European Payment Systems from a US PoV

Welcome back to Bitesize Payments. Where we discuss their history, how they work and who does what.

Today we are going to do the reverse of the last podcast with Eric Grover – we will be looking at Europe from an American's point of view.

We say Europe, but what do we mean? What’s the EU, SEPA, and EEA? We will walk you through that.

Obviously, European history is a little more complex as, among other things, we had nearly 30 different currencies and all that entails.

Last time Eric spoke, we discussed the USA from a European's point of view. Today we are going to do the reverse.

I have always been amused and confused by our differences. Mostly, we can sort out our language to smooth things over and understand each other, as at the end of the day, payments are just that – payments.

However, the EU has a few – well, maybe a lot – of complexities that are not always clear and frankly are a little fuzzy even for us. But it’s basically a lot of countries now trying to work together as a single (ish) entity.

I have spent a lot of my career working for US firms, and it became almost a second skill to try and speak Europe to my North American colleagues.

Let's dive down the rabbit hole. Here we go….

Payments Industry Insights

History of Payments

Payment System Explained

Corporate Payments Strategy

Payment Regulations Impact

ISO20022 Standard

Digital Payments Evolution

CBDC Advancements

Cryptocurrency in Payments

Financial Technology Education

Transcript

SPEAKER_00: 0:01

Welcome back, dear listeners, to Bite Size Payments, where we talk about the history, how they work, and of course, who does what. In this episode, we're going to do the reverse of the last episode. In the last episode, Eric and I had a look at American payment systems and how they work, but from a European's point of view. In this episode, we're going to look at European payment systems, whatever European means, and we'll explain a bit more. but from an American's point of view. When all is said and done, quite frankly, sometimes Europe, the EEA, CEPA and all that may seem a little like Alice in Wonderland, but everything seems familiar, but it's just not quite what it seems. Obviously, European history in the last 50, 60, 70 years has been quite complex. And amongst other things, of course, we had 30 plus different currencies. We had many, many more languages, many more systems and all that entails. So let's have a look with air apostrophes, Europe and apostrophe from a European point of view. Here we go. Let's dive down the rabbit hole. Cheers. I'm so pleased to welcome back my good friend Eric to help us understand a little bit more. Welcome Eric. Thanks, Paul. Well, Eric, last time we spoke, we discussed the USA from a European point of view. And personally, I've always been amused and frankly, a little bit confused by some of our differences, especially when, frankly, most of them can be sorted out because of language issues and we can smooth over these things and discuss them. And the end of the day, you know, a payment is a payment is a payment and we might have some different flavors, but pretty much that's the way it is. However, I would say, and I think you're going to help me point them out, that the EU, well, has a little bit more complexity and it's not always clear what's going on. And frankly, it can be even fuzzy for us. There's a lot of countries and trying to work out how you get together to a single-ish entity is what's going on over here. I've spent a lot of my career working for North American firms, and it's almost been like a second skill trying to speak Europe to my North American colleagues. I know, Eric, you've been a key watcher of Europe. Have you got any introductory comments before we jump into the detail?

SPEAKER_02: 2:57

Yeah, so I think there are certainly misunderstandings or misperceptions of Americans about the European payments landscape and from Europeans of all flavors about the American payments landscape. But the payments in Europe and the US are more similar than not. I think Europe, using the word Europe, causes confusion because there's the EU, which is a political project, more, I would argue, than an economic project. Europe is 44 countries, I think. The most populous country in Europe is not in the EU. The two biggest countries in Europe are not in the EU. The two biggest cities in Europe are not in the EU. Europe, the EU, is a patchwork of markets. It's a patchwork of different countries that speak different languages, have different payment histories, have different payment habits, different preferences. Europe with the exception of Switzerland, much bigger, on average, gray economies than the U.S., which is to say commerce that is conducted in cash to avoid taxes, regulation, to avoid something, and significantly bigger. Europe has, at the EU level, No, no. There are some differences, which I think in some respects, Europe has an advantage. There are a patchwork of dozens, literally, of alternative P2P and retail electronic payment systems in Europe, most of which are national, but some of which we can see are becoming pan-national. The Norwegian banks, Vips and MobilePay, which is established in Denmark, and Finland have merged. The Polish alternative system, Blix, acquired Viamo, maybe I'm mispronouncing it, was it last year in Slovakia, and entered Romania. There's the Italian payment system, SatisPay, that has entered, I think, France, entered Germany. So we see some efforts. But what I think is encouraging is there's a real diversity there of P2P and retail alternate payment systems. Now, in the US, there are alternate payment systems that have greater scale. There are far fewer of them. On average, for retail payments, Americans make a greater percentage of their payments using electronic payment systems than Europeans do. There are individual markets where that's not true. But for the whole, that's the case.

