Trends and Challenges in the European Payments Market

The survey is conducted each year by the innovation forum ‘Banks & Future’, which is set up by several international banks, IT partners and service providers under the scientific guidance of the Fraunhofer Institute. The partners investigate the current and future status of the banking industry. The research also includes promising new business models, technologies or other innovations. A special section of the survey hints at the future of the European payments market.

This year 546 participants from 12 European countries – France, Germany, UK, the Netherlands, Switzerland, Portugal, Finland, Norway, Austria, Belgium, Luxembourg and Poland – responded to the survey.

Figure 1: Participating European Countries

Challenges Ahead

Along with the introduction of the single euro payments area (SEPA) comes many challenges for European banks. Interestingly, the interpretation and national implementation of the Payment Services Directive (PSD), which 69% of banks consider the greatest challenge of the payments industry, seems to be beyond their influence. One of the reasons this is seen as the biggest challenge is very likely the unpleasant historic experiences the industry has with the national implementations of other European directives, such as those on VAT, electronic invoices or digital signatures. Banks are also concerned about a variety of other issues including migrating customers to the new instruments, being able to send and receive SEPA credit transfers and direct debits, and establishing reach within Europe.

A large majority (84%) of the banks is convinced that the first movers to adopt the new SEPA standards in the next three years will be large multinational corporations. However, only a limited number of banks are confident that the public administrations and authorities will be among the first movers. This is especially disappointing since SEPA is a strongly politically motivated and driven initiative by the EU Commission to realise the Lisbon agenda and increase the overall competitiveness of the European economy. The lack of confidence is not surprising, since there is no evident movement towards a migration to SEPA standards among public authorities in Europe. Even more astonishing is the fact that approximately 40% of the European banks seem to have little interest in switching to the SEPA standards for their own payments despite the large investments in upgrading their payments infrastructure.

Figure 2: Who Will Most Likely be the First Movers to Use the SEPA Products in the Next Three Years?

Trends in Payments and Cards

Establishing reach within Europe is one of the major challenges for all European banks and there is a clear trend in their strategies with respect to this challenge. In 2008, the vast majority of banks will directly or indirectly connect to EBA Clearing. Only some larger banks already have or will establish bilateral agreements or connect to one or more automated clearing houses (ACHs). Nevertheless, from 2009 there will be a clear shift towards a multi-option model. Almost 60% of banks plan to establish bilateral connections, 58% will use one or more ACHs and 50% will stay connected to EBA Clearing in order to establish reach in Europe. This development will provide banks with additional channels for routing payments as rapidly and economically as possible.

Figure 3: How are You Going to Establish Reach for Payment Transactions?

Moreover, 52% of European banks are considering going even one step further in order to decrease costs and consider outsourcing part or all of their payments processing activities to a third-party service provider. One important criterion for selecting a third-party provider is certainly competitive prices. However, this is not the most important one. The three top criteria for banks are the quality, reach and security and compliance of the service provider, which indicates that banks are well aware that low prices alone will not gain them a competitive edge.

In order to increase revenues or at least sustain their current position, many banks are also considering entering the acquiring business. Roughly a third of the European banks are planning to enter this business for international brands such as Visa and MasterCard, while another third of these banks intend to do the same for national brands. Only 28% of the banks are currently definitely not investigating this possibility because they are either already an acquirer or do not see themselves entering that business successfully. Although the discussions regarding interchange fees have been in progress for some time now, and banks seem to be somewhat worried about the position of the EU Commission on this issue, only 17% are basing their decisions to enter the acquiring business on the outcome of these discussions.

Innovations in the Payments Industry

Future growth and continued competitiveness in the coming decades are essential to banks. Consequently, European banks will have to develop a wide range of new payment products and services. At the moment, the two top innovations in the payments industry are e-invoicing and e-payments. According to the EU Commission, e-invoicing has the potential to save the European economy up to €200bn per year. The obvious revenue potential for e-payments seems to be of interest to banks as well.

However, the picture is not as clear in the field of contactless payments and mobile payments. During the last couple of years dozens of trials and tests with contactless cards or mobile phones to initiate payments have been conducted. Only a few seem to have been truly successful, such as the Oyster card on the London transport network. Nonetheless, almost half of the European banks expect this area to be a potential driver for future growth in the payments industry. Only 40% of banks see potential in new or improved risk management services for card and payment transactions. This seems somewhat odd, since the PSD will limit the customers’ liability for the fraudulent use of payment means to €150 per case. It is also surprising that only 34% of the European banks consider prepaid cards a future key to growth and innovation. However, this is certainly more attributable to the fact that prepaid cards are already a well-established business within banks and have entered the phase of maturity in their product life cycle.

Banks seem to have an extremely clear picture of the innovations that will be successful in the coming years and have the potential to realise increased revenues, cost savings or improved services for their customers. However, for the majority of these innovations banks are evidently seeking a partner to share the investments and risks involved. Consequently, in order to facilitate their own growth, payments processors must ensure that they become and continue to be involved in the development process of these innovations. They may even have to look beyond these trends towards the next generation of innovations such as biometric authentication.

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