REGULATION

Michael Salmony 0:02

Welcome to The Payments Trilogue, where three seasoned professionals discuss payments and more, for Europe and beyond.

Michael Salmony 0:12

Okay, welcome everybody to this new episode of the Trilogue, where this time we're going to look at regulations, especially in the EU, how well we're doing that and maybe compare a little bit to other approaches and how maybe to do it better. So, Gijs and Ralf, good to see you again. What do you think? The EU's roughly got it right. Do you like the way we do regulations in Europe?

Could I let Gijs go first? Well, it's also a matter of is the glass half full or half empty? And whilst I don't have a complete overview of how other legislators do it elsewhere in the world, my gut feeling is that we seem to be doing pretty much okay -ish in our regulatory processes, but also the outcomes.

It has disadvantages, there's a lot to be said, but as a general feeling, think also because you look at the PSD2, look at GDPR, we seem to provide a lot of inspiration for other jurisdictions, which we would have to take as a compliment and as a sort of confirmation that we seem to be doing some things right, not everything, but at least some things we were doing right.

And of course, that is a result of a legislative process in Brussels, which is sometimes tedious and cumbersome and thorny and takes tremendous amounts of time and resource. But let's say in the democratic process, ultimately with the European Parliament and the Council, based on the Commission proposals with all the input of stakeholders, some somehow produces results.

that make everybody, and there I quote somebody from the European Banking Authority for a long time, equally unhappy or equally happy, that is, and then we all move on. So I think from a holistic perspective, the approach, however, with disadvantages, of course, there's no such thing as the ideal, simple thing that produces ideal results for anyone because it has to be compromised. I think we're doing

Michael Salmony 2:37

pretty much okay. Okay. I mean, you made a couple of really important points. think one is that we actually generate in Europe quite a few legislations which seem to become the models or the blueprint elsewhere, right? So privacy and PSD2. So that shows we're doing something right. But it is quite a complex process. Yeah. Would you agree with that, Ralf? Is that a generally fair assessment?

Yeah, I think many see this as a good thing that Europe seems to be always ahead there with tackling regulation in new areas like GDPR, data privacy, open banking, open finance, identity, eIDAS, instant payments, you name it. I mean, we're always first.

I guess there is an advantage of having sort of a first mover advantage in regulation. and now the big but, think it has to be, if you're a first, you really have to be very light on it and you have to be very technology independent on it because otherwise you're restricting it far too much. So it's about getting the right balance. I'm not against being

first in regulation worldwide, but I'm against being too prescriptive. And there, I think Europe has a bit of a middle way there in the level of prescription. For my taste, it's already a bit too much. So I would favor much lighter regulation, much less technology dependent or prescripting and

Yeah, so that would be sort of the right compromise that I would favor. I mean, while we're on it, just to take another example here for the UK, which is much more prescriptive. So I think that is not really where that shouldn't be for us a role model to the country. I think they're really going far too

Michael Salmony 4:46

much into prescribing this and that on a technology side. it often reminds me of like, you know, I think you mentioned before the like the Soviet Union car design. And so so I'm not expecting too much success there, I must say. then the but I guess in summary, it needs a innovation and competition needs enough space for maneuver. And that is therefore you

If you are first in regulating, you've got to be really, really light on it. I mean, you both seem pretty positive about EU regulations, plus minus sort of technological independence and the complexities. But surely the goal is not to produce good regulations, but to provide new companies and new solutions and make the world better for consumers and businesses.

So isn't maybe a sort of more market driven approach rather than more regulatory driven approach? Might that not be more opportune? Yeah, if I could add on to what I just said. So the advantage of regulation is that it gives more certainty. It basically defines like a frame where you can. as a fintech, for example, you have more certainty what you can do, what you cannot do.

