-Sáez, managing director of the venture. The goal is for First Merchant Solutions eventually to enable a pan-European retail chain to handle a merchant's acquiring business out of one country for the entire SEPA region.
It could take years for true pan-European acquirers to have the technical infrastructure and commercial relationships in place to cut through Europe's balkanized payment system. And this is true on the issuing end as well for payment institutions.
But the threat is real for banks from these more-nimble companies, which could target the most profitable payment segments, Edgar, Dunn's van Winkel noted in a report last fall. Banks will find themselves weighed down by their payment products geared to national markets, he says.
Banks would do well to consider forming partnerships with payment institutions, for example, outsourcing operation of the ATM network or Internet payment services to the new service providers. If they do not, banks might find more and more of Europe's payments landscape staked out by this new breed of payment players.