SPEAKER_00: 6:45

I think that's right. And I think the patchwork piece is so spot on that I kind of felt I need to sort of create some... Some more history than I normally would do. So let me go through the history because it will drive a lot of the context around this. There's a lot of definitions, you know, and as I'll come back to, we say Europe, we say EU, and it's like, well, what does that mean? And I think that's really some of the context here we need to get our brains around. So some definitions and some history might help here. So we say Europe, we say EU, then we include in countries that are in the EEA. I'll explain that in a sec. And they're not in Europe. So let's try and put some context here. So bear with me just a few minutes, because as you say, a lot of this is. coming back from a political point of view. So post-World War II, Europe sought peace and, frankly, stability, leading to the creation of what we call the EEC, the European Economic Community. That was in 1957, which was a good year because it was the day I was born. And that was the Treaty of Rome. And as you'll see, a lot of countries come into this. By 1960, customs duty between the EEC member states were actually removed. The Maastricht Treaty of 1992 established the European Union, the EU, setting out the framework for economic and military union. The EU was introduced in 1999 and over time more countries joined the EU. Unfortunately, my country, Lataly, decided to leave the EU. That's a separate debate. I'm a little bit cross about that, but that's what happened. Anyway, not all countries were wanting to be at the same level of their legal control, leading to the formation of the European Economic Area, the EEA, which includes the EU, plus countries like Iceland, Liechtenstein and Norway. These countries participate in the EU single market trading, but without the full political integration. Now, the single European payments area, SEPA, was introduced in 2002 by the European Payments Council, the EPC, to facilitate and harmonize Euro payments across Europe. The SEPA zone includes EU, EEA, and Andorra, Monaco, San Marino, Switzerland, the United Kingdom, yes, the United Kingdom, and Vatican City. So let me try and summarize these as quickly as I can, because it's pretty tough to get your brain around a lot of these facts. In the EU, it's a political and economic union of 27 European countries with shared institutions and policies. EEA comprises the EU countries plus Ireland, Liechtenstein and Norway, 30 countries in total, focusing in on a single market without full political integration. SEPA consists of 36 member states and so hence the term Europe is often used generically to talk about this whole of this region the separate region but in fact there's many different bits and parts here eric have i lost you yet

SPEAKER_02: 10:32

no it's it is but it's it's it's uh quite a dense story history

SPEAKER_00: 10:40

yeah and you know as you said it was a patchwork you know originally every country had its own different currency

SPEAKER_02: 10:49

yeah every country had its own individual currency, every country still has its own individual payment habits and preferences because across that patchwork, the use of different payment systems, credit cards, debit cards, alternative payment systems, physical cash, paper checks varies enormously. And the competitive patchwork in terms of the firms and how those services are delivered to consumers and merchants varies enormously, which is– and if we took the analog of the US and there are folks in Brussels who are always trying to measure themselves against the US and the state. California and Texas and Florida and New York don't have different payment systems. They don't fundamentally have different payment habits. It is, for the most part, one big market. And they don't speak different languages, even if sometimes they have different politics and attitudes.

