01 July 2019

ECB: Implications of digitalisation in retail payments for the Eurosystem’s catalyst role

To facilitate continued open collaboration with stakeholders and to drive change in a way that will benefit all EU citizens, it is necessary for the Eurosystem’s stance on retail payments to evolve in line with the changing world of digitalisation. This revised stance does not mean a new role for the Eurosystem but rather the adaptation, within the existing mandate, of the current catalyst role.

The basis for this revised stance was the outcome of a fintech survey among EU central banks and the ensuing policy debate within the Eurosystem. The results highlighted a number of general trends underlying the current transformation of retail payments in the European Union. These include a stronger diffusion of technologies used to initiate and process payments, as well as an increasing number of stakeholders involved, including fintech start-ups, competing – but also cooperating – in the payments market. A strong trend towards a “dilution” of payments into overall commercial transactions in the name of a “seamless user experience” was observed.

New business models driven by the use of data analytics, payment account access for third-party providers and the roll-out of real-time credit transfers were identified as factors with the potential to challenge fundamentally the traditional structures and economics of retail payments.

While generally promising to enhance efficiency and user experience, these new developments also pose a number of challenges. New innovative payment solutions might increase complexity and limit choice by restricting consumers to a particular provider’s ecosystem. Thus, the emerging dominance of a small number of online platforms warrants further analysis and may become a matter of concern. The payments market, in the light of its extensive network effects, is inherently vulnerable to monopolisation. In the European Union this manifests itself through a dominance of national players in national markets and a dominance of global players in the European market. To avoid fragmentation, new solutions should, where possible, be designed with a pan-European reach in mind, rather than being restricted by having a national focus. Solutions should be able to function on a cross-border level and innovations should adapt to pan-European standards, where possible, to allow potential future growth.

The increased complexity in EU retail payments, stemming from new technologies and players, not only affects market participants but also poses challenges for public authorities and regulators. There is a strong need for enhanced cooperation at the national, regional and global levels. In fact, the diffusion of payments between different stakeholders at the global level might, in the long run, raise questions about the most appropriate governance model for payments solutions that transverse national and supranational borders, and the need for respective regulators to discharge their mandates.

The EU payments market is embarking on a new era, where the pace of technological change poses a challenge to the ability of policymakers to adapt at a similar pace. The Eurosystem needs to reinterpret its framework to facilitate innovation, while keeping the core values and governance of EU payments intact. It is therefore necessary to redefine the Eurosystem’s traditional catalyst role in retail payments with the following elements.

• A focus not only on payment instruments but, more generally, on payment solutions, i.e. with a stronger emphasis on the overall context in which payments are made.
• Promoting payment solutions, at the pan-European level, that offer increased “usability”, i.e. user-friendly and accessible payment solutions across the European Union, which are clearly identifiable as such.
• Supporting the European Commission in building a legal framework adapted to new technologies and in fostering convergence both between different legal acts and the ways in which regulation is applied by national competent authorities.
• Fostering the development and implementation of harmonised standards and business rules/schemes as a foundation for new solutions, and not as a reaction to them. This will ensure the pan-European reach of the basic functionalities of new payment solutions without stifling innovation.
• Reinforcing collaboration with relevant fora and market players.

This enhanced catalyst stance is in addition to the role the Eurosystem currently plays in overseeing the payment systems for the euro. Although this revised stance may seem to introduce several new areas of work for the Eurosystem, the Eurosystem has already begun adapting its role, complementing the significant ongoing work that is already carried out in the field of EU retail payment innovation and integration.

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