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European banks' initiative to challenge Visa, Mastercard could be a stretch

A group of 16 European banks plan to launch a payments system that could rival Visa Inc. and Mastercard Inc. in the EU. Although a challenge to the hegemony of the two U.S. payments giants is long overdue, according to industry insiders, the jury is still out on whether the club of lenders can successfully bring a viable alternative to the table.

The European Payments Initiative, or EPI, includes some of Europe's largest banks, such as Deutsche Bank AG, ING Groep NV, and UniCredit SpA. The banks said in a July 2 statement that they were preparing to launch a pan-European payments system that they expect to be up and running by 2022. The system is intended to address gaps in Europe's "fragmented" payments landscape, where the public are often unable to make payments digitally, the statement said, adding that some 50% of all retail transactions on the continent are still carried out in cash.

The European Central Bank has welcomed the initiative as it takes a much-needed step toward addressing fragmentation in European payments, particularly in the realm of cross-border transactions. The ECB has for some time nudged the European banking industry to challenge the duopoly of Visa and Mastercard, which have a European market share of around 80% between them, according to Finextra.

"European regulators ultimately don't like the fact that two U.S. companies are so dominant," Tony Craddock, director general of the Emerging Payments Association, an industry body, told S&P Global Market Intelligence.

There is a "political" angle to the EPI, he said, adding that he "wouldn't rate its chances of success as being very high."

Lance Homer, global head of digital payments and banking ecosystem at Equinix, the internet connection and data center company, is also skeptical.

"It's possible that EPI will have some success, but it won't happen overnight. It will take several years to get market penetration," he said in an interview.

Duopoly

Europe has no shortage of homegrown card and payment schemes, but many of them do not work outside their countries of origin, a factor which entrenches the continent's dependence on Visa and Mastercard.

"Ten European countries still have national card schemes that do not accept cards from other EU member states. There is also a growing number of innovative services, such as mobile wallets, that are only offered at the national level" the ECB said in its July 2 statement.

Yves Mersch, an ECB board member, said in a speech in 2018 that Europeans are unable to use their national debit cards in other countries within the bloc without going through one of the major, non-European payment schemes.

A case in point is that Cartes Bancaires, the French interbank payments network, is not interoperable with Girocard, its German counterpart, he said.

Mersch also called in 2019 for a more dramatic solution that would see European banks bypassing the international payments giants altogether, according to a Finextra report.

Industry insiders have also been concerned about the dominance of Visa and Mastercard in European payments, said Craddock.

"People complain that the two companies are too powerful, and it's important to have a conversation about whether the current system is fair and equitable," he said, adding that the dominant position of Visa and Mastercard brought with it "the potential for the abuse of market power."

The two card schemes wield such influence that they have a disproportionate influence on setting rules and norms in the industry, he said.

If it ain't broke, don't fix it

Another issue for the EPI is the two payment giants function well, to the extent that creating a new system is essentially "solving a problem that doesn't exist," said Cradock.

"It would be extraordinarily difficult to build a system to rival Visa's or Mastercard's. It would take a lot of time and a lot of money," he said.

Amit Goel, founder and CSO of fintech information platform Medici Global, said that he is "not very bullish" about the EPI.

Local alternatives to Visa or Mastercard are not without precedent, he said in an email.

"With the success of regional card schemes/entities like NPCI in India and UnionPay in China, I won't be surprised if this takes off well at some point of time," he said.

China Unionpay Co. Ltd., the Chinese alternative to Visa and Mastercard, was founded in 2002, while India's National Payments Corporation of India was formed in 2008.

Elsewhere, Brazil has its own card network, Elo, which is formed of three banks — Banco do Brasil SA, Banco Bradesco SA and Caixa Econômica Federal.

"There are already a variety of domestic schemes out there, but the EPI is unique in that it's multi-country," Equinix's Homer said.

'Open to partnering'

A spokesperson for Mastercard said that the company welcomed the EPI.

"As a leading European business, Mastercard is committed to delivering and participating in a functioning and competitive European payments market that provides people, businesses and governments real and reliable choices. We are open to partnering with EPI and are looking forward to better understanding its long-term vision and Mastercard's potential role in it," they said in an emailed statement.

Visa did not respond to a request for comment.

The other members of the EPI are Banco Bilbao Vizcaya Argentaria SA, BNP Paribas SA, Groupe BPCE, CaixaBank SA, Commerzbank AG, Crédit Agricole SA, Crédit Mutuel Group, DZ Bank, KBC Group NV, La Banque Postale SA, Banco Santander SA, Deutscher Sparkassen- und Giroverband e.V. and Société Générale SA.