The European payments system is undergoing major changes. In this article, we will analyze the essence of innovations and disruptions in the regional market.
In 2020, a group of major European banks came up with the European Payments Initiative. This project was designed to revolutionize the payments on the continent by making them faster, easier and more reliable. The European Central Bank and other financial institutions eagerly backed up the initiative.
The Essence of the Plan
The project involves cash withdrawals, card services, online payments, digital wallets and person-to-person transactions. It aims to unify and harmonize all these operations.
Both merchants and consumers should benefit from the initiative. For the former, it will be easier to manage all their payments. The process of carrying out and monitoring financial transactions will be simplified. The latter will be able to send funds to another private user from their bank card without opening an account in a specific wallet.
Today, the European payments system is too fragmented. New solutions enter the market too often. The EU legislation fails to integrate them into a unified international structure. Financial institutions struggle to regularize all the emerging services, standards and technologies. The innovation often comes from small private businesses. Major international players adapt to progress too sluggishly. The European Payments Initiative aims to foster cooperation on the market. It will minimize the disintermediation risks and strengthen the relationships between banks, merchants and their end customers.
Over the past two decades, Europe has already tried several times to harmonize its card payment systems. Neither of those attempts delivered the expected result and they were eventually discontinued.
Today, the authors of the Initiative emphasize the role of stakeholders and public authorities. They believe that their project will succeed because the representatives of both merchants and consumers will participate in decision-making. Their plan takes into consideration the already existing international and domestic networks. Not only banks will be responsible for the innovation but many different types of players and institutions.
The Legal Framework that Underpins the Initiative
The industry benefits from the PSD2 payment services law that entered into force in 2019. This normative act gives third parties access to bank infrastructure. This brings about fundamental changes in the sector.
The PSD2 law harmonizes Account Information Services (AIS) and Payment Initiation Services (PIS). The former implies that the system collects and stores in a single place a customer’s multiple bank accounts. When the person wants to review their expenses, they will not need to check each account separately. They can access all their data through a unified interface.
PIS makes online payments quicker and easier. An interface is created to bridge the consumer and the merchant account. The buyer fills in the form with the relevant information (account number, sum of money, any additional messages). The store gets the information about the transaction.
Thanks to the PSD2 law, it will be easier for third-party payment services providers to expand their operations internationally. This will increase the competition on all national markets — and at the same time will enable the strongest players to create large-scale solutions that will cater to the whole European population. Service providers will face an unprecedented challenge: they will need to adapt to multiple national legislations. They will need to comply with uniform standards that were previously mandatory only for traditional providers. These standards regulate the customers’ registration and authorization as well as supervision by competent authorities.
Prefered Payment Systems and Their Future
85% of the region’s population uses mobile banking. These statistics were gathered by MasterCard experts. People appreciate this payment option for its speed and convenience. The PSD2 law is about to revolutionize mobile banking. When the customer will be transferring funds to a third party from their bank’s mobile app, they will not need to stick to the account of that very bank. They will be able to access their account in bank A to send money to someone through the app of bank B.
Most Europeans today use either plastic or digital payment cards. To confirm online transactions, they indicate the number, expiration date and CVV of their card. But soon, this information will not be enough for authentication. The realization of the European Payments Initiative suggests that security requirements should be enforced. For instance, two-factor authentication will be required for bank operations, including the transactions made through the apps and the access to such apps. Experts still need to think about the definition of authentication factors and their implementation.
In Europe, corrected the spelling to super apps have not yet taken off. But in Asia, especially in China, this type of software is extremely popular. In the same interface, people can exchange text messages, hail a taxi and send money to each other. When Asians will come to Europe, they will launch their corrected the spelling to super apps, download the QR code that identifies them and touch their smartphone to the payment terminal of a partner bank.
The demand for biometric payments will increase. To confirm the transaction, it will be enough to look at the screen and let the device scan the customer’s face. Alternatively, the device can scan the palm of their hand. Thanks to this innovation, consumers will be able to go to a shop without their wallets or smartphones. They will need to use the corresponding app only once, when registering in the system. The app will ask them to take a selfie so that it can recognize their face. The merchants, for their part, will need to install the app and the terminal to receive payments. Today, many users characterize this technology as “breathtaking” and say that it seems too futuristic to be true. But it already exists and can be implemented on the European scale.
Conclusion
The European payment system is at the dawn of a new age. The essence of the transformation consists in integrating miscellaneous solutions into a continent-wide ecosystem and creating new laws that would regulate it. It might be challenging to embrace the changes — but the future definitely looks bright.
