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Saturday, 18 February 2012

An Integrated EU Market For Payments?

A Dog's Breakfast
We have until 11 April to weigh in on the European Commission's dream for "an integrated European market for card, internet and mobile payments."

Tedious as the EC's role and processes are, we mustn't forego these opportunities to feed into the EU's 'social dialogue'. If we don't participate we'll get legislation that's more reflective of canine culinary expertise rather than how various markets actually work (like the Payment Services Directive).

Some key issues in the current green paper are:
  • whether it's overkill to make a retailer show on your receipt how much it costs to use your chosen payment method;
  • whether non-financial service providers should be able to directly access clearing and settlement systems;
  • whether you should be allowed to permit any service provider you like to show you your bank balance, rather than only your bank; and
  • whether competition is being inhibited by the process of 'standardisation' and demands for "full interoperability".
My own personal view is that the short answer to all of the above is, "Yes."

The challenge to regulating payments is that service providers and regulators alike tend to view "paying" and "banking" as consumer activities in their own right. Whereas consumers don't actually "pay" - and retailers don't even "accept payment" - as distinct activities. The man from Visa who thinks the brand on my payment card is the most important brand in the context of me buying a gift for a friend on my way to a party is institutionally deluded. Actually paying for the gift is a barely considered sub-process in the course of getting to the party, and I might pay in cash.

Not only must we remember that payment occurs in the context of wider consumer activities, but we must also acknowledge that payment details are a subset of all the personal and transaction data used in retail services that are subject to broader market forces and other regulation. In particular, the impact of the EC's proposal for more comprehensive regulation of personal data processing cannot be underestimated. There seems little point in dealing with access to bank balance information in the context of payments regulation when the wider data protection regime would enable the "right to be forgotten", "data portability", "data protection by design and by default", the logging/reporting of personal data security breaches, personal data processing impact assessments, prior consultation and regulatory consent for potentially risky processing; not to mention enhanced internal controls, enforcement and compliance burdens, including the appointment of a data protection officer.

But let's glance away from the data protection elephant for a moment.

On the question of interchange, it's clear from Annex 2 of the green paper that the EC doesn't understand the lack of a direct contractual/settlement relationship between issuers and acquirers in four-party card schemes like Visa/MasterCard, even where a banking group has both an issuing business and an acquring business. Each acquirer and issuer contracts directly with the card scheme, and the card scheme settles independently with each of them. Besides, the issuing arm's cardholders won't always be making payments to the aquiring arm's merchant customers. Not only does this add an important nuance to the interchange debate, but it also has far wider implications for payment services regulation than there's time to cover here.

As consumers, of course we want retailers to keep a lid on their interchange costs (like any other overhead). That would enable them to improve their services, increase product selection or maybe reduce their prices. But unless the retailer has its own specific surcharge, I don't need the receipt to tell me the cost of using my chosen payment method, any more than I'd need to know what it cost to get the item from the warehouse to the shop. The underlying cost might be fascinating to EC officials and payments geeks, but the all-in price of the item should be enough for me to compare the efficiency of retailers' operational processes. Whether those retailers are competing properly in their own markets is a separate issue to the cost of payments in any event.  

I can also see that the cost of payments might be reduced by enabling sophisticated businesses to directly accessing clearing and settlements systems, rather than relying on financial institutions whose systems are geared to servicing the broader market. And such businesses shouldn't need to become regulated financial institutions or to join cosy industry bodies for that privilege. However, I should point out that developing an internal acquiring and settlement capability is very likely to prove an unwelcome distraction for non-financial corporate groups.

Similarly, as a consumer, I should be able to appoint a single service provider to enable access to my various bank, card and other payment accounts, without being in breach of the obligation to keep my account access details confidential. It's not beyond the wit of man to work out which provider is liable for any security breaches that might occur in that data sharing process.

Finally, we need to be really careful about requiring "standardisation" and "full interoperability" rather than merely enabling the market to develop this naturally, free of anti-competitive activity. Entrepreneurs don't have the time or resources to sit around in policy and standards meetings. Nor do they wish to telegraph to incumbents their disruptive plans. Yet there is also little meaningful distinction between "technologicial interoperability" and "commercial interoperability" in a digital world where business models are automated or 'hard coded'. I'm struggling to understand the EC's intention here. On the one hand the EC wants to see competition (which generally means less consolidation and more fragmentation - plenty of new players and competing, disruptive solutions), and on the other hand it wants to "avoid fragmentation of the market". So these aims seem incompatible. 

Interoperability and standards may be important to enable efficient, straight-through processing between participants at either end of an overall business process or system. But the more tightly that process is bound together - or the narrower the group of entities involved in the development of standards/interoperation - the harder it is for new entrants to compete by disintermediating or improving any one element of that process. This is a key reason we have been trying to avoid any preoccupation with mandating standards in relation to data release formats in the context of the 'midata' initiative, for example (formerly 'mydata'). This avoids creating an extra hurdle to the release of the data, while opening up a market for the supply of data transformation applications that collect such data in multiple formats and display or transfer it in another format. 

Paradoxically, the EC's own concerns on this front are reflected in the green paper questions as to whether card scheme management should be separated from control over card payment processing (Q's 9 and 10), as well as the competition challenge to standards-setting by the European Payments Council:
"JoaquĆ­n Almunia Commission, Vice President in charge of Competition Policy, said: "Use of the internet is increasing rapidly making the need for secure and efficient online payment solutions in the whole Single Euro Payments Area all the more pressing. I therefore welcome the work of the European Payments Council to develop standards in this area. In principle, standards promote inter-operability and competition, but we need to ensure that the standardisation process does not unnecessarily restrict opportunities for non-participants."
I rest my case.