SPEAKER_00: 11:58

I think that's right. And I think, you know, you talk about the patchwork. But, you know, I'm of an age where I can remember actually having Franks, having Lira, Me too. And yet, while they're the top line of the brand name that we remember, as you rightly point out, underneath it all were the institutions that managed control, supervised those habits, because if you were to go to Italy, the habits of what's going on in Italy day to day is very different to what we see in the Nordics, what we see in the UK. So, you know, it's kind of a, it kind of needed a push. And I think that's a little bit of what we'll get into in a second. But frankly, not all of these countries were in the same place at the same time, have the same needs, and they certainly don't now. I would agree

SPEAKER_02: 13:00

100%. And the notion that you're going to remake some sort of mythical european man and the greek and italian and a finn are going to be you know uniform europeans is is patent nonsense

SPEAKER_00: 13:23

yeah so look i mean i was in lisbon for eba day not so long ago and yes well i could use my apple pay on my phone If I didn't have had cash, I would have had lots of trouble. I barely use cash in the UK. Various different parts of the European project have very different methodologies. But let's just pause there and say, while we often talk about Europe, it's generally not as simple as it seems. And it's not just a picture on a map. And I think that's what we've got to get our brains around when we think about you saying California, Texas, fundamentally they're the same things. If I revert back to UK, Germany, France, etc., etc., They may be similar, but when you get to some of the more modern countries, some of the more newly entranced countries, they have very different policies. We talked about just the other day one of those countries having, I think, 83% dependence on cash. So we say Europe. We really mean Europe. But I think we've got to get a little bit sharper when we talk about it.

UNKNOWN: 14:43

Thank you.

SPEAKER_00: 14:47

Okay, so I think, Eric, you've got a good example that will probably highlight some of this for us.

SPEAKER_02: 14:52

Contrast labor mobility across countries within the EU versus labor mobility within the 50 U.S. states. A Californian can easily move and take his or her business to Ohio or Pennsylvania or Florida. That's a pretty straightforward... low friction experience. The average Greek, not highly educated, the average guy can't easily move and say establish his business in France or Germany or Poland. There are lots of barriers to doing that.

SPEAKER_00: 15:40

Let's switch gears a little. And so while at the beginning we said, you know, payments are payments, what payment systems are we talking about, Eric? They're much the same, really, aren't they? Very, very similar.

SPEAKER_02: 15:55

So, you know, people, we talk, so let's look at the quote-unquote card systems. And they're really two-sided payment networks. And sometimes it's the quote-unquote card, sometimes it's not. So at the pan-US level, we have Visa, MasterCard, Amex, Discover. There are half a dozen national debit networks that are brand neutered. There are a handful of national P2P systems. But in Europe, the card landscape at the pan-European level is It's very similar. There's a duopoly, effectively. Visa and MasterCard is the pan-European credit and debit card systems. But then at the national level, there are a host of European, quote unquote, card payment systems. The third biggest card payment system in Europe is CardBank Air. It's specific to France. It competes with Visa and MasterCard. In Italy, there's Banco Pagomat. In Belgium, Mr. Cash. In Denmark, Doncourt.

SPEAKER_00: 17:12

So let's come back to cards in a second because I want to bring in the more difficult issues around the card payments and where you're upscaling. But in terms of things like ACHs and high values and in some countries, immediate payments, These are just the same things, different brand names maybe, but they're just the same. Different

SPEAKER_02: 17:34

brand names, but account to account, mechanism of transferring value from account to account. And in almost all cases, it's a bank account to bank account. And the pricing might be a little bit different. On both sides of the Atlantic, there are central banks providing these services and there are private sector operators providing the services, and at least at some level competing with each other. And

SPEAKER_00: 18:09

I think that's right. I mean, there's a couple of things to throw in here that there clearly are pan-European systems, but there are also domestic ones too, to the point we made earlier. They were there in the first place. And yes, you can create... Target 2 systems. But actually, if you're already processing in France, and I think it's true to say about 85% of all the transactions, even now within Europe, happen within the country that you physically operate. And so guess what? They're the incumbents. You wouldn't throw them out.

SPEAKER_02: 18:45

Nope. And the systems work. The marginal cost of operating these systems is basically zero. They're integrated. And so, you know, pulling this stuff out, root and branch would, you know, not be easy and not probably economically desirable.

