Europe Needs An Alternative

It's time to think about a post-card European alternative payment scheme. Could it be SPAA?

Feb 12, 2023

Dateline: Woking, 12th February 2023.

Patrizia Flammini runs a cafe in the centre of Rome. According to the Financial Times, her heart sinks when a customer pays for a coffee with a payment card (as I always do, everywhere, all the time). Why? She says that the cost of accepting cards is so high that the bank earns more on a cup of coffee than she does.

If You Don’t Like Cash, Don’t Take It

When I read this, I naturally thought to myself “so what?” and “if she doesn’t like cards, she shouldn’t take them” because as far as I am concerned, retailers should be able to take whatever they want in payments. If they want to take cash or cowrie shells, cards or chocolate (cocoa was a currency in South America for hundreds of years) then it should be up to them.

In some illiberal places, however, that is not true. In some places shopkeepers are forced to accept certain payment instruments. In El Salvador, for example, retailers are forced to accept Bitcoin. In New York, retailers are forced to accept cash. In Italy, retailers are forced to accept cards.

**with kind permission of Helen Holmes (CC-BY-ND 4.0)**

What? Yes. Cash payments are not banned, but Italian retailers have to accept electronic transactions or face a fine of €30 and 4% of the transaction value. This law was introduced as part of Italy's post-Covid national recovery plan as an attempt to reduce tax evasion. The retailer can choose which electronic means they accept: They do not have to accept bank cards, they could accept payments apps or digital wallets or whatever. But they must accept at least one electronic payment option and for almost all of them, that means cards.

Shopkeepers such as Patrizia were hoping to have the option to refuse cards for cups of coffee and such like though. The new prime minister, Ms. Giorgia Meloni, wanted to give them the right to refuse electronic payments for transactions under €60 while simultaneously raising the limit for legal cash transactions from €1,000 to €5,000.

(I was interested to see the the president of the Lego Nord, the economist Claudio Borghi Aquilini, defend the use of raising the limit for cash transactions to €5,000 using what seemed to me to be the remarkably Italian argument that if he wants to buy a necklace for his mistress "what can I do with the limit of one thousand euros? I take the car, go to Lugano and pay cash.”)

Unfortunately for Patrizia the Economy Minister Giancarlo Giorgetti announced a U-turn in December when the plan to allow merchants to refuse payment by card for smaller amounts was scrapped, although the arguments about it will undoubtedly continue.

Cash Fans

What is going on? Well, in Italy the number of non-cash transactions per capita increased by 24% in 2021, driven mainly by card transactions, but even with this increase, it must be noted that according to official figures, Italy remains bottom of the Euro table in terms of non-cash transactions per capita: 130 transactions per inhabitant in 2020 compared with 297 on average in the euro area.

The use of cash varies pretty widely across the regions. Central bank analysis based on international comparisons and Italian data at province level show that differences in per capita income and in the degree of technological innovation play a central role in explaining the the gaps. Cash is most widely used in central and south Italy, by women, young people and those with the lowest incomes; students; the unemployed and, crucially (as we will see) the self-employed also tend to use cash more intensively.

(By contrast, people with higher levels of education, more income, the employed and rather interestingly pensioners make greater use of non-cash payments.)

Why would the new Italian government want to increase the use of cash? Is it an issue of national resilience, as hinted at in the recent story from The Times concerning the sorry tale of a PR consultant and her family who were on holiday in Cinque Terre, Italy, when a storm cut off the power in the town for 24 hours. This took down the POS terminals and ATMs so unlike the fortunate Ms. De Franco, who had cash on her, many people were stuck. She says of the ordeal, “My husband sometimes doesn’t even take a wallet because he pays on his phone”.

Begging the question of why retailers couldn’t take contactless payments using their mobile phones or take card details for later manual entry or take IOUs from people that they knew in the town, or whatever, I doubt that disaster planning has much to do with Ms. Meloni’s plans which are, of course, to do with politics and not economics.

Small Starts

Ms. Meloni says that “cash must be king” and told the Italian parliament that “the only legal currency in Italy and Europe is the paper notes issued by the European Central Bank” and that electronic money is not legal tender (which is true everywhere but, as we all know, does not matter) and it is a form of private money.

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Indeed it is. But so what? Well, Ms. Meloni’s policy is aimed at her small business supporters who object to the commissions on card payments, agree with her that merchant service charges are an “illegitimate present to the banks and financial firms that sell these services” and, I don’t doubt, agree with her view that financiers in general and George Soros in particular are the shadow puppet masters of the deep state and manipulate the political system to enrich themselves.

(Frankly, whenever I see that kind of focus on George Soros, I naturally hear the antisemitism alarm bells ringing, but that is another issue.)