So that has its importance, but again, so it's the amount of space that is still left there. So it's not about, I think getting a frame is good, but what we need is a very large frame. Yeah. You're already narrowing it down to your perspective as the more FinTech -y guy, but to stay at the more holistic level, of course, if I were a regulator, I mean, it's not easy because

Indeed, as you said, Michael, you don't regulate because you love to regulate, even if we think some people in Brussels do. But if I mean, if you're regulated, that's that's what you do. Right. But it's what do you regulate and how do you regulate and when do you regulate? So it's not that any regulation just happens or comes out of thin air. I mean, there's a whole process of strategic analysis. And we always have to keep in the back of our minds that we

Michael Salmony 7:09

The ultimate goal is to create a competitive economic union. We are an economic union. want to try most of the legislation in Europe is aimed at improving the internal market, which provides the scale like they have in the US, which would provide a fruitful ground for companies to thrive with providing good services with a lot of scale and happy consumers by the end of the day. That's why we're doing it.

And then, of course, it's the why, the what and the how of this regulation. That's where the differences are. I think that the continental European way is more trying to look ahead of what developments, new innovations might mean and already try to imagine where it might lead to and try to sort of preempt the negative sides of developments, whereas in the more

Anglo-Saxon world, it's the more laissez-faire thing. So just let it go, let it happen, let them innovate, even if consumers might suffer. And when it's a little bit too late for our European taste, then we will regulate. And then it's pretty harsh regulation like in the UK and in US, where we have the more soft but more anticipating regulator approach, I think. And it's not a matter of good and bad, but I think that the balance

And how far do you go and also how prescriptive because I wouldn't always agree with Ralf. It has to be technology neutral. That's one of the mantras of the European Commission. It is not choosing or mandating any technology and basically because they can't. And sometimes we would love to have a more prescriptive thing because if we do agree as market participants that we wanted technology A or B because we really believe it's the best and the commission. sorry.

We can't prescribe it and we can beg them, please prescribe what we think is the best option from a market perspective. Sorry, you can't do that. We can't do that. So there's also a downside to that. That sometimes as a market participants, you would love to have it mandated with what we are doing that everybody had to do it that way, because that would be easiest to have economies of scale and pan -European approach. But that's another dilemma we have to cope with.

Michael Salmony 9:33

So I agree to a certain extent, but there's much more to it, Ralf, than you just said, I think. You put in some interesting nuances there. I I particularly like your point about the US or the more market driven geographies sort of doing the regulation afterwards when they discover something has gone wrong.

I mean, for example, privacy for me is an example of that. was a time when everybody in America said these crazy Europeans with all their GDPR. And then they discovered that their data was being used in all sorts of ways. And they said, maybe we also need a privacy legislation or the other one not in financial services. The EpiPen, I think, is the classical example, which just driven by market forces costs $600.

which meant that people who had allergic reactions died because they couldn't afford the EpiPen until the regulator stepped in and now it costs $60 instead of 600. So if you regulate afterwards, you can have an impact, but do things go wrong for a while until that new legislation happens? And we in Europe try to get things right before even the market has developed. And I know you struggle with that sometimes too, Ralf, right? You say some things are regulated before we've even let the fintech, for example,

flourish, right? And that stifles innovation. Would you? so I mean, I do agree that there is, of course, luck in the US taking more risky approach. And yes, there are there's a lot of downside to it. And there are casualties, there are whatever there. This results in problems and all of that. But it also results in companies that are taking a worldwide lead, because they were able to flourish and grow big time.

So if I compare valuation, say on open banking in the US versus Europe, it's, well, you have to be jealous because I mean, here in Europe, had prior to PSD2, we had a really flourishing TPP industry. And yes, whilst there was a bit with new regulation, there comes a certainty, there comes new players, there are new ones getting into the market. There is some investment coming because of

Michael Salmony 11:42

more certainty and we all know, okay, now it's legal, at least we know that, but it then comes with too much restriction. And so therefore you can't do that anymore, you can't do that anymore, you can't do that anymore. And suddenly we have these US players coming up again who are still allowed to do all of that. And to some extent, as long as they don't need a license in Europe.

