I should admit that I was one of the many skeptics who didn’t believe that EPI was going to fly, having witnessed earlier failures to develop a European card brand (remember the Monnet initiative?). My doubts were confirmed last year when the EPI Company announced a rather drastic reduction of scope, abolishing its ambition to develop a European card scheme.

EPI would now focus on the development of a product that serves as “a multi-faceted digital wallet solution and an instant, account-to-account payment means under one brand, unified across European countries”. The majority of founding banks left the project, leaving 12 shareholders to beat a dead horse. Or so I thought.

EPI Company Surprises With Acquisitions of iDEAL and Payconiq

But that horse surprisingly rose to its feet, whinnying happily. On April 25, the EPI company announced that it had acquired the Dutch payment scheme iDEAL and Payconiq, the technology provider for iDEAL and other account-to-account payment solutions.

As a bonus, Dutch major banks ABN Amro and Rabobank joined EPI as shareholders. With these banks on board, EPI shareholders now represent a market share of 90% or more of account holders in Belgium, France, and the Netherlands as well as a large share in Germany (from the major banks, only Commerzbank and HypoVereinsbank are not participating).  

The acquisition of iDEAL could be the breakthrough that EPI needs. The Dutch payment scheme processed 1.2 billion payments in 2022, which is equal to about 20% of total online card volume in the eurozone. The scheme has a huge market share of 70% of Dutch e-commerce transactions, compared to other payment methods such as credit cards (about 8%) or direct debit (4%). But e-commerce contributes just 20% of iDEAL transactions. The majority of iDEAL transactions are generated by other online applications (bill pay, tax payments, fines, charities), and payment requests (both C2C and B2C). Payment request is an increasingly popular method that enables consumers and businesses to send a payment link to a person to settle a bill; the payment is then processed in real time via iDEAL.

The success of iDEAL can be attributed to the ubiquity of the service (all consumers can be reached), the convenience of use (no registration required, authorization via the trusted mobile banking apps of the banks), and the favorable merchant conditions (payment guarantee for a fixed price per transaction).

This acquisition of iDEAL will bring scale to the EPI initiative. The experience of the iDEAL and Payconiq teams will be an important factor to realize the ambitions of EPI. The infrastructure of iDEAL has recently been modernized, running on the Payconiq platform (iDEAL 2.0). This infrastructure can be leveraged to create a pan-European scheme for e-commerce payments and other online applications.

Will EPI Succeed Where Others Failed?

The EPI Company can continue its work with renewed energy. The key idea is to develop a commercially viable proposition on top of the existing instant payment scheme and rulebook (SCT Inst). The latter describes how instant payments are processed and cleared between banks in the Single Euro Payments Area (SEPA), but it lacks the commercial features that are required to support e-commerce transactions or person-to-person transactions, for instance.

To compete with cards, the EPI scheme aims to provide a user experience and richness of functionality that are at least on par with those provided by card payments. In addition, EPI Company says it will support a wide variety of use cases, including one-off payments, subscriptions, installments, payments upon delivery, and reservations.
EPI Company plans to start a pilot with person-to-person payments between France and Germany in Q4 2023, with further rollout to other countries in Q1 2024. Commercial launch is planned for Q4 2024. 

EPI’s journey is supported by the European Commission’s ambition to create a single payments market. In October 2022, the Commission adopted a legislative proposal to make instant payments in euros universally available at no extra cost compared to traditional credit transfers. This is a very important driving factor to make the use of instant payments ubiquitous in SEPA countries.

From a market perspective, there is strong demand from merchants to have a viable alternative to the perceived duopoly of Visa and Mastercard. Account-to-account-based payment methods look attractive compared to card payments, as they offer certainty of payment, faster receipt of funds, reduced risk of fraud, and lower cost. For example, for a 50 euro transaction, a merchant will pay almost four times more for a credit card payment than for an iDEAL transaction.

Challenges Ahead for EPI

But the question is how can merchants and banks steer customers to this new payment method without introducing unwanted friction into the checkout experience. Changing customer behavior is notoriously difficult, and payments is no exception. Each country in Europe has its own payment culture, developed over decades and representing differences in consumer behavior, socioeconomic factors, and regulatory environment. Large differences among the countries remain in terms of payment method use.

Consumers should see a substantial benefit in terms of ease of use, and/or financial incentives, to adopt a new payment method. While iDEAL became an iconic success in the Netherlands, similar schemes were introduced in other European countries e.g., in Germany, Austria, and Italy without the same success.

Experts I speak with see many bears on the road for EPI, as the Dutch saying goes. And these bears may well be real. Large programs with many competing stakeholders typically suffer from conflicts of interest between banks or banking communities, changing market conditions that require the program to go back to the drawing board, and commitment fatigue if things are not going according to plan or if investments do not generate sufficient return.     

