PAYMENTS INFRASTRUCTURE vs. SERVICES

Michael Salmony 0:12

Hello, my name is Michael Salmony and I'd like to welcome you to another episode of the Payments Trialogue. And this is a bit of a follow on from the last one where we spoke with Eric Ducoulombier. And I made some assertions that my colleagues didn't always agree with. So we thought we would actually delve more into that because it's much more fun when there's a bit of disagreement and one hears different points of view. So the point that I tried to make last time is that I have the impression that we in Europe

are too focused on the rails, on the low levels. I've known this since my IBM and IT days that the DG CONNECT was always obsessed by putting fiber everywhere. And nobody thought about the high level services. And maybe that's part of the reason why Europe is so bad at digital services. The digital services all coming from everywhere else, because everybody's only thinking about the rails and the plumbing.

And I think I see the same in payments that we're completely obsessed with putting the rails in place, instant payments, which is lovely and everything. But then it just means that the American conglomerates slide over Europe very conveniently using our rails. And they have built all the higher level services, the Google pay, the Apple pay, the PayPal's, the cloud services. Everything is coming from other people. And we are just too focused on the rails as opposed to America.

where they're not too fussed about the infrastructure, the payments infrastructure is pretty bad compared to ours, but they've developed these global champions. So that's the point I was trying to make. Maybe I didn't make it very well, but Javier, for example, disagreed with me on that. So Javier, here's your chance to set me right.

Javier 1:56

Okay, well I see two perspectives to the matter you are just proposing. First is whether we should have gone

to the building of the infrastructures or we had any other chance or priority. I think firmly that the only choice we had was to build a new infrastructure if we wanted to create a single market. So the only way to get into the way to building the single market was starting by building the foundations, the infrastructures in payments. I'm talking about payments.

because I do agree with you that the problem with European champions not only applies to payments but to many other industries as well. And there are reasons why this is wider than we can see in finance. But nevertheless, focusing on payments, I think that the only ⁓ way to do something ⁓ relevant and to develop something European was to start by building the foundations, the infrastructures. And that's...

where we are still doing. We are still bound to that endeavor because we have not finalized. And yes, I see that we are lacking many other aspects. I do agree that we don't have international champions, that we don't have worldwide services, that we don't have global solutions. That is absolutely true. But ⁓ that is not due to the fact that we needed to start with infrastructure, in my view.

We needed to start with infrastructure. Then we have other problems. One of those being that we are unable to create these global solutions. And this, think, is not something to blame the payments industry. It's something wider in Europe. It applies to probably all industries in Europe. It's this, way we have created the European Union is still not completed. For instance, in banking, we are still far...

from the banking union, you need a banking union, a very strong domestic market, so to speak, to really be able to develop global solutions. We are not yet there. We have ⁓ to evolve a lot if we want to compete in that league. But this is not something that is missing just in payments. It applies, I would say, European weight to many other markets and industries. Why is that so? Well, it's the...

peculiar way we have landed capitalism in Europe, the way we create regulation, the way we behave, the way our culture has evolved. We are not, I would say we are not proud when we have these national or very successful ⁓ winners. We tend more to be egalitarian, to distribute rather than to create great champions. That's our culture, our politics. And as well, I think there are some...

elements missing in the way policy is developed in Europe. We have many times criticized that there is no really policies pushing for the development and the unfolding of many businesses. It's more about distributing to the last consumer, whatever is created. And I think we enjoy advantages there. Consumers have an easy life, for instance, in payments in Europe vis-a-vis many other

jurisdictions, but we are not able to create ⁓ strong businesses. It has to do with this lack of policy and how it is not enforced because we are there missing as well many elements to really create an enforcing environment in which businesses can evolve naturally. I think it's...

this kind of European wave which is what creates that lack of ⁓ international solutions. For instance, even governments, would claim, are more interested in defending national entities rather than creating a truly pan-European one. So if that's the case, certainly we will not compete in the global world with national European country champions.

Michael Salmony 6:23

I mean, that makes sense. And you've added a lot of other dimensions, which I certainly skipped over. And I hear a little bit from you that it's sort of part of our culture and part of the way Europe is structured. It's very federated, that we don't really want a global champion, right? Everybody is looking more for their local thing. Is that true? Is that, should we be doing that?