And yeah, or also having from their own home situation, much more investment, much more money coming in, much more growth that they could have. yeah, so I have to look at that with jealousy. You both raised the point of... Sorry. ahead, Ash. Of course, I'm equally jealous because how can it be? But then if you look at more fundamental things, of course,

How can it be that an economic area like the US compared to the EU, let's say with roughly the same amount of inhabitants has such a huge difference and that we have not been able to grow with basically the same amount of people build the same big platforms as the GAFAs they have been able to build in the US. That's nothing to do with FinTech, has nothing to do with regulation, but one huge big single market that they are...

that they have profited from and which we are trying, struggling to create. And I fully agree that the extremely deep pockets look at the market caps of the companies we're talking about, the US companies. They can basically buy anything, do anything, buy any fintech and they can wait and see what happens in Europe and jump in when things are sort of playing out a little bit and they can see where it's going and then they will just jump in.

buy stuff because their pockets are so extremely deep. But there are two different points you raised there, Gijs. I wonder which one of those is more true. You say on the one hand there is a single market in America, on the other hand you say they have deep pockets and more investment, right? The second one I can completely follow but the first one I'm not so sure, right? There are many different states who have different laws, different taxes, some even speak more Spanish than English.

Michael Salmony 14:01

We know the payment system is incredibly fragmented in America. Is the single market argument really strong? I think so. Well, at least one currency, they all have the dollar, right? So that's to start with. And yes, I know there's all sorts of what we've been seeing very recent examples that a former president cannot be taken, take part in new elections in some states. So there was a lot of

anecdotal stuff on that state level, apparently. And I'm not an expert in the federal laws and state laws to what extent that helps or doesn't help. But still, I would think they all speak, well, at least Spanish or English. I think it would be fair to say it's a more homogeneous market, at least with one currency, basically one language for a very long time. And this has produced tremendous economic results.

which we have not been Can I just give you a counter argument? There some people who say that PayPal was actually generated because there's such fragmentation in America. You can't send money properly from one bank to another because a lot of them are not connected. There is no IBAN So the industry then created something like PayPal. So it isn't actually because it's all homogeneous and it's all the same and it's all a single market. It is the innovation that happens in America and the investment and the creativity and the

and lots of other things that are the reasons why they're so successful in these GAFAs and all these world conquering companies appear. Feel free to disagree.

No, well, I think I do agree, but we know fintechs create value to where friction is. Friction is left by the market and indeed PayPal has solved that friction that no regulator at a federal level thought was a problem that was worthwhile solving at the federal level. So we need one retail payment system across, well, it's coming up now with FedNow, it's changing a little bit, but a few decades ago, probably nobody cared.

Michael Salmony 16:12

that they still had to send checks from one state to another and then PayPal sold a lot of friction and grew tremendously big. So aren't your fintechs conquering Europe and conquering the world? Well see that last thing conquering the world because I don't yeah of course internal market and the bigger that is the more

advantage you have. yes, so I think it's generally good that in Europe, we're doing that we're growing together into a single market. And I also think that we're not that far away anymore from how the US has developed into that. But the big difference is not in that whole market is it is on the global impact on the global perspective, because the freedom you have to develop at home, that is then what gives you the lead worldwide.

So, and all these bigtechs, they are not bigtechs because they are big players in the US. They are big players worldwide in every single country in the world, maybe except for North Korea. So that is what makes that real difference and trying to conquer the world, you've got to have the freedom at home.

and the liberty there to do all of that. that's what I meant when I said that. I mean, the US, I think that they got it right in many or most cases. and I don't know, if I watch these rocket launches there, when they celebrate, when it explodes, not in the first second, but only after half a minute or whatever,

That will, you wouldn't see that here over here. Well, let alone we are not even having the start of that much rockets. anyways, you know, it's that freedom for innovation that is being given that, well, we could only dream of here. You think that's part of the complex legislation? I mean, I know you're, we talked about before about the trilogue, right? Indeed, our series is called the trilogue.