SPEAKER_00: 19:07

Absolutely right. I think the most important thing here to take away from this is, though, that whether it's an ACH or whether it's a high value or an immediate payment, we'll talk a little bit about that, the brand names may be different, but underneath it all, the processes are almost identical, whether it's in America. And yes, there are fees differences. But actually, the biggest thing that I find is trying to explain when I say target to I just mean a high value payment or I say backs. It's just an ACH. You know, it's not something that is completely different out of a different world because it's in the UK or Europe. They're just the same.

SPEAKER_02: 19:50

Well, I think every industry does this, and we do it, is we use jargon to define people in and out of our industry tribe. And if you simply said, we have a bunch of systems, and they enable you to transfer value from account to account, then Joe and Sally Sixpack would have no trouble understanding that. But if you say, well, I've got an RTP system, I've got a FedNow system, and I've got Fedwire, I have RT1, I've got TIPS. Well, I think the average consumer's eyes would gloss over.

SPEAKER_00: 20:28

Yeah, I think that's absolutely right. Look, here in Europe, various countries have created their own immediate payment systems, BizSum or Jiffy in Spain and Italy. And to reference the point that we talked about in the last podcast, EBA Clearing has its own set of systems, effectively a private network of EU ACHs, Step 2, Euro 1, etc. And it also provides RT1, which provides immediate payments across the SEPA zone, fully compliant with SEPA-INST. So a lot of these things are extraordinarily similar. And while the UK is not strictly part of the EU, it is part of the SEPA zone, it has banks, The automated clearing system, it's an ACH. And CHAPS, which is now being replaced, but effectively is a high value system. And all these things are the same. And of course, the UK came up with faster payments. And there's a story behind that. But it was in 2008. And it was probably the first of the immediate payment systems movements as we know them today. Frankly, many countries have moved on a lot more quickly. But there's a lot of moving parts here in Europe, aren't there? I think that's the thing to hone in on.

SPEAKER_02: 21:50

A lot of moving parts, but given this is the payments world, those parts move slowly.

SPEAKER_00: 21:56

Yeah.

SPEAKER_02: 21:58

Very slowly. Yeah.

SPEAKER_00: 21:59

I mean, you know, I've always joked about the fact that, you know, the first check was written in 1659 and we still support checks. So when we say...

SPEAKER_02: 22:08

Well, think about payment systems. Every payment system... It's a network of entities willing to make and accept payments. And those networks, once they have critical mass, if they're working reasonably well, have a very, very long tail, very hard to displace. Physical cash has been around for thousands of years. And I think physical cash, notwithstanding electronic payments evangelist, is going to be with us for the rest of your and my lives. Paper checks, paper check use in the United States peaked back in 1995. Memory serves about 55 billion checks. And it's been declining ever since. But there are still billions of checks. And it's declined more rapidly for consumer checks than business checks. But there's still billions and billions of checks written every year. The infrastructure is there. And I don't see where the end is. I mean, presumably there is an end, but it's way out.

SPEAKER_00: 23:16

I agree with that. I think that many people would like to do away with checks because of the additional costs. Many people would like to do them so you could move them over to the electronic world. There's lots of regional issues behind it. But as you say, it's so embedded in so many of these networks that I think it'll take a long time to do that. But I think the point here is that when we looked at the USA, we weren't saying, ah, yes, but there was this history from the 18th century where we did this, or there was history with this type of currency, or there was this type of desire in this country or this state in the US. In that context, it was relatively... simple and straightforward. And yes, there are complexities, as we discussed, about the US. Relatively speaking, though, Europe does look like a patchwork. And while we, you know, it's simple to think about it from a country point of view, we also have to understand that underneath it all, the systems, the supervisors, the processes, the desires, the way of life is very different too.

SPEAKER_02: 24:23

Yes, and those differences... are going to endure, I would suggest.