Javier 6:50

I think that's the reality. I don't know if that's how we should be. But certainly, for instance, in payments, and I guess that it happens also in many other industries, the mantra is that you only can price above cost plus a margin, and that's all. It's not based on value, it's based on costs. And you are capped in your businesses by... pricing

⁓ and this applies certainly to payments. Everything must be just cost plus a sensible margin, which I don't think that really helps businesses to be ambitious, to be challenging, to be really looking forward to create something global. They just will apply for solutions to get those margins and to survive, but not to become much bigger and...

to reach the globe.

Michael Salmony 7:47

So Javier is saying there's a lot to be put at the foot of the regulators and that they're stifling innovation. But maybe I can ask you, Ralf some people say it's actually the fintech's fault. They're not ambitious enough. They are just, especially in Germany, which is all sort of engineers, they like to do the plumbing and add a little bit of sort of invoice plug-in for some ⁓ solution instead of thinking big and really trying to transform the world like the fintechs in America.

where they're doing and create completely new worlds. Is that unfair or would you, how would you see that? I hope you think it's unfair.

Ralf Ohlhausen 8:25

I think it is unfair. Yes. Because

I think from a fintech perspective, we're more forced into this infrastructure first thinking. I mean, Javier, you had some fair points there, but you know, SEPA was largely done by 2014. Even instant payments infrastructure.

was available by 2017. So we are talking 10 years and more since basically the plumbing and the infrastructure is there. so the question at what point do we stop say infrastructure first and then we'll do services later. And

Even then, did we really need the perfect infrastructure in the first place? I mean, we have some European players, take WISE, Based in the UK, I think now, but anyway, so ⁓ they built like a 10 billion euro business now on top of imperfect rails, SEPA, slow SEPA, not instant and all of that. Of course, we all want the instant, but you know, you can do good business without...

Javier 9:23

.

Ralf Ohlhausen 9:46

that instant. And if you solve a customer problem, despite the infrastructure, then that's exactly what all these American companies are doing. So if we accept that, for whatever, 2000 to 2010 or so, it required some infrastructure focus, but now it's 2026. And we've been doing this infrastructure first for, well, a quarter of a century, really.

Javier 9:55

Okay.

Ralf Ohlhausen 10:13

So when does second arrive? I, and where I sit, it's always another infrastructure project that needs completing before we can talk about services. And if I may, I could just go into all this discussion here with the what is it the, the open banking being the being actually the perfect ⁓ case study for for that problem. So we have spent years

debating on RTS specifications, on screen scraping versus APIs, on SCA exemptions, on fallback mechanisms, on enforcement

Javier 10:52

.

Ralf Ohlhausen 10:53

mechanisms. And during all that time, for example, Plaid in the US, they just connected to the banks, often via screen scraping and became worth, I think, 13 billion or so. So they solved the customer problem with, well, maybe imperfect

implementations, but in all that time, we just

Javier 11:19

you

Ralf Ohlhausen 11:20

tried to perfect the regulatory architecture. it is from a FinTech perspective, I think we've been forced into this regulatory game and changing infrastructure, waiting for the better infrastructure, well, basically waiting for good APIs and then ⁓ waiting

Javier 11:30

Mm-hmm.

Ralf Ohlhausen 11:42

for the payment certainty thing to come back that we were not allowed to look at accounts anymore. And now we had to wait for instant payments to come along to give that payment certainty again, etc. So I think fintechs are not to blame. I wouldn't say that is fair.

Michael Salmony 11:59

Well, that's a surprising answer you gave me there. Yeah. No, but I think your example from Plaid is really powerful. mean, they just solved a customer problem, as you said, right? They provided a single access point where you could initiate payments from all the banks that they connected to and didn't worry about which technology they used. If an API was available, they would use that. Otherwise, they would use screen scraping or whatever. And that's surely a very smart approach. And another example that comes to mind is PayPal.

I mean, the American payments infrastructure is terrible and PayPal just put a layer on top of it to allow a smooth, instant looking payments from everybody to everybody using email. And that was a huge success, even though the infrastructure underneath was rubbish. So actually sometimes a bad infrastructure can generate new players who then, because the infrastructure is rubbish in lots of places, then become global champions. And that's how PayPal became such a huge success.

because they papered over all the cracks in the infrastructure. And America to this day, right, doesn't have pervasive instant. They're still working on that. In B2B, I think 25 % of all payments are on checks. You know, it's a joke compared to European plumbing, but maybe we're looking too much at the plumbing. Maybe we should be thinking about the Plaids and the Paypals and the Google Pay and the Apple Pay.

