Mastercard and Visa may be challenged by a new European payment system

As many as 20 major EU banks, including Deutsche Bank and Santander, are set to announce details for a new payments initiative in the very near future, per Electronic Payments International.

Purchase transactions from Europe's global general purpose cards

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The system, referred to as the Pan European Payment System Initiative (PEPSI), will process card payments in addition to making fund transfers and mobile payments without using Mastercard’s or Visa’s network. It’s set to rely on the EU’s Target Instant Payment Settlement (TIPS) system that enables real-time fund transfers to handle payments.

PEPSI reportedly has the support of the European Central Bank (ECB) and the European Commission (EC), and could eventually replace EU countries’ national payment schemes, potentially making it a serious threat to card networks that don’t want to lose business, like the significant cross-border payments opportunity in Europe.

PEPSI could help banks capture more revenue from payments, especially considering interchange fee regulations have hindered their performances but not card networks’. A new report found that the EC’s Interchange Fee Regulation (IFR), which moved to restrict interchange fees on card transactions approximately five years ago, has reportedly cost issuers an estimated €2.95 billion ($3.32 billion) in annual revenue.

Meanwhile, card networks’ fees have been unaffected by the IFR, allowing card networks to raise fees and boost their revenue by €550 million ($619 million) on a yearly basis. PEPSI could enable issuing banks to cut out card network fees and drive revenue through proprietary fees or other tactics.

PEPSI may be able to appeal to consumers in the EU due to their existing interest in debit payments, but it may have difficulty pulling cardholders away from entrenched card networks.

  • Debit payments are already a leading payment method in the EU, which could make PEPSI attractive to consumers. EU consumers report making more in-store and online payments with debit and prepaid cards than with any other payment option, per a report from Payments Europe. This, and the popularity of direct debit payments that bypass card rails altogether in some European countries, suggests consumers in the EU are interested in making payments that debit their bank accounts, which PEPSI should specialize in since it will be backed by major banks, potentially helping it quickly amass a significant user base.
  • But it’ll be hard to muscle out card networks, specifically Mastercard and Visa, that have deep roots in Europe. Visa counted 57.3 billion purchase transactions from general purpose cards in Europe in 2019, while Mastercard racked up 38.3 billion, per The Nilson Report. It’ll be difficult for PEPSI to pry a significant chunk of that volume away from the card networks since Mastercard and Visa have established relationships with their cardholders and they’re increasingly expanding into noncard rails. So, the issuing banks backing PEPSI could adjust their rewards to incentivize consumers to use PEPSI or otherwise complicate card networks’ operations in Europe to try to push consumers to PEPSI once the system launches.

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