Lorenzo Codogno, a financial analyst (and former official at the Italian treasury) reinforced my suspicion about the underlying reason for the dash to cash, saying that “I suspect this is also linked to pressure from retailers who prefer cash because it gives them the flexibility to avoid tax”, a view supported by political consultant Wolfango Piccoli, who said that the new right-wing government is listening to "groups like taxi drivers, who you can never ignore in Italy — this is a good budget for tax dodgers”.

(There is good evidence to support this view, by the way. Six years ago electronic payments became mandatory in the hotel and catering industry. As a result, declared revenues from those businesses rose considerably, along with their tax contributions.)

This is why, as you might imagine, the plan has seen some pushback from the central bank precisely because of concerns about the black economy and the scale of tax evasion in the country. Italians evade around €100 billion in tax every year, which is around double the rate of tax evasion in northern Europe. For comparison, in Britain the “tax gap” is more than £30 billion and around half of this is down to sole traders and small businesses not declaring cash income.

Cash Costs

I spent a day in London this week. I had no cash and no need for any. I bought my train tickets on my phone, used a contactless wearable (a ring) for the bus and the subway and coffee, paid for lunch with Apple Pay and bought drinks the same way. When I stopped in at Orc’s Nest to buy some sundry Dungeons and Dragons items, I again paid with Apple Pay, as did the person in front of me.

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The restaurant that I went to does not accept cash at all, which is becoming normal in London. As an American Banker piece on the topic pointed out, restaurants give three main reasons for this:

At the La La Land Kind Café in Dallas the main reason was for sanitary purposes. The owner said “I’m a bit of a germaphobe, and cash is a very dirty thing. I wanted to keep it away from where we prepare food and drinks”.
At the Sky Rocket Burger a couple of miles away the main reason refusing cash was crime. The restaurant had had two break-ins when the register was stolen.
At the nearby Serious Pizza an important reason for the move away from cash was to move the line quicker. I assume this adds a fair bit to the taking. I can remember talking to a pub owner in the early days of ceaselessness in the U.K. and he told me that when potential customers see a line, they just walk past.

As far as I am concerned, they can take what they like in payment. But that’s not true in some places I mentioned. New York, for example, where the city has imposed a stealth tax on merchants and forced them to accept cash.

Why, you might wonder. Well, Vilda Very Mayuga, the commissioner of New York City’s Department of Consumer and Worker Protection, says that “It’s not for the business to decide who they want to serve”. Presumably they have to serve people with no shirt or shoes as well. But does this mean that the Department of Consumer and Worker Protection will be prosecuting the cash-only cafe in NYC that discriminated against me when I was last there because I only had cards? Will the Department of Consumer and Worker Protection be paying the $3.50 it costs cash-free people to get cash out of an ATM in order to buy things in a cash-only store? Will the Department of Consumer and Worker Protection be paying the extra costs incurred by the ice cream van that now has to install a cash draw and go to the bank to deposit the cash? Will the Department of Consumer and Worker Protection pay the extra insurance that merchants have to pay for holding cash on the premises?

There are other jurisdictions beyond New York and El Salvador looking at imposing compulsory tender laws. Even the Norwegian government is planning a proposal to force businesses in Norway (where many see cash as useless, with some businesses already refusing to take it, and most people haven’t even seen cash for years) to accept cash payments.

Should we really be imposing a stealth tax on merchants by forcing them to accept cash any more than we should be forcing them to accept Bitcoin or, for that matter, cards? Should we be forcing banks to keep open branches to accept cash and install ATMs everywhere to dispense it?

The answer is, as I wrote in the London Times this weekend, no. People seem to think that cash is free, but it really isn’t. The cost to merchants is significant (which is why an increasing number of them don’t take it) and the cost to society should not be overlooked.

The APPian way

I suspect, then, that the merchants’ dislike of card payments has as much to do with tax avoidance as it does with merchant service charges. Nevertheless, these Italian merchants have a point. They need an alternative. But what should that alternative be? Risk expert Wolfgang Piccoli was quoted in that context saying that “Europe is well aware that Amex, Mastercard and Visa are all American. It doesn’t have a credit card company and that’s a problem”.

Cards? Really?

That isn’t the problem. We don’t need another credit card company and it is a fact that Europe has failed to develop an alternative to Visa and Mastercard many times. There are a number of reasons for this, but one obvious one is that Visa and Mastercard work very well indeed. Even using new technology such as biometrics or blockchains or whatever it would be something of a mountain to climb to try to create a card payment scheme to compete with them.