Javier 13:21

Yeah, but I think I didn't make myself clear because I'm not claiming that we should do first infrastructure. What I am trying to say is that because our priority is creating a single market and this is

about integration, then a consequence of integration is that you need that infrastructure being built ⁓ anew. Had we decided not to have an integrated single market, we could have decided to do otherwise and have international or global champions. But once we had decided that the first priority was integrating the market, then as a consequence, infrastructure was needed.

Michael Salmony 14:06

But in the spirit of friendly disagreement here, which we have here today, you are saying that's a natural consequence of wanting the single market. One could say there are 50 American states and they've provided a single market by just going up a level higher and papering over the cracks. They didn't spend all the time on the... So you could get the single market by other means than just by doing the infrastructure.

Javier 14:06

And what I would.

Yes, yes, yes, yes.

Michael Salmony 14:34

And let me give you another example. iDEAL is such a super successful example from the Netherlands. They kept their old non-instant infrastructure, but just sent an instant guarantee to the merchant and then settled two, three or three days later. That's a lovely example of how you just did a higher level service and kept the old infrastructure and moved forward really fast and gave a great experience to the merchants and to the users. We could have done that across Europe, but we didn't.

Javier 14:48

Book with that.

Michael Salmony 15:03

We actually knew.

Javier 15:03

No, because the

starting point was different. It's not the American point where you have a confederation born 250 years ago and evolving naturally ⁓ during two and a half centuries. We started by being a bunch, a number, a set of different countries aiming to become closer. So the starting point is different.

That being the reality, if you want to get all those countries together, all those member states together, you have to do differently. Because it's not that we have a history of being a union for more than two centuries. So that, I think, creates a ⁓ different starting point. And therefore, you need different means to shortcut and get to this single market in a different way. But I do agree that it could have been done differently.

The only thing is that probably the other way would have been much longer in time to have a single market by other means would have been, I would say a much longer journey. But I think it all depends on priorities. I do think that in Europe, and this is coming from the governments and the authorities, the priority is not to have global leaders. It's just to have a...

a ⁓ single market, homogeneous market, ⁓ benefits to the end users, to the consumers and small businesses. That's how it works. that things could have been done differently, I agree, they could have been done differently. Probably, nevertheless, I would say that if we had not built the infrastructure, we would have been now much farther away from becoming an integrated market than doing otherwise.

Michael Salmony 16:52

I agree with a lot with what you say, but one thing I would differ, you are saying that if we had done iDEAL across Europe, that would have taken longer than if we'd done the plumbing first. I'm not sure that's true. Why do you say that?

Javier 17:06

Well, that's precisely my point. To a number of countries, you cannot impose a solution from the outside. You need to make them feel that they are creating a solution, imposing a solution. Of course, you could dictate a solution to all countries, but that couldn't be the European way of discussing together how to get to a solution. And that's why I think that the only way forward 20 years ago or 25 years ago,

was to create something new because it was impossible, politically impossible, to impose a national solution to the rest of the member states.

Ralf Ohlhausen 17:45

But if you see, common infrastructure, SEPA, did still not solve the problem or the reason why iDEAL didn't become European. We're now slowly, very slowly going through the process of trying to fit together country-based solutions, individual national solutions, which exist despite

that common SEPA infrastructure, because it's not the infrastructure, the common infrastructure that has determined that separation. is commercials, is whatever, culturally, it's other reasons why these, we are not having these harmonized systems. And if we, we could have focused on that 20 years ago, or whenever iDEAL was created, probably around about that time. So, and then just look at

Javier 18:41

Yeah.

Ralf Ohlhausen 18:44

driving it that way. But I think there are there may be a few other reasons as well, if I may, because

Javier 18:49

Well,

particularly in payments, there is another strong reason, which is that payments happen in the small region, in the closeness of the human relationships. And it's not that you have to address the big picture first. So what has happened is that PSPs in Europe, they are addressing the closest necessities and their closest necessities are definitely domestic and very

And they are not SEPA-like, are not pan-European, they are not global. They are bound to solve the what is close to them rather than looking to the big picture. That I think is... We could have known differently, but PSPs, try to solve their current needs for their actual clients, which are the ones they have close to their area.

It's not that they have to solve the rest of the Europeans problems. It's a very domestic issue and they of course they are not ambitious to solve in Spain we are not ambitious to solve the German problems. We try to solve what happens next door.

Ralf Ohlhausen 20:05

Yeah, and okay, I agree. And I also think that while this European fragmentation creating single market and so there are some arguments there, ⁓ which ⁓ will justify a bit of this infrastructure obsession, as you call it, Michael, I think I like that. That's exactly it. But there are other reasons as well. So I think generally speaking, there is some risk aversion in European policy culture. So we don't launch until it's perfect.