One recent example is the P27 initiative in the Nordics. The vision of P27 is to establish the first integrated region for domestic and cross-border instant payments in multiple currencies. Recently, it became clear that the future of this massive undertaking is uncertain. In a press release, P27 CEO Paula da Silva stated, “Our vision was to provide a better payments infrastructure to the 27 million people living in the Nordics, with an optimistic timeline. Lately, it is evident that our vision was too ambitious and complex. Hence, we need to reassess our future ambition in the Nordic payments market.”

Still, I would give EPI the benefit of the doubt. The potential of a pan-European payment scheme based on instant payments is just too big to set aside. With its political support and the mass volume acquired through the acquisitions described above, the odds look promising enough for EPI to earn money and avoid becoming the next Monnet.

Have thoughts about the EPI or want to learn more about developments in the European payments market? Contact me here.

The post The Future of the European Payments Initiative: Money or Monnet? appeared first on Datos Insights.

Aite-Novarica recently interviewed 20 acquirers across North America and Europe to understand their current risk environment, how it has changed over the past five years, and what concerns they have about the future. The results of these interviews were published in our latest report Managing Merchant Risk: Best Practices for Underwriting, Onboarding, and Monitoring.

The risk profile for acquirers has substantially changed over the past several years due to a variety of industry forces, many of which are beyond their control. Some of those industry forces include:

• Disintermediation of the typical acquirer-merchant relationship: Historically, merchants would work directly with an acquirer to establish a payment processing relationship. Today, a number of new entities sit between the acquirer and the merchant, such as payment facilitators (payfacs), independent software vendors (ISVs), and marketplaces. As a result, acquirers do not directly interact with the merchants for which they process. Understanding merchants’ underlying business fundamentals and assessing their risk becomes more difficult.
• Higher fraud losses chasing growth and profitability: Acquirers are under pricing pressures from enterprise merchants, which is lowering their profit margins. To find new merchant relationships that are more profitable and provide growth, acquirers are focusing on small/medium businesses (SMBs) and higher risk merchant categories. However, acquirer fraud losses in these areas are considerably higher. For example, while fraud losses with enterprise merchants are sub one basis point, losses with SMBs average between two and three basis points.
• Increasing challenges with SMB applications and onboarding: Many small businesses are being started by sole proprietors and young professionals who are heavily influenced by online experiences of digital-first companies. In an effort to attract SMBs, acquirers are having to overhaul their application and onboarding processes to make them digital, streamlined, and efficient while also delivering near-real-time decisions. Gone are the days when humans reviewed each application. Decisions today are mostly automated without human intervention, which is a fraudster’s dream. Leveraging stolen personally identifiable information and creating synthetic identities, fraudsters can easily fly under the radar and obtain processing relationships to begin their attacks.
• Dynamic nature of fraud and risk: Fraudsters are clever and always evolving their attack vectors. They may nurture a relationship with an acquirer for weeks or months before committing fraud. As such, acquirers need to constantly monitor merchant behavior and transaction activity, looking for deviations from past behaviors and new, suspicious patterns. Fraud and risk assessment no longer ends at the time of the application; it is dynamic and lasts throughout the processing relationship with the merchant.

Acquirers should revisit their control framework to adapt to an ever-changing risk landscape. Modernizing risk frameworks should focus on key technologies to address current limitations and future-proof them.

Acquirers use multiple tools in both merchant onboarding and ongoing monitoring. While point solutions can be effective, they are narrow in scope and function. To unlock their potential, acquirers should identify ways to integrate them via data sharing. Risk signals in one solution can add value to other solutions, thereby increasing fraud detection and reducing false positives.

Some of the interviewed acquirers report opening thousands, and even tens of thousands, of applications monthly. And in the case of a traditional payment processor that caters to payfacs and ISVs, the number of new monthly merchants can grow exponentially. It is nearly impossible to manage ongoing risk across such a large merchant base. It is imperative for acquirers to deploy automated tools that can monitor and assess the risk of behaviors at scale and generate alerts of abnormal activity for further investigation.

Traditionally, acquirers have focused on financial risks and potential fraud losses of their merchant clients. In today’s world, risk has a broader definition. While fraud losses are still important, other forms of risk such as anti-money laundering, sanctions screening, cyber, geopolitical, the acquirer’s reputation, and others are gaining more attention. Tools are needed that are both broad enough to cover multiple forms of risk types and deep enough to do this across very large merchant portfolio sizes.

Concluding Thoughts

The acquiring market is changing quickly, and risk control frameworks need to evolve to keep pace. Legacy solutions that were effective when initially deployed may not meet current needs. Acquirers need to monitor changes in the payment processing industry and adapt their frameworks to effectively manage risk in a diverse ecosystem. By having a robust risk control framework in place, acquirers can better position themselves for the future and allow them to respond to new threats and capture new business opportunities.

Successful acquirers will be those that have best-in-class risk management processes, enabling them to gain market share in higher-margin merchant segments while keeping firm control on the risk exposure of their portfolios. To learn more about how acquirers are adapting to evolutions in their industry, read our full report Managing Merchant Risk: Best Practices for Underwriting, Onboarding, and Monitoring or reach out to me at rvanwezel@datos-insights.com or my colleague David Mattei at dmattei@datos-insights.com. 

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