The competitive landscape for payments: a European perspective March 2020 www.oxera.com The competitive landscape for payments: a European perspective Oxera Contents Acronyms 1 Definitions 2 1 Introduction 3 1.1 Scope and objectives of this report 3 1.2 Key findings 3 1.3 Structure of report 5 2 Economics of payment systems 6 2.1 Introduction and key messages 6 2.2 What is a payment system? 6 2.3 Economic characteristics of payment systems 7 2.4 How do networks compete? 12 2.5 Implications for competition between payment methods 18 2.6 This report: assessing competition 19 3 Trends reshaping payments 20 3.1 Introduction and key messages 20 3.2 What role do payment systems play in the modern economy? 20 3.3 Traditional payments value chain 21 3.4 Developments in technology, regulation and consumer preferences 22 3.5 Current value chain 29 4 Retail payment methods—market structure and different types of player 31 4.1 Introduction and key messages 31 4.2 Cash 33 4.3 Cheque 35 4.4 Credit transfer and direct debit and payment methods using interbank infrastructures 35 4.5 Cards 36 4.6 Entry by new providers of retail payment methods 38 4.7 Entry by providers of payment services using interbank processing infrastructures 39 4.8 Payment initiators 41 Oxera Consulting LLP is a limited liability partnership registered in England no. 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The competitive landscape for payments: a European perspective 3 Oxera 4.9 Peer-to-peer payments 43 4.10 Online and person-to-person-based payment methods are being made available for physical in-store payments 46 4.11 Digital wallets 46 5 Market outcomes 51 5.1 Introduction and key messages 51 5.2 Choice and quality 51 5.3 Innovation 56 5.4 Volumes 57 5.5 Prices 60 6 Competitive dynamics 63 6.1 Introduction and key messages 63 6.2 Competitive dynamics allow for entry and expansion 64 6.3 Front-end competition 66 6.4 The rise of digital wallets 69 6.5 Effect on the competitive dynamics 74 6.6 Forward-looking trends 76 7 Competition for the provision of payment services in France 82 7.1 Introduction and key messages 82 7.2 Market background 82 7.3 Competition between card schemes in France 86 7.4 Competition between card schemes and other providers in France 89 7.5 Conclusions 93 8 Competition for the provision of payment services in Germany 94 8.1 Introduction and key messages 94 8.2 Overview of payment methods 94 8.3 Market structure, types of player and payment methods 95 8.4 Competitive dynamics in Germany 99 8.5 Conclusion 101 9 Competition for the provision of payment services in Italy 102 9.1 Introduction and key messages 102 9.2 Overview of payment methods 102 9.3 Competitive dynamics in Italy 110 9.4 Conclusions 118 10 Competition for the provision of payment services in the United Kingdom 120 10.1 Introduction and key messages 120 10.2 Market background 120 10.3 Open banking and regulatory developments 122 The competitive landscape for payments: a European perspective 4 Oxera 10.4 Key UK trends 124 10.5 Conclusions 128 Boxes Box 2.1 Two-sided network effects for retail payment methods 8 Box 4.1 iDEAL 40 Box 4.2 Paydirekt 40 Box 4.3 Swish 41 Box 4.4 Blik 41 Box 4.5 Sofort 42 Box 4.6 Trustly 42 Box 4.7 GoCardless 43 Box 4.8 Tikkie 44 Box 4.9 Twyp 44 Box 4.10 Bizum 45 Box 4.11 MobilePay 45 Box 4.12 Payconiq 45 Box 4.13 PayPal 48 Box 4.14 Amazon Pay 49 Box 4.15 Vipps 49 Box 4.16 Apple Pay 49 Box 9.1 Regional heterogeneity in the diffusion of traditional and new payment methods among Italian consumers 109 Figures and tables Figure 2.1 Network effects in payments 8 Figure 2.2 Networks with different economic features 14 Figure 2.3 Models of comparison in network industries can differ considerably 17 Figure 3.1 Value chain of a traditional retail payment system 22 Figure 3.2 Alternative routes of payment 26 Figure 3.3 Global shipment of smartphones (m), 2009–2018 28 Figure 3.4 Global mobile app revenues ($bn), 2015–2020 28 Figure 3.5 Current value chain