How the four pillars of the Retail Payments Strategy could impact future retail payments

Briefing

On 24 September 2020, the European Commission published a communication on Retail Payments Strategy for the European Union (the Strategy). Here, we provide an overview of the four key pillars under the Strategy and the potential impact on retail payments in the future.

What does the Strategy aim to achieve?

The Commission recognises that payments are at the forefront of digital innovation in finance. With digitalisation and changing consumer preferences, payment service providers will increasingly abandon traditional payment instruments and develop new ways to initiate payments.

However, the EU payments market is currently highly fragmented along national borders. Other than a handful of major global players – such as worldwide payment card networks and large technology providers – there's virtually no digital payment solution that can be used across Europe to make payments in shops and in e-commerce.

Although there have been encouraging developments such as the European Payment Initiative (EPI) project and work towards common European schemes and rules to facilitate interoperability of instant payment solutions, the Commission recognises the risk of inconsistencies and further market fragmentation.

Looking to the future, the Strategy envisions achieving a fully integrated retail payments system that promotes the emergence of home-grown and pan–European payment solutions. Outwardly, the Strategy sets out the Commission's plan for the EU to make a significant contribution to cross-border payments with non-EU jurisdictions, supporting the international role of the euro and the EU's open strategic autonomy.

The Strategy aims to achieve this through four pillars for strategic actions, discussed below.

Pillar 1: Increasingly digital and instant payment solutions with pan-European reach

The key under this pillar is for the use of instant payments to be the "new normal" across the EU. The Commission is aiming for full uptake by the end of 2021.

Uniform rules for payment transactions are recognised as indispensable to instant payments and ensuring interoperability.

However, the Commission has noted that the current voluntary nature of the SEPA Instant Credit Transfer Scheme (the Scheme) means it hasn't attracted sufficient participation. If uptake remains low by the end of November 2020, the Commission may:

propose legislation mandating payment service providers to adhere to the Scheme, and
require adherence by relevant stakeholders to the additional functionalities of the Scheme, such as future standards for QR-codes.

For instant payments to be more attractive to consumers, the Commission will also assess:

the impact of charges levied on consumers of instant payments and, if relevant, require that they are no higher than those for regular credit transfers
the extent to which the EU’s existing consumer protection measures can be reflected in the context of the PSD2 review at the end of 2021
the feasibility of having a "label" for pan-European payment solutions, and
ways to promote the use of electronic identity solutions to support the fulfilment of Strong Customer Authentication requirements under PSD2.

Separately, the Commission has noted the decline in the use of cash and expressed commitment to further support the issuance of a retail Central Bank Digital Currency (retail CBDC).

There are concerns that the chances for home-grown and pan-European solutions to emerge might be substantially affected by the launch of retail CBDC , as retail CBDC targets the same market segment (retail payments), with similar features as those offered by the private sectors.

Eric Ducoulombier, the Head of Retail Financial Services and Payment Unit at the Commission, responded to the concern during a webinar organised by the Commission on Wednesday 14 October 2020. He stated that retail CBDC wouldn't crowd out solutions that come from the private sectors but would instead be complementary to the private sector opportunities.

The Commission notes that further work is needed to assess the potential impacts of retail CBDC on monetary policy, financial stability and competition.

Pillar 2: Innovative and competitive retail payments markets

In the area of consumer protection, the Commission will launch a review of the application and impact of PSD2 at the end of 2021 and use the review to:

inform a legislative proposal for a new Open Finance framework (scheduled for mid-2022)
explore whether additional measures should be considered to address new types of fraud regarding instant payments, and
re-examine the legal limits on contactless payments while striking a balance between convenience and fraud risks.

To address risks to consumers arising from ICT, the Commission is also proposing a Regulation on digital operational resilience, including in the payments sector (read our coverage here).

Furthermore, to help foster a level-playing field between payment service providers, as part of the review of PSD2, the Commission will:

evaluate any new risks stemming from unregulated services, especially technical services ancillary to the provision of regulated payment or e-money services, and assess how these risks can be mitigated, including by subjecting the providers of ancillary services or outsourced entities to direct supervision under PSD2
align the PSD2 and E-Money Directive (EMD2) frameworks by including the issuance of e-money as a payment service in PSD2, and
subject issuers of e-money tokens to additional provisions complementing EMD2.

Pillar 3: efficient and Interoperable payment systems and support infrastructures (clearing, settlement)

As payment and e-money institutions compete with banks to provide payment services, the Commission recognises the importance of all players having open access to payment systems and necessary technical infrastructures. The Commission will therefore:

consider extending the scope of the Settlement Finality Directive to include e-money and payment institutions (subject to appropriate supervision and mitigation), and
consider proposing legislation aimed at securing a right of access under fair, reasonable and non-discriminatory conditions to necessary technical infrastructures (including software and hardware).

Pillar 4: Efficient international payments, including remittances

The emphasis under this pillar is for cross-border payments involving non-EU countries, including remittances, to become faster and more affordable, accessible, transparent and convenient. The Commission hopes to achieve this by:

calling for the implementation of global international standards (such as ISO 20022) at the latest by end of 2022
encouraging payment service providers to use the SWIFT Global Payment Initiative, and
addressing specific issues affecting remittances, such as supporting SEPA-like initiatives in regional groupings of low and middle income countries, and in relevant cases, the possibility for third countries to join SEPA.

What can the private sectors expect of the Strategy?

The Commission intends to play a role of political catalyst, while relying fully on the private sector to design the relevant payment solutions. Understanding the four pillars outlined above will allow institutions to start preparing for the changes and to reap the opportunities presented alongside those changes.

Keeping you informed

We'll be monitoring developments in this area to ensure you remained prepared for the changes. If you would like to discuss any of the issues raised in this article further, please contact a member of our Financial Services Regulatory team.