SPEAKER_00: 24:45

Let's talk about some of the differences that always amuses me. And I want to do that. I'm going to talk briefly about routing numbers and what have you, and then talk about IBAN. I want to get into the regulatory world in a second. And of course, we'll then get into cards, which I know you're keen to talk about. But, you know, I think it's true to say, if you want to move money in the US, you just use a routing number. And it's quite simple. It appears very simple, right? I think it's what, nine character number or

SPEAKER_02: 25:18

something? Yeah, so routing number, count number, and you're good to go. But the average consumer, of course, doesn't know what, I mean, they can look it up, but they don't know what the routing number is. They often don't know what their demand deposit account number is. They can get it. And of course, aliases now, aliasing the account number to an email address, an ID, a mobile phone number. is increasingly common, making it easier. But underneath, the plumbing is tied to routing numbers and demand deposit account numbers. And every banking system in the world has a numbering convention that is used to manage payment keys, if you will, to manage payments between accounts.

SPEAKER_00: 26:07

And, you know, in many ways, if you look at it from a UK point of view, you have a sort code and an account number, very sort of comparable. But if you look at it now from a different perspective and you're talking about moving money across Europe, you really have to get into IBAN numbers, the International Bank Account Numbers. And that kind of goes to the patchwork conversation. Now, you know... The IBAN numbers are in some ways very similar, but at least we forget it's a 23-character code. And yes, it says it's FR for France, and then all the various details are inside of it. But, you know, it's a 23-character number. And I take your point about nobody ever knows what their account number is. I suspect very few people do. as probably some people listening to the podcast, but there are very few people, frankly, would know what their IBAN code is for their account. That's right. But it is a marker, I think, between, you know, it's a good measure of the simplicity versus the complexity if you can get your sort code and routing number versus a 23-character number. I think in a nutshell, that kind of talks a little bit about the complexity we have.

SPEAKER_02: 27:28

Well, I have to share a story. So in paying... my nanny, who is from Europe, and had no idea how to be paid, no idea, wanted to be paid through Revolut, through PayPal, wasn't sure. But when I said, I want you to give me your IBAN number, your SWIFT number, your account number at your demand deposit account in Ireland, and then I will send you a wire. It took her about 30 minutes to get it. And I mean, she was paid not instantly, but pretty close to instantly. And it wasn't simply, this is what, you have to give me these numbers and I will make the payment. And she doesn't have to know how it works, doesn't care, shouldn't have to... And I think that's representative.

SPEAKER_00: 28:30

Anyway, let's switch over to a bit of oversight and regulation. And perhaps to help with that, let me give you a... I know you know these things, but for our listeners, we have the ECB. The ECB, the European Central Bank, oversees the operation of key payment systems like Target 2 and TIPS. And moreover, it ensures the stability and efficiency of the European infrastructures. And as we'll maybe talk about some of the things that they're bringing to market. We also have the national central banks, the NCBs. So these are, you know, Bank de France, for instance. They play a crucial role in managing domestic payment systems and clearly in the partition on the partition... and in participating in the operation of Target2 systems and of course their own domestic systems. They have their own supervisors too. Then we have what we call DG FISMA which is effectively the regulator and supervisor and while this bit can get pretty complex because there are many players here. Effectively, along with the ECB and the national supervisors, they work together to try and set out the regulatory and supervisory steps that effectively the government agrees to or doesn't agree to. And the EBA, which is the European Banking Authority as well, one of the many bodies that can set standards and guidelines of how things are done. Now, if you want to know a little bit more about the specifics of that, a very good friend of Eric's and mine, Monica Monaco, came on and we talked about regulators specifically. So there's a podcast on that if you want to. Now, I did want to talk about cards because it's both contentious and and frankly interesting, if we look at the history of the... Let me tee it up like this. Basically, the cards networks that we talked about before in this podcast are effectively US-based, or certainly the key ones are, and the EU has tried several times to create its own, as yet hasn't been successful, and then... That has called all sorts of context and all sorts of change to happen within the EU. That's the starter for 10. Let me fire the starting pistol and let you go.