of payment system 30 Figure 4.1 Total number of all EEA retail transactions, by payment method (bn), 2016 32 Figure 4.2 Total number of EEA retail e-commerce transactions, by payment method (bn), 2016 33 Figure 4.3 Use of payment instruments for physical in-store purchases in the eurozone, by value range (%), 2016 34 Figure 4.4 Cash usage for physical in-store retail payments in Europe (%), 2016 35 Figure 4.5 Physical in-store transactions by payment amount, eurozone, 2016 37 The competitive landscape for payments: a European perspective 5 Oxera Figure 4.6 Online transactions for a selection of European countries, 2016 37 Figure 4.7 Card penetration in Europe, 2017 38 Figure 4.8 E-wallet share of online transactions, 2017 47 Figure 4.9 Number of mobile wallet users in Europe (m), 2016–2022 48 Figure 5.1 Cash transactions as a proportion of physical in-store transactions/all transactions, by volume, 2009–2017 58 Figure 5.2 Cheque transactions as a proportion of card, cheque, credit transfer and direct debit transactions, by volume (%), 2000–2016 59 Figure 6.1 Summary of competitive dynamics 64 Figure 6.2 Levels of competition in payments 66 Figure 6.3 Preferred payment methods across Europe for e- commerce, 2017 70 Figure 6.4 Global customer base of digital wallets (m users), 2018 71 Figure 7.1 Share of cash transactions per country (eurozone) in- store, 2016 83 Figure 7.2 Breakdown of online payment methods in France (by value), 2018 84 Figure 7.3 Evolution of the amount of contactless payment in France (€m), 2017 85 Figure 8.1 Payment usage in Germany— in-store and private transactions (value and number of transactions), 2008, 2011, 2014, and 2017 96 Figure 8.2 Average cards per person in Western Europe and Germany, 2016 97 Figure 8.3 Online payments usage in Germany, survey data, 2017 99 Figure 9.1 Share of cash transactions per country (eurozone) in- store, 2016 103 Figure 9.2 Response to the survey question: ‘Assuming you were offered various payment methods in a shop, what would be your preferred payment method?’, 2015–2016 105 Figure 9.3 Number of cards and POS terminals in Italy: traditional and contactless, 2018 106 Figure 9.4 Share of number of cards in Italy and value of card payments: breakdown by method, (€bn), 2018 106 Figure 9.5 Ecommerce turnover and ecommerce number of transactions in Italy (€bn), 2018 107 Figure 9.6 Share of transactions by ecommerce payment methods in Italy, 2018 108 Figure 9.7 E-wallet share of online transactions by country, 2017 109 Figure 9.8 Number of cards and e-wallets per capita by region, 2017110 Figure 9.9 Breakdown of online payment methods in Italy, 2012– 2016 114 Figure 9.10 Italian consumers’ trust by economic sector, 2018 115 Figure 10.1 Breakdown of total payment methods in the UK (by volume), 2018 121 Figure 10.2 Average cards per adult in Western Europe and the UK, 2016 121 The competitive landscape for payments: a European perspective 6 Oxera Figure 10.3 Attitudes towards non-cash payment methods by demographic, February 2018 122 Figure 10.4 UK split of online retail payments, 2017 124 Figure 10.5 Number of monthly contactless transactions (m), 2014– 2017 126 Figure 10.6 Number of mobile commerce users by amount spent (m), 2013–2016 127 Figure 10.7 Apple Pay and Android Pay users by age range (% of users), 2016 128 Table 5.1 The cost of using cash 61 Table 9.1 Summary of new payment methods in Italy 117 The competitive landscape for payments: a European perspective 1 Oxera Acronyms Acronym Description ACH automated clearing house ACPR Autorité de Contrôle Prudentiel et de Résolution AISP account information service provider API application programming interface APP authorised push payments ATM automated teller machine (cash dispenser) CCP central counterparty clearing CSD central securities depositories CB Cartes Bancaires CNPS Comité National des Paiements Scripturaux DE Germany ECB European Central Bank EEA European Economic Area EMV originally, Europay Mastercard Visa.