Transforming Payment Systems in Europe

Traditional payment systems were built around cash. Non-cash payment instruments, including payment cards, used most often besides cash in retail payments, occurred quite recently, as it was in 1940–1950s. Innovative payment instruments that may become an alternative for cash have even a shorter history.

Every now and then academics write a popularising book on economics that effectively becomes wildly popular. Information Rules by Carl Shapiro and Hal Varian comes to mind, and in 2008 there was Nudge — Improving Decisions about Health, Wealth, and Happiness by Richard Thaler and Cass Sunstein, a book described by one website as “the Harry Potter of the policy world this summer”.¹ In the book, behavioural economist Thaler and law professor Sunstein, then both at the University of Chicago, argue that seemingly small changes in the choice context — “nudges” — can have massive effects on people’s behaviour. Other books, such as Daniel Kahneman’s (2011) Thinking, Fast and Slow and I’ll Have What She’s Having by Bentley, Earls and O’Brien (2011) have since ridden the wave of interest in behavioural economics.

The European retail payments market is fragmented. It used to consist of twenty-eight nationally operating payment markets served by national schemes, which were separated from each other by legal and technical barriers. With the unification of the European retail payments market, most of the legal and technical barriers between countries have been removed. National payment instruments for credit transfers and direct debit payments have gradually been replaced by European payment instruments, and since 1 August 2014 there are, in theory, no differences between making payments with these payment instruments within one’s own country or to another European country. However, this does not hold yet for card payments, which ‘have not reached the same level of harmonisation and integration as credit transfers and direct debits’ (European Central Bank (ECB), 2014).¹ According to the ECB, ‘substantial efforts are still required in order to achieve a single card payment area’, as the card payment market is very complex.

The intention of the European legislative bodies, which is enshrined in different legal acts, such as the Payment Services Directive and the second Electronic Money Directive, is to boost competition and innovation on the payments market by creating new categories of payment service providers, i.e., payment institutions (PIs) and electronic money institutions (EMIs). Traditionally, banks operating current accounts of consumers and companies used to be major payment service providers (PSPs), which as a group faced only marginal competition in the payments business at the front end. However with the advent of new laws on payments in Europe and the rising willingness of customers to use innovative services of non-banks, questions need to be posed about the level playing field between old and new players.

When addressing the issue of m-payments, it is difficult to come up with a proper definition. The term remains as opaque as ever. As a consequence, “m-payments” refers to very different types of payments that only have in common that the mobile phone is used somewhere in the payment process. The mobile phone is used as: Mobile phones are used for payments in the mobile Internet, they are used for proximity payments at the POS and they are used for P2P payments.

The number of virtual currencies based on blockchain technology grows rapidly, counting more than 400 different schemes today (ECB, 2012, 2015; Raymaekers, 2015). Bitcoin (Bitcoin, 2015) is the largest and most widely known, but it has several competitors such as Ripple (Ripple, 2015), Litecoin (Litecoin, 2015) and Peercoin (Peercoin, 2015) to name a few, and a longer list can be found at Cryptocoincharts (Cryptocoincharts, 2015). The term virtual currencies can be used to cover a larger variety of different Internet payment systems, some of which are not based on blockchain technology, but traditional centralised real-time accounts. PayPal (PayPal, 2015) is probably the best known centralised world-wide Internet payment system. In this chapter the term virtual currency will only cover the subset of virtual currencies which is commonly referred to as cryptocurrencies, that is, those that are based on blockchain technology and decentralised account databases or files. These payment instruments will be compared to traditional payment systems based on centralised account databases. Virtual currencies and blockchain technology have often been greeted as the new technology revolution that will fundamentally change paying in the future (see for example Harvey, 2015), but there are also more critical voices (see for example Tymoigne, 2015).