This is part two of our payments series, ‘Taking a European View on Payments.’ You can read part one, ‘Taking a Global and UK-Centric Look on Payments’, on the WeavePay Blog.
To kick off the second part of this series, I thought I would recall an important point mentioned in WeavePay’s previous piece that gives context as to why dedicating time to this topic is so key, whether you’re an individual, business, or large corporation, payments touch every facet of life.
With the exit of the UK from the European Union (EU) in 2015, also known as Brexit, the discourse around payments was only beginning to touch the world outside of the offices, meeting rooms, and corridors within the finance industry. At this point, payments were not dominating panels, talk shows, and media outlets in the way they do today.
It has become extremely apparent to EU-member countries dealing with the UK since the fallout from Brexit, and from the ripple effect it has had on relations with countries outside of Europe, as to why innovation in the payments space is needed to: (1) continue servicing an increasingly globally-linked customer-base; (2) to remain competitive in the export and import market; (3) to support businesses with multiple hubs within and outside of Europe; and, (4) to continue to empower its member countries to hold its dominance as powerful financial hubs.
Europe is a fascinating part of the world to examine in regards to payments, partly due to the amalgamation of cultures and languages. This diverse group of countries is closely connected by rules and regulations that trickle down from the European Banking Authority (EBA) and are supervised by The European Central Bank (ECB). The ECB’s role is to manage the euro and implement EU economic and monetary policy, plus look over the 115 banks across the Union, which represents 82% of the banking assets of these countries.
Another important organization, The European Payments Council (EPC), differs by focusing on the harmonization of electronic methods of payments across Europe.
The EPC claims to have been key to the transformation of Europe’s payment system, seizing opportunities offered by the Single Market (an association of countries trading with each other without restrictions or tariffs, which came into effect on the 1st of January 1993) and through the introduction of the euro over the past two decades.
They are also credited as pioneers, establishing instant payments settled in risk-free central bank money on a continental scale, capping interchange fees for card payments, and limiting the costs of cross-border transactions.
Innovation primarily takes place at the country and regional levels, although the EU has a mandate for a standardized regulatory framework. Despite this, from the outside looking in, Europe has started to create a communal financial infrastructure that transcends the connection normally established through language – this is no easy feat.
The European Commission is strongly pushing for Instant Payments.
The initiative, spearheaded by SEPA (Single Euro Payments Area) and the ECB, plans to streamline the retail payments market and unlock instant payment advantages for EU citizens and businesses. This will translate to instant availability of funds, which directly challenges one of the key benefits of cash.
In several European countries such as Germany, which are still very reliant on cash, instant payments are perceived as a premium option, resulting in relatively strong potential for revenue growth.
According to McKinsey, instant payments constituted 12% of the credit transfer volume in the SEPA (as of September 2023). If regulators proceed to encourage adoption at the current rate, this share could rise to 45% of SEPA’s 23 billion annual transactions and a far higher share of account-to-account (A2A) payments, including transfers done through Automated Clearing House (ACH), real-time gross settlement (RTGS), and instant payments.
This adoption of instant payments across Europe is key to digitizing payments and keeping up with the world’s transition away from cash. Nonetheless, it is clear that Europe is still leading the charge for homogenizing payments across such a diverse continent.
Notable payment trends taking place across Europe:
The segment most vulnerable to market fragmentation in Europe is alternative payment methods.
European alternative methods tend to be more focused on the domestic market and will be spread across a couple of countries within the EU without being present throughout. This is unlike global players, such as Apple and Google, who have widespread market share in fragmented markets.
That is why there is disparity across countries regarding the development of payments. Furthermore, this localized approach to the creation and adoption of digital payment methods proves why cash is still prominent in certain countries. Groups without access to technology or with different financial habits (preferring cash to card) or who are more community-centric tend to use cash as it’s universal and much easier to use.
According to The World Bank, in Europe, Norway is closest to achieving a cashless society, with only 3-5% of point-of-sale transactions paid for by cash. The country has one of the lowest physical cash rates in the world, with its neighbors, Sweden and Finland, not far behind.
One economy that continues to prefer cash, the latest study by Germany's central bank, the Bundesbank, on payment behavior, shows that Germans pay for nearly 60% of their purchases (both goods and services) in cash compared to 74% found in their last major study in 2017. Germany is not the only country standing against the global trend toward cashless payments.
With over 70% of payments made in cash, Romania is reported to be the European country most reliant on physical cash. Nearly half (42%) of the Eastern European country's population is unbanked, showing that many citizens still rely on notes and coins.
To ensure that no person gets left behind and put at a financial disadvantage, it is important to empower payment solutions and infrastructure at a localized level. Creating cashless societies can only work through strong education on payment methods, investment in technology, and installation of the right infrastructure.
From an individual perspective, more than 13 million adult EU citizens still lack access to formal financial services, and in some parts of the EU, the percentage of those who remain unbanked is over 30%. Compare this to the UK, where 1.1m - or 2.1% of adults are unbanked, and it is clear that cultural nuances and local innovation in infrastructure have a part to play in the acceleration of payments across Europe and fostering a financially inclusive society.
Denmark - open banking utilization
Denmark is at the forefront of the European instant payment landscape.
Recently, Mastercard made open banking more widely accessible by acquiring the open-banking fintech Aiia. It aims to help businesses and consumers across Europe use their own data simply, securely, and quickly. This is a brilliant way to increase adoption and shows Denmark’s appetite for open-banking solutions to support the population's needs.
