Instant payments could break Visa/Mastercard duopoly

Visa and MasterCard enjoy a duopoly, accounting for more than 80% of all European Union card transactions. But the dominance by the two payment firms could end or reduced in share if the idea of instant payment rails to link up national card schemes continues to be popular. The European Central Bank is floating that idea to break the duopoly.

This is according to ECB board member Yves Mersch who was speaking at a presentation during the American European Community Association in Brussels, recently. He lamented that the bloc had failed to implement a true Single Euro Payment Area (Sepa) for cards. Currently, he said, cardholders are unable to use their national payment cards to make payments across Europe unless they go through a global card payments across Europe that can execute such intra-European payments.

He said within that context, that the arrival of instant payments across the European Union could change the game in regard to payment systems. He said that the industry sees the implementation of a European infrastructure for instant payments as an opportunity to instantly clear and settle card transactions, which would offer a possible way of supporting the interlinking and interoperability of national card schemes. He said interoperability should aim to foster a European identity, for instance by using a common European logo to show users that their cards can be used across the EU.

It seems that the idea of instant payment and settlement like is with cryptocurrencies, will also be increasingly implemented by and on legacy systems are also increasingly, although both systems do not utilize crypto or blockchain. Plus the major issues with instant crypto and blockchain payment systems include scaling and volatility.

The idea of instant payments can also be implemented to the point-of-sale systems, by-passing traditional card schemes altogether. Mersch said in this way, instant payments can be a cost-efficient alternative to cards. He said it was important to ensure that such instant payment systems can have a pan-European reach so the end users can make and receive payments without restrictions across national borders.

ECB has set up a working group known as Euro Retail Payments Board to analyze in detail the barriers for instant payment systems to reach pan-European, their usability and ways to overcome them.

And while national solutions that support instant payments have been quick to develop, this has not evolved so much in the multinational and pan-European level. They are beginning to take cause thanks to collaborations among industry players.

Last month, Thomas Egner who is the secretary general to the Euro Banking Association said that real-time euro payments had reached the region markets, but more was need to make them viable for use.

According to Egner, the ECB's project to fast-track payments is about “more than just a need for speed:” In reality, to be successful, more factors other than speed have to be considered. They must be sustainable according to him and satisfy the need to “meet the needs of today’s and tomorrow’s end users.” Achieving an instant payment system that is able to make payments from one end to another within seconds, 24-hours a day, seven days a week and 365 days a year, will take a little bit more time to achieve and will require careful choices.

European businesses are increasingly being interested in a real-time economy. This is being accelerated by different drivers including technological changes, regulatory developments and instant payments.

Multinational and pan-European level systems that support instant payments are gaining ground thanks to collective efforts on many levels. For instance, the first pan-European instant payment infrastructure, the EBA CLEARING’s RT1 system was launched in November 2017. It has on-boarded over 2,300 payment service providers (PSPs) in 12 European countries and will have processed 10 million euro-denominated transactions around the turn of the year. The pan-European platform handles more than 10,000 real-time payments in euro per day and over 95 % of the transactions are processed in less than three seconds. 

European Central Bank has also announced TIPS (Target Instant Payment Settlement), a central bank-driven pan-European infrastructure system meant to complement the private-sector platform RT1.

RT1 reached a 5-million-transaction mark in October last year. It can be used by any bank and financial institutions from all over Europe for any payment product in Euro fully compliant with the SCT Inst Scheme of the European Payments Council (EPC) and is in line with the ISO 20022 global messaging standards for real-time payments. It operates around the clock on any day of the year and supports payment service providers in transferring euro transactions between payment accounts in less than 10 seconds end to end.

RT1 also connects to Ripplenet and the Dutch's largest bank was expected to start using xCurrent. Some banks that are on the RT1 or TIPS are using Ripple network, which has entered into agreements with many banks and financial institutions to use its blockchain network to make cross-border payments between institutions. Dutch banks were all expected to hook into the system starting December last year.

Visa will also be integrating its SWIFT system in order to facilitate card payments with instant payment ability through both TIPS and RT1.

Some issues that are being looked into in order to facilitate such instant payments on systems include needing to develop authentication mechanisms that are fast, need to provide uniform experience and the right level of convenience.

There are also challenges related to both service providers and businesses. There is a need to put in place processes and tools that add value to instant payments beyond the transaction of funds. Additionally, most banks and financial institutions would need to upgrade their own reporting software and internal processes. Besides, there is a need for the creation of bulk formats for instant payments according to view by corporate treasurers.

For instance, with these bundles of salaries or bill payments, it is important to combine the ability to process instant payments in real time but also at the precise time pre-determined by the treasurer. They want ‘right-time’ payments rather than real-time payments. Also to be required is an easily processable instant notification. A pan-European association such as EBA comes into play to foster dialogue among payments industry practitioners in order there can be the needed coordination to achieve goals such as pan-European instant payment systems.