I don’t understand why European policy makers continue to think about a “third scheme” for cards. The time has gone, so let’s move on.
In the winter 2013/2014 Journal of Payments Strategy & Systems (Vol. 7, No. 4, p. 344-358) there is an excellent paper by Ewald Judt and Malte Krueger called “A European card payments scheme: forever a phantom?” which is about the European so-called “third scheme”, otherwise known as the European Card Payment Scheme (ECPS), otherwise known (by me) as the EU Non-American Emergent Electronic Legacy Interchange Exclusion scheme, or the NEELIE for short.
The authors set out to try to understand why generations of European policymakers have failed to create a pan-European alternative to (in essence) Visa and MasterCard and conclude that (and I paraphrase) that there are three main reasons:
- There are genuine economies of scale.
- The historical timing of the MasterCard IPO and competition authorities pressure on interchange means that the opportunity has passed.
- Bank management doesn’t care.
I think that this last point is important for policymakers to fully understand. Banks are not that bothered by the current situation, as it kinds of suits them. Now, when it comes to competition policy and interchange rates I have constantly argued the competition, rather than regulation in the sector. Policymakers should focus on competition in the payment sector – which we fairly have done to a great extent – and let the market work out interchange rates for itself.
Forcing banks to create a third scheme with low interchange rates just isn’t going to work. And it’s looking in the rear-view mirror anyway. If the European Commission wants to create a dynamic new payment service across Europe, why would it bother with cards at all? Why not a euro M-PESA, setting to one side the fact that the Commission is (as I understand it) going to rule against using M-PESA accounts in Romania as “euro basic bank accounts” under impending regulation. I don’t get it.
The authors point out the contradictions between, broadly speaking, using competition policy or regulation to obtain the Commission’s desired outcome. There is a tension that will need to be resolved at the policy level, because competition (my preferred solution) will not deliver what they want. I think this is a good thing, personally. I also think that the mental model behind this (that there should be a card that can be used at any terminal in Europe) is somewhat last century. Having 50 different cards in my wallet that I need to use in different places in Europe would, of course, be a real pain in the arse. But having 50 different apps on my phone? Not a problem: especially since the phone knows where I am so it can use an appropriate payment mechanism wherever I am and link all of them (via the proposed euro-API for banking) back to my account automatically so it doesn’t need to bother me about that sort of thing at all.
Celent does not believe that any of the main contenders will deliver a new viable and competitive European card scheme any time soon. Furthermore, we argue that the market has moved on in the last seven years, and the case for a European-only card scheme created from scratch is simply no longer there, if it ever was.
Indeed. And that was written a couple of years ago. If we ever do build the NEELIE, it will be for political purposes, a sort of symbolic pan-European canal network in the age of the bullet train. Why bother?