SPEAKER_02: 31:14

Yeah. So it is the case that the dominant pan-European card payment networks are US domiciled and they're public companies. And, you know, Brussels... EU enthusiasts are keen on pan-European payment systems, except if they're not owned by somebody in France or Germany or Belgium. But those systems, Visa and MasterCard in particular, are pan-European and also dominant in many of the national markets. However, at that one level, at the national level, there is a patchwork has long been a patchwork and continues to be a patchwork of national quote-unquote card payment systems, most of which are owned by banks, several of which are owned by commercial processors, that continue to endure. Some of the national systems have gone by the wayside. The PIN system in the Netherlands, Laser in Ireland, the national debit system in Finland have all been retired, scrapped. seen as redundant. But we have national card payment system in Spain, Portugal, Italy, France, Denmark, Norway. There are a bunch of them. And they work. You made mention that the EU has tried to create EU card payment champions. And I think tried to create, I think they've encouraged, ECB and the EU, EC in particular, have cheered European-owned payment projects. These have all to date failed. They have all been completely political rather than economic projects. And so if we think back on them, Monet, which at one time was a... a coalition had 24 Western European banks notionally committed to it. And there were resources seconded to it. There were resources expended. It didn't launch. There was an effort to get forbearance from Brussels on interchange to make it financially worthwhile to banks, which Brussels was unwilling to give. If it had launched, it would have been... European banks would have had to spend billions of euros building a system that out of the gate would have been, and for a long time by any reckoning, would have been inferior. They pulled the plug. There was the Euro Alliance of Payment Schemes, which on its face was plausible. This was a coalition of Western national payment networks that And the thesis was that if you provide interoperability between these systems under the EBS brand, that this would be a system with critical mass, be viable, and at least within some major markets in Western Europe, be able to build momentum. The participating national systems were unwilling to invest in the pan-European brand, unwilling to rest resources. And fundamentally, it wasn't solving a problem that consumers or merchants had because consumers and merchants had systems that worked and they worked very well. And that failed. Now, we have the European Payments Initiative, which– is a diminishing coalition of banks, a couple of processors, which is the latest. And we have open cheering from Brussels for this system as a notionally European, therefore better, more appealing system. It acquired Ideal, which is the leading e-commerce payment network in the Netherlands, very successful. which gives it a basis, a foundation. And we'll see what happens. My prediction is that this is going to fail. And I say that as someone, I'm 100% for more competition in payment systems. I think that's good. But the decisions to allocate capital to build new payment systems or to acquire other ones and change them, I think should be driven by economic considerations, not political considerations. And I think in this case, we have yet another system which is fundamentally political. Now, if we were in China or Russia, the political decisions are dispositive. If Beijing says we're going to do X, we're going to do X. But the EU notionally embraces liberal economic principles. And I think the market is always, always a better allocator of capital. And when capital is being allocated in payments, as in other sectors, by the market, we end up with optimum value for banks, for consumers, for merchants using those systems. And whenever you have someone from on high who professes to be more enlightened and to know better than the market. I think we end up with misallocation of capital and the value that is provided to consumers and suppressing innovation and suppressing value that is provided. And there, I'll recur to some of my remarks at the outset. At the Brussels level, there is a great comfort that very smart, enlightened, well-meaning bureaucrats know better than the market and know better in terms of setting prices, in terms of what kind of systems people should use, and are comfortable trying to pick winners and losers. We see the slippery slope in the U.S. where there's an increasing um, willingness to second guess the market, but there's still much, much greater reluctance, um,

SPEAKER_00: 38:15

to. Yeah. And I think to be fair, much of what you said, I, I, I, I can't unpick because I think it's valid. I think the point that I would say is when you talk to the, um, European, especially DG FISMA, they would turn around and say, well, you know, um, These card systems aren't under European control. If something bad happens, we want to be in control of them. And I think, you know, I'm just trying to throw that in there because I know that that's a valid point that David

SPEAKER_02: 38:48

has. And I think we should cite the euphemism, the favorite euphemism, which is that we, quote unquote, Europeans need strategic control. That's right. That's the phrase he used.