No, the problem isn’t that Europe doesn’t have an alternative card scheme. The problem is that Europe doesn’t have an alternative to cards, which is why “Le Third Scheme” should be based on the things that Europe does have: Open banking, instant credit transfer, smartphones and payment institutions.

(With this in mind, I was pleased to see that the European Payment Initiative, the EPI, abandoned its plans for a card scheme — which I always thought sub-optimal — and decided to focus an account-to-account instant payment solution (A2A) for all kinds of use cases, all through a wallet. There is an interesting synergy here with the European moves to develop a common digital identity service and euro-wallet infrastructure, but that’s a topic for another discussion.)

These technologies and the regulatory structures around them are a practical way for retailers to change the cost-benefit equation around retail payments. Moving to in-app payments in the context of a better customer experience that delivers more data at lower cost. This is one of the reasons why I found the recent announcement from Sainsbury’s, one the U.K.’s largest retailers, who are going to use Checkout.com to revitalise their SmartShop app so interesting.

The new functionality will allow customers to pay for their shopping without having to visit a point-of-sale (POS) at all. They will instead pay using the app on their smartphones. Taking the POS out of the payment loop makes it vastly easy to offer different and better payment solutions to consumers.

Instant Solutions

This is not a purely European trend, of course, since some US retailers have already been encouraging shoppers to try various forms of “pay by bank” options as alternatives to payment cards (by, for example, using Plaid to link the retailers to customer’s bank account) and many observers expect to see a significant increase in the use of such options in the coming year.

McKinsey report U.S. growth rates for instant payments of more than 60% (admittedly from a small base) and suggest that "there remains room for a breakthrough that sparks an even higher U.S. growth rate”. That might be sooner rather than later, because I am pretty sure that the impact of FedNow, the U.S. instant payment network which is due to be launched later this year, is underestimated in the retail context. As noted by The Economist amongst others, retailers have every reason to switch from paying card issuers to provide incentives to the card issuers’ customers and instead routing transactions account to account and providing incentives to their own customers.

This is just as true in Italy. Rita Camporeale, Head of Payments Systems at the Italian Banking Association (ABI), has said that the pandemic already accelerated the embrace of instant payments in the country and she has pointed to new use cases emerging among SMEs hoping to improve their cash management practices, initially using the service to move money between their own accounts. As more and more businesses connect to instant payments, the pressure to use them in retail environments will surely grow.

At the retail level, there are already two popular payment methods to compete with cards. Bancomat Pay (run by Bancomat, which operates the domestic card scheme and many of the country’s ATM machines) and Satispay both offer mobile apps that allow users to connect their bank accounts with their mobile phones in order to make A2A payments. These can be used by merchants as an alternative to cards already and in some markets (eg, Sweden, where more than eight million consumers and 300,000 businesses already use Swish) we can see A2A volumes building.

The speed of A2A aside, there is another factor that might accelerate adoption and satisfy the concerns of key Italian stakeholders, and that is privacy. As Diederik Bruggink and Alessia Benevelli from the European Savings and Retail Banking Group wrote in their interesting paper on Instant payments and cards: Apples and oranges or a possible substitute? in the Journal of Payments Strategy and Systems 15(4): p.398-409, one of the key enablers for a flourishing instant payments sector might be privacy. Using account-to-account payments via wallets, where the transaction details are conditionally anonymous, might address European sensibilities around privacy and data protection and meet the concerns of customers who prefer to keep certain transaction details confidential.

The Path To Retail Instant Payments

I rather agree with Andrew Marshman at FIS who suggested that an open, industry-wide overlay service with interoperable standards could be the way forward, which is why developments around the Single Euro Payments Area Payment Account Access (SPAA) scheme from the European Payments Council (EPC) seems rather interesting. The scheme covers the exchange of payment accounts-related data (eg, between a merchant and a consumer) and the initiation of payment transactions. It is interesting because it leverages investments already made for PSD2 compliance and goes with the grain of the European Commission (EC) legislative proposals around EU “strategy autonomy” in payments.

The SPAA scheme rule book has just been published and makes for good reading because it was developed collaboratively by the retail payment industry and the users as represented by the Euro Retail Payments Board (ERPB). While there is a lot of work be done to turn these standards into a business, they are certainly an important stepping stone from open banking on towards open finance and eventually open data. The potential for new products and services built on rich data and instant payments is real and significant.

In the future, a retailer’s QR code might trigger customers’ smartphone wallets to then push the money directly from their bank accounts while keeping their personally-identifiable information safely locked up in a bank vault. Who knows, perhaps in a few years’ time the customer’s wallet might send central bank digital currency across the internet from her wallet into the retailer’s wallet, leaving banking networks out of the loop altogether.