EU Puts Pressure on Payment Systems in Order to Take Down Their Pricing
Rapid development of online business and digital payment methods has drastically changed the market, with card payments from giants like Visa and Mastercard becoming dominant. Just a few decades ago, cash was the only way to pay for purchases, but today many countries are already battling yesterday's processing unicorns — card payment systems. What happened?
Europe is at the center of a payment scandal involving Visa and Mastercard, where the government is trying to force these payment systems to operate within the framework of market competition. Due to the entrenched position of these card brands, their business clients have virtually become dependent on the conditions and fees they impose. This monopoly harms market development, negatively affecting profits of many participants. All this has led to disagreements between the two companies and the EU, with investigations and proceedings ongoing for years in search of a better solution.
Today, we will delve deeper into the conflict between the two payment systems and European Union antitrust law.
Fees and Monopoly in European Market
Let's start with the root cause of why the EU suddenly became dissatisfied with Visa and Mastercard after so many years of successful cooperation. In recent years, many merchants and payment institutions have noticed an increase in processing expenses, and as it turned out, they are not rising on their own — it is the card brands increasing the prices of their same services. We are talking about interchange fees and other scheme fees charged by Visa and Mastercard in the process of providing their payment services.
These fees are charged every time a buyer makes payment using a credit or debit card under their brand. Visa and Mastercard set standard fees in their networks independently and do not subordinate to any governments. In fact, they are free to operate within the framework of a market economy. And since both companies are dominant in the EU market, they have a significant advantage in this matter.
European Commission believes that the current fees limit competition and lead to increased processing costs for PSPs and, consequently, for merchants. They also hinder market transparency, as no one knows exactly how Visa and Mastercard set these fees. All this has led to the antitrust committee launching an investigation into the activities of both IPS. The efforts have led to a slight softening of conditions on their part and even fines imposed on Mastercard. Moreover, both companies have committed to set a fixed fee size for years, although they were not happy with this decision. Ongoing investigations, which continue to this day, impose a significant legal and administrative burden on Visa and Mastercard, as well as the risk of substantial fines in the future.
Simply saying, EU views Visa and Mastercard as opponents of a free payment industry, and antitrust actions are intended to neutralize their dominant position, preventing them from suppressing competition and unjustifiably increasing costs for European market. For a long time, usage of American payment systems was beneficial and very convenient, as the global expansion of both companies is undeniable. Today, having a Mastercard or Visa card, you can pay for a purchase in almost any country. This convenience has become the reason the widespread introduction of cards under their brands in stores and online, but this situation that has led to worsening conditions for PSPs, banks, and businesses. Everyone found themselves too much relying on large payment systems.
EU to Create its Own Payment System
As part of resolving this situation, European Union has long followed its standard path of strict regulations and fines. Although these actions are ongoing, European Union believes that viable alternatives are necessary.
Most countries agreed that the EU needs its own new payment system that can provide worthy competition and offer better conditions to payment providers. After all, constant fines are not a very effective in terms of consumer preferences and real market influence. Although both companies suffer significant losses and face difficulties operating in the EU, they remain the main card brands and are widely used. However, developing its own system will require not only technical efforts and investments but also work on integrating this system into consumer habits. Here, the EU plans to take a regulatory and market approach.
Legislative and regulatory authorities can help to influence the market, consumers, and businesses. The main efforts that the EU is making in this regard are:
- Interchange Fee Regulation (IFR): In addition to existing restrictions, the EU can further amend or expand the IFR to cover other fees or charges to increase pressure on Visa and Mastercard.
- Payment Services Directives (PSD1 and PSD2): These are fundamental in regulating payment services. An important update from PSD2 allowed for development of open banking and payment initiation services (PIS), enabling third-party providers (fintech companies) to initiate payments directly from bank accounts, completely bypassing card networks. This has created a payment method that does not need either Visa or Mastercard.
- Instant Payments Regulation (2024): This regulation obliges all EU banks to offer instant euro transfers without additional costs compared to traditional transfers. Thanks to this, instant payments are seriously considered as an alternative not only to regular transfers but also to cards. If they were significantly more expensive, it would be difficult to compete with existing payment methods.
Speaking of market efforts, we have to mention the solutions that are already working and are also designed to replace card transactions. Among them, for example, is WERO wallet, developed by European Payments Initiative, backed by many banks and supported by Revolut (which will sell the solution to merchants).
WERO is truly a flagship project of the EU, that was needed. It aims to create a single payment solution that works throughout the European Union. Moreover, the application will be convenient, fast, and beneficial for all participants. To make a transfer within the system, user will only need to know phone number or email of the counterparty, which eliminates the step of filling out complex banking forms.
Open banking, which we have already mentioned, played a significant role in development of new payment habits and preferences. Based on it, a user-friendly transfer was created at a moderate price and with high quality. Moreover, payment approval ratio for this method is much higher than that of card payments, and this also serves as an influencing factor for merchants when choosing payment partners. Open banking eliminates many issues of card providers; the process does not involve as many participants, and there are fewer opportunities for user to make a mistake.
However, despite all these advantages, it is not easy to make users switch from Visa and Mastercard to new bank transfers or applications. The EU cannot do this through regulation and does not choose this path. Instead, the strategy is aimed at creating compelling value propositions and influencing user choice through real benefits. Europeans are open to new things, and WERO application has already managed to gather its fans after launching in just a few countries.
The authorities expect that transition will happen smoothly and do not plan to completely remove Visa and Mastercard from the market but confidently want to reduce their share in payments. Thus, desired option for the EU today would be the presence of strong local payment systems that are in demand and cover up to 90% of transactions, meeting all strict legal requirements, allow local businesses to earn. At the same time, access to international systems will also remain open, but they would become the preferred choice for travel abroad or international payments. Will Europe be able to achieve such a result?
Well, let’s observe together. However, it will undoubtedly take some time and efforts along with investments.