SPEAKER_00: 39:05

There's two sides of the same coin. I am more sympathetic to the latter statement than I might make out in this podcast. However, let's just sort of unpick some of this and try and go, you know. So the style of regulation, U.S. and Europe. is different. Of course, at the heart, they're trying to do the same things. They're trying to make sure everything works, et cetera. But it is fair to say that the US and Europe have come from whatever you mean by Europe, but you get my point. They've come from different places. And the point that I would make is- Well, and I have to jump in

SPEAKER_02: 39:46

continental Europe in particular. Yes,

SPEAKER_00: 39:48

yes.

SPEAKER_02: 39:49

I think where the US has come from is where a big part of Europe, the UK, came from. And views about the role of the legislature and the role of the regulator in the Anglo sphere are very different than historical views of the regulator, the legislature, the state in continental Europe. And when we talk about Europe, I think there's a casual assumption of the continental model.

SPEAKER_00: 40:27

There's two parts of that. One is where they've come from, the things they have to do from a political or legal infrastructure to try and get to a single entity, a single monetary system. We've said it's a long way away from that. The thing was to try and get to a place where a lot of these things were common required a lot more activity and a lot more supervision than you would find in the US. However, I think it's also true to say that the supervisory style or the interventionist style is very different from that of the US, which is, well, we'll make sure bad things don't happen. but it's a commercial world to get on with it. Whereas I think from a European point of view, they're trying really hard to drive things to be a single monetary policy, entity, whatever you want to say, and their intervention list as well. Yeah, yeah. And they want to manage the outcomes. Yeah.

SPEAKER_02: 41:31

And they want to manage how it's done.

SPEAKER_00: 41:32

And I think getting... And I think the classic example of that, right, is PSD3, you know, or PSD generally.

SPEAKER_02: 41:40

Well, the parade of PSDs, right? So we have PSD1, PSD2, PSD3, and there's going to be, you know, PSD10. I mean, this is central planning. We're never going to get it right. We're going to keep directing. We'll take our shot, and then we'll see what happens, and then we'll come in and we'll adjust. We say, well, this time we're going to get it right. But it is, I would suggest, raw central planning.

SPEAKER_00: 42:06

And I think there's a bit of that that is undeniably true in the sense that if you consider where the EU has come from, it had to do central planning. Maybe it's loved it so much it's done a little bit more, should we say, to be polite about it. Gosh, I'm being very English now, aren't I? I think that we have to get around the fact that the PSD... is probably the most famous of all the regulations around the world. And, you know, just to lighten the mood a little bit, PSD3 is in fact the fourth in the trilogy of PSDs, which always makes me smile, especially as I'm a Hitchhiker's Guide to the Galaxy fan. But, you know, I think at some point we should do a podcast just on PSD. But let's try and pull up some of these threads together. The underlying pieces between what's the difference between the US and Europe, whatever Europe means in the context that we've described, from a payments point of view, it's extraordinarily similar. Brand names are different, but the actual mechanics of how these things are done are very, very similar. And the business models

SPEAKER_02: 43:21

are very similar, even though there are more and lower price caps in the EU, the fundamental business models are the same.

SPEAKER_00: 43:31

Take brand names to one side, payments are payments are payments is payments. Now, on the regulatory side, as we just touched on, there is significant differences, maybe from directional, maybe that's overstating it, but nevertheless, the key thing is I want to get across is there are more similarities here than there are differences. It's just wrapped up in a slightly different way. And least we forget, Different countries across Europe do things in a very different way and have very different needs. 83% in one country deals in cash. Do that to the UK, it's extraordinarily low. Go that to the Nordics, it's like people don't even know what cash is anymore. So similar but different, a lot more moving parts here, I believe, than there are in the US. Yes. That's how I see it, Eric. Do you want to just give us your final thoughts on this? Because I think it's a lot more difficult doing it this way around than the other way around, in fact, because America is more explanation than it is insight.