Estonia - growing payments environment
Estonia's flourishing fintech ecosystem is a testament to the country's tech-savvy culture, supportive regulatory environment, and commitment to digital innovation.
Although domestic payments in Estonia fell by 6.1% between Q2 '23 and Q3’23, Estonian citizens and residents made domestic and foreign payments totaling €82.3 billion, a rise of 3.7% on year, according to the Bank of Estonia (Eesti Pank).
The turnover of cross-border customer payments, excluding card payments, grew by 8.3% on year to Q3 23, while the volume grew by 201.4% over the same time period. Revenues from cross-border payments stood at 28.1% of the total payments, while the volume reached 11.7%.
According to the Bank of Estonia, the main factor behind the high growth derives from payment mediation services.
The TARGET Instant Payment Settlement (TIPS) project was launched by the Eurosystem in November 2018 to offer final and irrevocable settlement of instant payments in euros at any time of day and on any day of the year.
TARGET2 included a new real-time gross settlement system and central liquidity management tool, and as of March 2023, processed payments worth €2.2 trillion per day on average. It included the participation of Banca d’Italia, the Banco de España, the Banque de France, and the Deutsche Bundesbank. These four national central banks act as service providers for TARGET services.
This project is part of Eurosystem’s continued efforts to modernize market infrastructure, ensuring that it is future-proof, meets the needs and expectations of market participants, and further improves the efficiency of Europe’s financial markets.
Creating a system that runs across so many different countries is a huge testament to the continent’s willingness to standardize, which will allow for more efficient cross-border payments.
Borderless payments are necessary to maintain a seamless flow of exports and imports in and out of Europe.
One example of the breadth of imports and exports from Europe to the UK: in 2022, the UK exported £340 billion of goods and services to the EU – 42% of total UK exports. The UK imported £432 billion from the EU, which totaled 48% of total UK imports. The UK had a trade deficit of £92 billion with the EU compared to a £5 billion surplus with non-EU countries.
Although we have looked at Europe throughout this blog, the UK’s exit from the European Union (EU) in 2015 impacted the payments landscape, especially how businesses interact with the space and how they service their customers.
As a consequence of the UK’s decision to leave the EU, the new regulations and requirements that businesses soon had to navigate became more complex and changed irrevocably.
As J.P Morgan’s report on Brexit’s Impact on Cross Border Payments stated: “Payments across the United Kingdom (UK) and the European Economic Area (EEA), in any currency, were treated as ‘domestic’ by Payment Service Providers (PSPs). This ensured protection of the principal amount and resulted in less onerous payment data requirements.”
As the withdrawal process for Brexit started to take effect, financial institutions based in the UK could no longer passport their UK regulatory license and authorization, therefore cutting off any cross-border operations with the European Economic Area (EEA).
Many PSPs have had to navigate new legal entity structures, clearing scheme connections, employment models, and technology changes, forcing them to rethink their expansion plans, increase the costs associated with these changes, and figure out how to provide products to European customers, or non-European residents financially-involved in the continent.
As for financial institutions, British banks are now outside of the EU because of Brexit, but they continue to maintain and develop business in the EU space via hubs such as Ireland or Luxembourg. Since January 2016, multinational bank Citigroup is the only EU-passported bank (operating in Europe as Citibank Europe plc since 1988 through their headquarters in Ireland), with branches in 22 European countries, securing regulated status by the ECB.
It’s clear that since the withdrawal from the EU, residents of the UK now have to incur extra charges that have been brought on because of the distinction of the transaction – payments between the UK and countries within the EEA can no longer be defined as intra-EEA payments under PSD2. Therefore, the principal on impacted wire payment amounts can no longer be protected from deductions or chargebacks.
These hurdles can create a substantial impact on the bottom line for many businesses who have staff to pay across the continent, plus, need to buy goods and services in local currency. As a result, many businesses are now turning to payment services offered by Electronic Money Institutions (EMI), who can offer physical and virtual cards with preferable exchange rates with many currencies and the ability to send money across borders with minimal fees.
Because of the many cultures, languages, and differing habits that exist across Europe, it’s not easy, or ever fair, to pin down the common sentiment around payments. Moreover, casting broad strokes or generalizing will undoubtedly do the continent a disservice.
Yet, what Europe shows us time and time again is that there’s a unified effort to create a stronger payments environment, with a keenness to build a harmonious climate between digital solutions and physical notes and coins, especially as smaller communities continue to be reliant on cash transactions.
This can also be seen by the EU’s effort to bind the member countries through a single currency - the Euro - of which 20 EU countries (who are also a part of the Economic and Monetary Union (EMU)) adopted over the last two decades.
Plus, with neighbors like the UK and the current financial crisis taking place, I would be remiss not to acknowledge the financial ripple effect, which can be greatly seen and felt as every economy, country, and jurisdiction has the potential to impact another, creating change, good or bad, from a payments perspective.
If one country suffers economically, the toll will be felt by another; if the EU enforces regulation, other countries may take note as they learn the lessons from their predecessors (for example – PSD2 and the Middle East’s enforcement of similar regulation, years later).
That’s why it is also necessary to take a look at the EU’s part to play and how the geopolitical organization can dictate the way other countries innovate payments services and products, today.
All in all, the payments culture in Europe is an extremely compelling example to explore and learn from, and no doubt, in 2024, there will be new emerging winners in the payments space deriving from the diverse continent.
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