Michael Salmony 18:18

that it's quite a complex process, you know, getting an agreement in our very democratic, least structured Europe, whereas we don't get I get Elon Musk to lay down the rules. Do you think that's a good idea or a bad idea, Ralf? you're what is a good idea. This trilogue, right? Where you commission and parliament and council and 27 member states and you know, and seven regulators, they all agree on the way forward. Okay, I got it.

Well, generally speaking, I think this trilogue or process is something we can be proud of because I think this gives the whole thing a founded and, how should I say it, a very, well, a great foundation and a very democratic foundation.

So the these principle of having well the sort of specialist in the commission come up with a proposal about whatever some certain area, but then have the co-legislators, the parliament and the council to amend to propose to discuss and to have in the end a trilogue process like what we have here. So I think it's a good thing to have a trilogue and to have different perspectives and definitely have the different legislative

parties here to coming together and having to battle it out somehow at the end. it is something that is principally very good, but again, but it takes time. And it is that where I see the problem. Now we just went through this PSD2 review. I'm sure we'll discuss more about that, but it's

Yeah, it's good. It has come relatively early. Other laws are not revised that quickly. And still, it all takes time. you have, which makes it again, it emphasizes the importance of staying technology neutral, of not hampering innovation in any form. Because if you have this dependency on year long or half decade long processes,

Michael Salmony 20:40

that could stifle, that is I think what would or could and actually does stifle us to some extent. And Gijs, would you agree with that? Well, I'm hesitant. Probably we're overestimating the legislative process in the US if we compare there. Because Ralf, you're probably not an expert like me on the intricacies of the US legislative process, but usually a legislative

proposal process starts with a bill in the House of Representatives and anyone can can do that and you can gather some friends to support your bill and then you vote and then it's progress to the through the Senate and if the Senate votes yay, if the yeas win from the nays and then the president signs it and that process can be pretty lengthy as well. So although it's different, it's not that different. I think and I don't believe it's any

better or more flexible or whatever than we have. It's just different. But I'm not sure if this produces better results to your taste, as you seem to imply, Ralf. And I know you're an impatient person. That's why it always takes too long for you. But it would probably be the same in the US. It would also take you too long there. That's the problem with the legislation in a democracy. And I still would contend that...

both the European Union is a federation, well, it's not a federation of democracies, as is the US is also still, I believe, democracy. And that's the price you pay for democracy. takes time. Yeah. I mean, you see Biden now introducing open banking and the Consumer Protection Bureau wanting more data sharing. So you do see things happening in the US. But maybe we can take an example closer to home in the UK, you know, the competition authority.

said we want more innovation, more competition and therefore more data sharing and things like open banking. They set up an organisation, they got the funding, there are only a handful of banks that need to be got in on this to cover 80 % of the market. They can move at a very different speed and we see at the moment that they are doing really going ahead, although we invented it in Europe, they seem to be winning the race at the moment. Isn't that a bit of a

Michael Salmony 23:02

Well, if I may say that, I think you're coming here a bit from the regulation to the supervision as well, because it is of course a great driver for competition if you have the competition authority being in the supervisory space and not like in our case here where we have basically the bank regulators supervising also the fintechs now.

as many of them have a prudential supervision mandates, etc. Basically, their existence has been there to make sure that banks are not getting into trouble. And what we are, well, not that we want to get banks into trouble, but we are troubling the banks, of course, with new competition. And hence, it's not in the mandate of all these supervisors to actually help us or push us or do more. They're trying to push us back.

They're trying to push us back into a smaller box. And that's very unfortunate. So it's that other aspect of regulation that you need some supervision afterwards. And that is the other half of the problem. So you should be happy about that. Cutting corners, Ralf, I understand your frustration. But you have to take a step back why all that is the case. Supervision is there for no good reason.

We want financial stability and we want to safeguard people's life savings. That's the whole idea behind it. And of course a stable euro and then blah -de -blah. But from the user's perspective, it's for no good reason. And it's not the fintech or the institution that's being supervised. It's the activity that's being supervised. of course we've seen, especially because of the whole competition argument, first we did not have any payment services directive. Then we had the first payment service directive.

