Will Card Schemes Succumb to the Rise of Instant Payments?

The European payments landscape is undergoing a transformative shift, driven by the proliferation of instant payment (IP) solutions and the concerted efforts of banks and regulators to diminish the dominance of global card schemes like Visa and Mastercard.

As the continent strives for greater payment sovereignty, the question arises: will the entrenched card payment infrastructure be able to withstand the onslaught of these rapidly evolving IP alternatives?

The European Union has been at the forefront of the instant payments revolution, with the launch of the SEPA Instant Credit Transfer (SCT Inst) scheme in 2017. This real-time payment system, designed to facilitate cross-border transactions within the Eurozone, has been touted as a potential game-changer in the payments landscape. However, the uptake of instant payments has been slower than anticipated, with only 11% of euro credit transfers in the EU being processed as IPs at the end of 2021.

Regulatory Intervention to Boost Instant Payments

Recognizing the need to accelerate the adoption of instant payments, the European Commission has recently proposed legislative amendments to the SEPA Regulation and the Regulation on cross-border payments in euro. The key elements of this proposal include:

1. Mandatory Offering of Instant Payments: Payment service providers (PSPs) in the EU will be required to offer instant payment services to their customers without charging fees higher than those for typical euro credit transfers.
2. Consistent Application Across the EU: The new regulations aim to ensure a harmonized and consistent application of instant payment services across the European Union, addressing the current fragmentation in the market.
3. Alignment with Existing Frameworks: The proposal seeks to align the instant payments regime with existing regulations, such as the Payment Services Directive (PSD2) and the Settlement Finality Directive, to ensure seamless integration and compliance.

The European Central Bank’s Stance

The European Central Bank (ECB) has firmly endorsed the European Commission’s initiative, welcoming the push to promote the widespread adoption of instant payments. In its official opinion, the ECB has suggested only minor amendments to the Commission’s proposal, such as clarifying the scope of the regulations and aligning certain definitions with existing payment frameworks.

Overcoming the Challenges of Instant Payment Adoption

Despite the regulatory push, the adoption of instant payments in Europe has faced several challenges, including:

1. Infrastructure Investment: Many financial institutions, particularly those that have not yet offered real-time payment services, will need to make significant investments to build the necessary infrastructure to support instant payments.
2. Fraud and Money Laundering Concerns: Concerns have been raised about the potential for increased fraud and money laundering risks associated with the speed and convenience of instant payments, necessitating robust security measures and controls.
3. Market-Driven Approach: Some industry stakeholders argue that product requirements should be market-driven rather than imposed by regulators, emphasizing the need for flexible, adaptable solutions.
4. Ambitious Timelines: The Commission’s proposed timeline for the implementation of the new instant payments regime has been criticized by some as being too ambitious, potentially putting undue pressure on financial institutions.

The Resilience of Card Payments

Despite the regulatory and technological push towards instant payments, card-based payment schemes have remained a dominant force in the European payments landscape. The underlying infrastructure, speed, security, and widespread acceptance of card rails have made them an integral part of the modern financial system.

In response to the rise of instant payments, card networks and processors have begun to reposition themselves. Mastercard, for instance, is actively building on its core real-time payment rails, while Visa is focusing on developing overlay services through strategic fintech acquisitions.

These efforts aim to leverage the existing card infrastructure and integrate it with the capabilities of instant payments, potentially creating a hybrid solution that can cater to the evolving needs of both consumers and merchants.

Ultimately, the success of instant payments in challenging the dominance of card schemes will depend on the ability to create the right incentives for both consumers and merchants to adopt the new payment methods. Factors such as cost, convenience, security, and user experience will play a crucial role in driving the widespread adoption of instant payments.

The Role of Open Banking and Payment Initiation Services

The development of open banking and payment initiation services (PIS) has the potential to further disrupt the traditional card payment ecosystem. By enabling consumers to make direct bank-to-bank transfers, PIS-enabled payments can offer a low-cost alternative to card-based transactions, potentially driving greater adoption of instant payment solutions.

The rise of instant payments and the emergence of new payment methods, such as those enabled by open banking, pose a potential threat of disintermediation for traditional banks. Retail banks, which have historically profited from interchange fees associated with card payments, may need to innovate and adapt their payment strategies to remain relevant in the evolving payments landscape.

While the competition between card schemes and instant payment solutions is likely to intensify, the future may not necessarily be a zero-sum game. Collaboration and coexistence between these payment methods could be the key to unlocking the full potential of the European payments ecosystem. By integrating card rails with instant payment capabilities, financial institutions may be able to offer a more comprehensive and seamless payment experience to their customers.

The Importance of Regulatory Oversight

The European Commission’s and the ECB’s involvement in shaping the instant payments landscape underscores the critical role of regulatory oversight in fostering innovation and ensuring a level playing field. Ongoing monitoring and adjustments to the regulatory framework will be necessary to address emerging challenges and maintain a healthy, competitive payments ecosystem.