COVID-19 has underlined the need for a pan-European digital payment solution and plans to establish the European Payments Initiative, also known as EPI, are well underway. Launched by 16 Tier-1 Eurozone banks in July 2020, the lending initiative aims to create a unified European-wide payments system to rival those of U.S. card networks like Mastercard and Visa, as well as Big Tech firms like Google, Apple, PayPal and AliPay that are active in financial services.
In making known their intentions, the founding institutions, which are from five countries (Belgium, France, Germany, the Netherlands and Spain), announced the creation of a Brussels-based EPI Interim Company to spearhead the implementation of the joint payment initiative, with the appointment of payments expert Martina Weimert as CEO in December 2020.
That same month, Poland’s largest bank, PKO Bank Polski, and leading Finnish retail bank OP Financial Group, joined the lending initiative as founding shareholders, with PKO being the only EPI member outside the Eurozone. Another consortium formed by a group of 12 Spanish credit institutions banks also joined the EPI Interim Company as a collective founding shareholder.
From 16 banks, the number of institutions has increased to some 30-plus European banks and credit card processors as well as two leading payment service providers — Worldline and Nets, showing growing support from the private sector.
Backed by the European Central Bank, the initiative is expected to become fully operational in 2022.
Here are five things the payments ecosystem needs to know about EPI:
Monnet Project 2.0?
This is not the first time that there has been an attempt to create a pan-continental payment network. In 2008, a group of 24 European banks from seven countries founded the Monnet Project with a goal to create a new SEPA-compliant European card system.
The project was disbanded in 2011 before it ever took off, with its failure primarily attributed to a lack of clarity over interchange fee regulation.
However, in the case of the EPI, it’s been confirmed that with respect to card transactions, revenues will come from interchange fees, capped at 0.2% of the value of a transaction for debit cards and 0.3% for credit cards.
There will be “an alternative business model that is not based on an interchange” for other types of payments, EPI CEO Martin Weimert reportedly told UK-based Raconteur Media, adding that it will also offer more transparency and be cost-attractive for merchants.
See also: The Monnet Project — Our challenge
Benefits for Consumers
The EPI will use instant payments in the form of the European Central Bank’s SEPA Instant Credit Transfer, with a card service and digital wallet offered to consumers and merchants across Europe to cover all types of retail transactions including online, in-store and peer-to-peer (P2P) payments in one single, convenient app.
Consumers will have either bank account linked to the app to ensure full transparency, with the ability to see their transaction history and select a payment method of their choice.
In addition to instant payments, consumers will also have the option of alternative payment methods like buy now, pay later (BNPL) and the EPI will have a currency conversion system, which will first be tested in Poland.
Incentives for Merchants
The EPI Interim Company has shared very little on incentives for merchants, other than the fact that it will “enrich the merchants’ and consumers’ choice in terms of payment solutions,” as stated on the website created to update the public on the project launch.
It adds that the “EPI as a new and innovative market player may be expected to increase competition both in terms of quality and conditions,” which hints that the EPI lacks certainty on how much it can help merchants compete effectively on the market.
As it gears toward implementation, the EPI is working on a collaborative approach and interacting with merchant associations in Europe to gather feedback on the solution and how best the solution can meet their needs.
Even though European banks are planning to create the EPI collectively through the pooling of resources, there could be significant risk from a distribution perspective as prices will still differ from one institution to the other. This defeats the purpose of creating a unified scheme and would make it difficult to achieve its goal of taking on schemes and Big Techs active in Europe.
Another challenge would be getting consumers to want to use the network, which will determine how much value merchants and issuers see in issuing the EPI, and whether they choose to adopt it.
FinTechs will also need to see value in riding the rails and issuing the products, adding to the list of challenge to tackle.
The EPI is looking to expand beyond the seven countries currently involved, targeting more financial institutions, banking associations and payment service providers in other European countries who can apply and join the initiative.
Converting the EPI into EPI Target Holding Company is the next goal the company is targeting later this year, which is an important step symbolizing a firm commitment to its market launch.