SPEAKER_02: 44:37

Yeah, well, I think that there are more moving parts in the sense that you have more national infrastructures as opposed to one set of national infrastructures. I think in terms of the number, the competitive intensity in different sectors, I think might be greater in general in the US, but still in terms of at least retail payments and P2P payments, I think in general in Europe, it's competitive. I think entry barriers at a pan-European level are higher. At an individual national level, perhaps not different. I think, and this is a long... A bugbear of mine, pricing, when I think of pricing differences in retail payments, and when you think about the 30 and 20 basis point interchange caps on credit and debit cards in Europe, well, for branded, unregulated debit interchange in the U.S. for Visa, Discover, MasterCard debit cards, it's 600% higher. than in Europe. So Visa, 143 basis points on average. Discover, 141. MasterCard, 137 basis points. And that's an enormous difference. And the funding of economics there affects the issuing business model, retail banking. And for reward credit cards, interchange in the US versus that 30 basis points can be 800% higher.

UNKNOWN: 46:15

Yeah.

SPEAKER_02: 46:16

And that's just an enormous difference, and it affects how things are priced for consumers and the value they get. But having said that, the fundamental business model is the same. It's just there are constraints that are different that have been imposed by the legislatures, ultimately, in both the EU and in the US. I think in the US, the price caps that were imposed were more rawly political. So we have big banks are politically unsympathetic and therefore should be subject to price caps and small banks. Everyone loves or professes the love and should be exempt. And I suspect that that kind of unequal treatment wouldn't have gotten much traction in Brussels. I don't know. You can correct me if I'm wrong there. A

SPEAKER_00: 47:16

lot of things being looked at, but whether they get actioned, you know, we saw PSD3 originally being the most complex piece of regulation that was ever established, I think.

SPEAKER_02: 47:30

PSD4 is going to be the most complex.

SPEAKER_00: 47:32

Well, so don't forget, and this is a subtle point that we need to introduce here. PSD is a directive it is not a regulation and it goes back to the patchwork so i have a directive that says these are the things we'd like you to do but if you don't want to do them in your country then you can kind of change them a little bit and so one of the things that was interesting was the psd3 at one point was believed that it would be a regulation i.e it was de facto you had to do this and in fact it did come out as a directive i.e. if you don't believe in everything that we're saying, you can change it a little. Anyway, Eric, I could be here forever with you, as you well know. What I would say to you is thank you for your insight. I've loved this conversation. Well, there you go. Europe, whatever that means. whether that's the EEA, whether that's the SEPA zone, whether it's the EU, whether it's the geographic space that we call Europe. Having a look at that from an American's point of view, I think really opens up the fact that the region is effectively a patchwork that's trying to move in a single direction. But we have to put that into context and say, well, hold on a second. It wasn't that long ago that all these countries had their own currencies and they had their own currencies so that they could manage their own tax, their own affairs, et cetera, et cetera. Now, replacing them with a single entity or single or less entity, shall we say, takes time and time. The speed that they're moving may seem slow to some or too fast to others, frankly, but I would say the moving of all these countries into a single path is moving in an extraordinarily quick and relatively efficient way. I have my gripes, everyone has their gripes, but frankly, it's moving pretty well. However, when we come to look at the differences between the way that Europe operates its payment systems and the way that the US operates its payment systems. The truth of the matter is, frankly, it's the brand names that get us confused. An ACH works pretty much the same in America as it does in Europe. A high value payment works almost exactly the same in Europe as it does in the US. Now, it might be called a wire or it might be called a Target 2 system. But frankly, once you understand the brand names and what they do, you will understand that the systems are extraordinarily similar. Yes, there are cultural differences. Yes, there are regulatory differences. But you know what? It's more simpler than you can possibly imagine. So, as ever, Big thank you for listening. You know what to do. If you've enjoyed this, please do tell a friend. I would also be grateful if you could do some reviews and give us some ratings. Apparently that helps the podcast algorithms, which I don't know very much about. But if you would, that'd be great. Anyway, I hope you've really enjoyed this. Take care. Cheers.