You know, in the US is the exact opposite. Well, you get going and then you regulate if things go wrong. We regulate before things can go wrong. And so we never find out if they ever would have gone wrong. Maybe they would not have. again, open banking, perfect example. We had that since I think, yeah, 2003, first TPPs arising. And then we had all that.

growth, at least in some of the countries where it was technically possible, where we had two factor authentication and therefore the risk was manageable, etc. That was, by the way, one of the reasons why we did not have in the UK, because they did not have two factor authentication and it was too risky to do ⁓ PIS in the UK before PSD2.

But then for everyone else, all these other countries where open banking was already flourishing, including Germany and ⁓ Austria as well, or also all the iDEAL, even on the non-banking side, this account to account was flourishing. then, at least from the open banking perspective, the whole thing was stopped with PSD2.

Javier 21:45

Yeah.

Ralf Ohlhausen 21:46

So, and then we

were forced into ⁓ completely different discussions. We had to move away. We could not provide a single click, you know, a single screen, a single whatever to the customer. Now it was 17 screens to go through some redirection flows and all that crap. So it has basically ruined the customer focus that we had before. And if I may say so, I think there is... ⁓

and coming back to regulation, actually, guess, in the middle of it already. I think we have this bank-centric policy making that, you know, infrastructure actually benefits the incumbents because you control it. They control it. So the service benefit more the challengers.

like the fintechs, et cetera. So that's where the value of service, that's where the innovation is, that's where the fintechs are playing and the banks are playing in the infrastructure. And you know, from the last episode, I'm currently having a bit of a rant against the council, but I think the council positions, so the country positions here have consistently favored incumbent interest for the last whatever 10, 20 years or so. So I think it is...

maybe even well I wouldn't actually I guess this European infrastructure focus or obsession may actually be a feature that protects incumbents not a bug.

Javier 23:16

I disagree in two aspects.

I could be closer to you in thinking that we have in Europe, we have aversion to the innocent being jailed. And we then ⁓ release a lot of guilty people because we certainly abhor the idea of having ⁓ an innocent being blamed. And that's why that permeates many other aspects. And we want every single citizen to be

the same and to have the same rights and to have the same access and to have everything. And that's why there is a focus from the authorities on infrastructure being universal and all that. That's because we feel bad if there is someone being left aside. But that's, I think, a feature of our personality. And maybe it's too extreme and we should look into that. What I don't agree is that infrastructure benefits the incumbents because that's what

didn't happen in America. Despite infrastructure being owed by somebody, many others could develop services on top of that faulty infrastructure without any problem. The fact that you have a good or a bad infrastructure does not prevent businesses to create their solutions. It's different universes, different worlds. You can have a good or a bad infrastructure, and then you can build...

good or bad business solutions, but the one does not depend strictly on the other. So you do not develop good or bad solutions because you have good or bad infrastructure. To me, does not hold.

Michael Salmony 25:04

Well, maybe we could spend a few more minutes before we finish just trying to summarize what we learned and maybe we're looking at some recommendations for the future. ⁓ I mean, it sounds to me I've not had any reason against why the regulator should not have mandated iDEAL across Europe or maybe even the EPC brackets have you your old club could have implemented iDEAL across Europe that would have allowed people to.

send money to the merchant instantly. It looks instant to the merchant because the guarantee arrives instantly. The goods could be shipped instantly and that works perfectly without doing the instant plumbing underneath. And so either the regulator or the banks could have done that. And maybe we can reflect a little bit on how that should work for the future. Now that we have an infrastructure, what's the next thing that the regulator should mandate or the banks should do?

⁓ without doing the plumbing but to actually force higher level services. Anybody have any thoughts on that?

Javier 26:08

But that...

Yeah, but that, think that's another issue because we are far beyond the idea of guarantee. Now, Europe, as we know, we enforce, we require settlement to be done, any instant payment to be final, strictly speaking, by a legal definition of finality. And is that necessary? Certainly not. Nobody's asking for a...

Statement 3 final!

Michael Salmony 26:37

Sorry, I didn't explain myself well. I meant just this paradigm of trying to do something user oriented and not doing it coming first.

Javier 26:42

Yeah, yeah, yeah. I fully, in that sense, I fully agree

with you. I fully agree with you. There is no need to have this instant settlement. There is no need to have instant finality. But that's where we have gone. And that the only one who was benefited with that was the European Central Bank.

