EU payment system takes aim at card giants

The biggest banks in the European Union have spent years quietly creating a new way to pay that could finally allow customers to ditch their Visa and Mastercard cards — the latest sign that the region is looking to dislodge two of the most valuable financial firms on the planet.
Wero, as the project is known, is now rolling out across much of western Europe. Backed by 16 major banks and payment processors including BNP Paribas, Deutsche Bank and Worldline, the platform will eventually allow a German customer to instantly settle up with, say, a hotel in France using their own bank account instead of a Visa or Mastercard.
That might sound simple but if the firms pull it off, it could end up costing the two payment giants billions of dollars of the fees they reap from European merchants each time consumers swipe one of their cards at checkout.
But more importantly, it’s an example of Europe’s unease about relying on the US for key pieces of infrastructure — financial or otherwise. Ever since Russia invaded Ukraine and the two networks yanked the country’s ability to conduct everyday payments, governments around the world have been wary of deepening their reliance on them.
“Visa and Mastercard being so big, they have in their hands a lot of market control power,” said Martina Weimert, chief executive officer of European Payments Initiative, the company behind Wero.
The idea, she says, is to build up an “alternative to international solutions in order to offer European players and consumers a European choice”.
Wero has a long way to go before it stacks up against Visa and Mastercard, which together process tens of trillions of dollars globally every year, or even the new generation of digital payment firms competing fiercely for consumers moving money.
Weimert conceded that “it would be very presumptuous” to call the firm a challenger. “We are a kind of a startup,” she said, albeit one that already has €500 million from its backers and a ready-made customer base from its banking participants. (story continues below)
Within days of Russia’s invasion of Ukraine in 2022, Visa and Mastercard moved swiftly to suspend their operations, preventing overseas payments by Russian cardholders and halting foreigners from making transactions on Russian soil.
Russia’s central bank, ready for this sort of crisis, had previously created the National Payment Card System to process transactions domestically, even if the cards carried a Visa or Mastercard logo. This workaround meant consumers could continue to make payments locally after the invasion.
“For those people who are interested in Mastercard, you should be interested in what the nationalistic tendencies are around the world,” chief executive officer Michael Miebach warned investors on a conference call last year.
“There are countries who are sitting and saying, ‘What will happen to us if a similar kind of situation as Russia played out?’ Which has got nothing to do with Mastercard, per se, but it’s got everything to do with the political environment which we’re operating in.”
Even before the networks’ showdown with Russia, the European Central Bank had grown worried that it lacked sufficient sovereignty over its payments systems. That’s where EPI is supposed to come in.
Plenty of national challengers have emerged in Europe over the years, such as Swish in Sweden, Twint in Switzerland and iDeal in the Netherlands. But none of them are quite as ubiquitous as Visa or Mastercard — for instance, iDeal handles 70% of online commerce in the Netherlands but doesn’t yet allow consumers to make payments in stores. Often, Europeans can’t use these tools in neighbouring countries, so they’re forced to opt for American brands.
Wero, which acquired iDeal as well as Luxembourg-based Payconiq last year, seeks to plug those gaps, the banks say. Its services will be available both through its own app and through participating lenders’ platforms.
“Payments is a matter of volumes. If you don’t have volumes, you don’t have the capacity to be competitive” on user experience, said Carlo Bovero, global head of cards and innovative payments at BNP Paribas. French payments service Paylib, developed by several French banks including BNP Paribas and already at 35 million subscribers, will be folded into Wero.
To be sure, Europe has stumbled with its previous attempts in this space. The Monnet project sought to create a pan-European card brand but folded over a decade ago after disagreements over the business model. EPI started in 2020 with a similar idea but was forced to narrow its scope as Spanish banks dropped out of the alliance.
It decided instead to start with account-to-account payments as this was cheaper and easier for member banks to integrate. EU regulations for instant payments, mandating banks to process money transfers within ten seconds, made that focus more pressing. Next year, it wants to expand into e-commerce and offer in-store payments with retailers across the continent after that.
“It is the right step forward for Europe, apart from everything else that we bring to the European level, to also consider payments more holistically through a European lens,” said Ole Matthiessen, Deutsche Bank’s global head of cash management. He sits on the EPI board. “The issue of payment sovereignty is also a political one.”
Some of the building blocks for easy cross-border payments already exist in the form of the euro, which is now accepted in more than 20 countries. Still, in the digital space, “local payment methods have become the standard”, Matthiessen added. “Now we have to bring it to the front end and make it more convenient for the end user. There are still too many users ultimately using offerings from either the US or the East, China particularly.”
Visa and Mastercard, founded by banks in the 1950s and 60s as an alternative to cash, processed $14.8 trillion and about $9 trillion respectively last year, taking a cut for handling transactions. The two companies have been under fire from regulators, customers and lawmakers around the world for the fees they charge.
And it’s a volatile time to be a global payment company as numerous regional rivals emerge. Seven major US banks including JPMorgan Chase and Wells Fargo have coalesced around Zelle, a system that offers speedier transactions between accounts. It had grown to 120 million accounts by last year and competes with the likes of PayPal.
In Brazil, the central bank’s instant-payment system Pix grew along with pandemic-driven online shopping, and is now targeting Brazilian tourists in Europe. The Indian government-backed Unified Payments Interface, or UPI, crossed 100 billion total transactions in 2023 after eight years in operation.
In Asia, the Bank for International Settlements has this year started work on Project Nexus for instant cross-border payments between Malaysia, Philippines, Singapore, Thailand and India. Meanwhile, online wallets such as AliPay and WeChat Pay along with Apple Pay and Google Pay continue to expand.
Overall, payments revenues grew at an annual rate of 8.3% from 2017 to 2022, taking the revenue pool to $1.6 trillion, according to Boston Consulting Group.
Consumers already have plenty of other options in their wallets and smartphones, making it a challenge for Wero to find a place, Sonja Forster and Elisabeth Rudman from Morningstar DBRS said in a July note, even if its speed and lower costs make it “likely that merchants will adopt the technology.”
For now, Visa and Mastercard have by far the biggest heft and can afford to be gracious about their challengers.
“I look at EPI as it’s yet another solution, and we welcome that,” Mastercard CEO Miebach said in an interview. “At the same time, we want to put out Mastercard payment solutions that give the consumer a reason to make a choice to use our product versus somebody else’s. So I’m not particularly worried about it. We know what it takes to invest and scale a business. It’s very hard to do.”
Miebach said “the principles of choice and competition are good ones” for the European payments landscape, a sentiment shared by executives at Visa.
“The competitive landscape in Europe has never been richer and for me EPI is one of those solutions,” according to Charlotte Hogg, who leads Visa’s business in the region. She pointed to a bundle of regulatory changes about a decade ago aimed at cracking open competition in finance for helping to stir up the market.
“What doesn’t exist despite the growth of open banking — and there’s now 500 of these players across Europe — is the rules of the road for payments in terms of what happens when they go right and what happens when they go wrong,” said Hogg.