And why was that? Because there was not enough competition between the incumbents. That's why payment institutions came about. The first step, Ralf, you know that. And as things go, regulators need to make analyses and then say something is still terribly wrong or not good enough. So we will have another round of legislation, more innovation, more competition. We will have the second payment service directive. We will have access to the account.

Michael Salmony 25:23

to help the poor incumbents open up a little bit more to the newcomers and now we have PSR and PSD3. competition and innovation are the key words in all the review processes over the past two decades of the European Commission and that it needs to move on. I don't believe, but there's always a price to pay, you know that. If you want to play the game, you got to know the rules. If you want to...

play that game, the financial services game, there are certain rules and there are supervisors. The only thing is that there has to be a level playing field between all entities that provide the same service, same activity, same rules, same supervision. That's the whole story behind it. And if you don't like that, maybe you're in the wrong business. No, but you say same rules, same supervision and same activity, but we do not have the same activities. So where we do not have the same activity, we need different rules.

where we are not touching money as a third party provider. We different. We should not follow the same rules. so for example, there is just one example where PSD2 is mixing up the general thing of payments institution with TPPs being part of that, whilst they are significantly different in many aspects from other types of payment institutions. So that is

already mixing things too much together and therefore restricting the activities of specifically TPPs much more than necessary. as I said, well, just one example, but I'm sure we'll go into PSD2 and all that in more detail. So I'll, yeah, we'll wait for that. We can have a discussion on that, but as a general principle, there has to be same activity, same rules, same supervision, right? Level playing field. And if that's not correct, it should be corrected.

That's another story. If that plays out well from your perspective in the PSR, we probably will have a discussion on that. But as a matter of principle, it should not be a problem. That's the idea behind it. We'll have another session on that on particular topic extra. But it's already good to see the different points of view from one from more from the banking side and one more from the

Michael Salmony 27:42

and take a side on where regulation is going well and where it is. I'm not just banking because our association also represents payment institutions, but it's more the traditional supply side of payment services that would be better than strictly the banking side because I don't just do credit institutions. Okay, fine.

But you are more the more the traditional side and Ralf represents more the that's right. OK, we we've basically come to the end, I think, of our episode on regulation. There's still a lot more to be said. But I think we sense a general sense that maybe Europe isn't doing it so badly. It has roughly the right level of legislation. It tries to preempt problems before they happen.

it legislates the basis and doesn't go into, I mean, there are some areas where they, where the regulator will even do the API hubs and do the wallets themselves. We don't do that. We leave things like that to the market. So I think the level, we have some disagreement on whether the, is too detailed sometimes, too technical, or whether all parties are being treated fairly, but that's part of the debate.

and also maybe this mechanism that we have. So I think there's plenty more to discuss, but I think I would begin to close this session now on regulation and hope that we will... One last quick perhaps. guys. Ralf triggered that on the competition law thing. I can recall a former competition law, competition commissioner, it was still called DG MARKET No, not DG MARKET, DG COMP still.

Mr. Almunia once said in a general assembly of the European Payments Council that the commission was trying to achieve its goals through, and that was exact words I still remember more than 20 years ago, through an intelligent combination of regulation and competition law enforcement. And that really says it all for me that you have to have intelligent regulation.

Michael Salmony 29:59

and then leave it up to the market to really do it. So you have to provide a legal framework that works well for market participants. And then you still need a competition authority to where the market has to agree on stuff, make horizontal agreements. You have to have a very good competition authority that looks after that all market players behave in conformance with competition law. that ideally that combination should provide the best results.

Okay, Gijs thank you for that. Ralf, do you have any urgent last thing to say? There is another topic in this space which is about the sovereignty that we are and how to achieve that with regulation, but maybe we'll take it in another episode. I think that's a topic in itself because that's going to need a bit more time than we have now. Okay, so I thank you, Gijs and Ralf, for the lively debate and hope people watching and listening to this enjoyed it.

and will join us on the next episode where we drill down into yet more of how to make Europe payments and finance great again.