Michael Salmony 27:00

Hmm. You know, is there something in fraud or maybe?

Javier 27:02

So that does not benefit

the PSPs, that does not benefit the businesses, that does not benefit the citizens. It only benefits the European Central Bank, but it has been enforced.

Michael Salmony 27:15

Okay. Now I'm just trying to think out loud. Is there anything in fraud or in AI or in stable coins or in any of the other topics we're talking about where we, where we're again, going into the plumbing and the bottom layer and not thinking enough about the user.

Ralf Ohlhausen 27:16

Well done.

Yeah, exactly. know, stable coins, think what's striking about them is that, you know, they didn't wait in the US Circle, they didn't wait for regulatory clarity, they didn't wait for a perfect framework, they just built the whatever USDC on existing blockchain infrastructure, I guess, and got it in the hand of users and then engaged with the regulation afterwards. So they basically put

We did 30 plus billions, I think, in circulation, widespread adoption, global reach. And now compare that with what we've done. We have created MiCAR. We got the regulation. we have, we basically ⁓ needed the straight jacket first, so that we can actually, whoever comes, can actually can get in there. And so now,

Well, we're now tentatively slowly exploring a bit. So this infrastructure first mindset is so ingrained, even when we create good frameworks, we don't move fast. So it's horrific. And by the way, if I may also on ⁓ another perfect example of this, what we're doing here is the digital euro. So this digital euro discussion is...

I guess fascinating because it's exactly the pattern we are describing. So you have this massive policy energy on the technical architecture, the privacy framework, the holding limits, the offline functionality, all infrastructure questions. So where is the equivalent energy on what will make the consumers want to use it? So what services will run on top? What's the killer app?

Michael Salmony 29:14

But nobody knows whether anybody's interested in this.

Yeah, exactly.

Ralf Ohlhausen 29:25

Because if you build the most technically elegant digital euro in the world and nobody uses it, we've just repeated the same mistake once again.

Javier 29:32

But

and Ralf, not only that, in order to be able to invest 30 billion in stable coins, you need to have them. It's not only that the alternative is building infrastructure, you need to have those funds able to be invested in whatever. And that's not the case in Europe. I don't know. I don't have those 30 billion.

And I guess nobody will have them because they have to think on how they will be funding digital euro and many other things, which is what is being required by the authorities. So it's not that the alternative is investing in new solutions or investing in infrastructure. It is that you have to invest in infrastructure and then there is nothing left as an alternative to invest in businesses.

Michael Salmony 30:16

I mean, that's something the banks have been saying for a long time. They have to spend all their money on running the bank and they have no money left for change the bank. Right. It's a very similar discussion. Right. Because of all the compliance. Yeah. Or there was somebody at Divorce who said Europe is very good at regulating things they don't have. We regulate AI, we regulate stable coins and then the others. Yeah. Anyway, that's a famous sound note.

Ralf Ohlhausen 30:39

Yeah, and one more thing on regulation.

mean, I know I'm repeating myself, guess, and it's almost like a broken record. But I think one of the one of the most important points on this discussion is that the regulation cannot continue to be this technical dependent. So it has to be outcome based, it has to be, it has to look at the what and stop defining

the how and all these technical frameworks and regularly and service at RTS and all of that. is really a straight jacket for ⁓ stopping innovation because it is the exit. So innovation technology is moving faster and faster and faster. And if we are having any dependency in the regulation on technology, we already lost the race.

Javier 31:36

But that I would ⁓ completely agree with you, Ralf. My only question would be then the Latin qui protest. Who benefits? Because we should answer that question, asking ourselves who's benefiting from that situation.

Ralf Ohlhausen 31:51

Well, in my mind, it looks like it's the incumbents.

Javier 31:56

No, no, no, certainly

not. They are just forced to do that. They are certainly not the ones aiming to do that or benefiting from that situation. Certainly not.

Michael Salmony 32:08

Well, that was fun. We should disagree more often, I think. is very lively and I think we all got some new insights. And we also ended on some areas where we agreed on, like the digital euro. We all, I think, have a similar opinion on that one. And also that regulation should be more evidence based and more about outcome based and not try to write six chapters about how to do two factor authentication from Brussels.

Javier 32:12

you

Michael Salmony 32:37

So I think we do have some agreements within our disagreement. Okay, so thanks very much, Javier and Ralf, it was real fun to have this discussion. Maybe we should pick more things to disagree on in future. ⁓ And thank you to all of you who've been listening. Please like and share and do all the usual things if you like. And we look forward to seeing you next time.