The single e-market

Citation

Birch, D. (2001), "The single e-market", European Business Review, Vol. 13 No. 1. https://doi.org/10.1108/ebr.2001.05413aaa.001

The single e-market

The single e-market

The lack of an effective and efficient low-value cross-border payments infrastructure in Europe is a barrier to free trade.

Earlier this year, I bought something from a chap in Frankfurt. The transaction was very efficient. More importantly, it was a transaction that would never have happened at all without the Internet in general and eBay in particular. Score one for free trade: I got something I wanted and he got something he wanted (money). We were a willing buyer and a willing seller, matched through an electronic marketplace that did not exist a couple of years ago. We were better off because of this and so was the European economy.

It is illuminating to see how each stage of this transaction proceeded. Using the Web and e-mail, I searched on eBay, found what I wanted, checked the seller's reputation, bid for it, won the auction, agreed the shipping method and postage costs. This was all achieved with the minimum of effort. The total came to around E40. Then came the question of payment. I looked into a bank transfer, but it seemed rather expensive: my bank wanted to charge me £10 (a transaction charge approaching 40 per cent). A cheque would not work, since I have only Sterling accounts and my counterparty had a Deutschemark account. Inexpensive (in fact, free) and fast (in fact, instant) person-to-person small payment solutions widely used in the USA – such as Paypal (which already has more than four million users), for example, or Billpoint – do not (yet) work in Europe.

The European banks' principal thrust in this small payments area – the smart card-based electronic purse – was useless for the task in hand. Being in the UK, I do not have one (Visa recently shut down their only scheme in Leeds, Mondex in Edinburgh closed earlier this year, and so on). Being in Germany, my counterparty did have one (a GeldKarte, as do 50m+ of his fellow citizens) but he could not use it on the Internet. Even if it did work on the Internet and he had had a smart card reader connected to his PC, his Geldkarte would not have worked with my British bank account so it would have been pointless (and the situation would have been no different if my bank account was in Euros and his Geldkarte could store Euros, which it cannot). There are probably 100m+ electronic purse cards in circulation in Europe, most of them unused and all of them in non-interoperable schemes, although the industry is planning for a future transition to a single pre-authorised smart debit card standard known as the Common Electronic Purse Specification (CEPS).

Banks have, in fact, probably done more harm than good with their botched launch of e-cash to the general public. The threat of non-bank competition for the retail payments franchise, and enthusiasm for high technology, drowned out the "alarm bells" from the pilot schemes[1]. Instead of re-focusing their efforts into areas where the market wanted solutions (e.g. the Internet, mobile phones and other remote and unattended points-of-sale[2]) they continued to push e-cash where it was not wanted: shops.

Eventually, I e-mailed my German counterparty and asked him for his preferred payment method: he recommended sending cash! So in the year 2000, to execute a transaction between two of the most advanced e-economies in the world, on the dawn of the single currency, I put two $20 bills in an envelope and popped it in a mailbox. A few days later my goods arrived and the transaction was complete. Now this strikes me as odd. At the dawn of the millennium, one of the most computerised, electronic, global businesses imaginable (i.e. banking) is incapable of supporting intra-European cross-border trade and causes trading partners to use US federal reserve notes (interest-free loans to Uncle Sam) and the postal service!

So small net payments in Europe are a shambles. At the start of November, a high-level meeting of representatives from EU institutions and the finance industry met to discuss the problem. Motivated by the desperate need for a secure system that will work alongside the soon to be introduced Euro notes and coins and the lack of a "reliable, secure, efficient, practical and cheap way of (making payments on the) Internet"[3] they looked at a number of different ways forward for electronic cross-border payments.

It is understandable that cross-border payments have their problems. They are more expensive than national payments: for one thing, they account for only 3 per cent of all payments, and therefore, economies of scale are limited. The traditional means of handling cross-border payments – intermediaries and correspondent banking – do not offer value for money[4]. Yet it is still puzzling that I could post a brick to Frankfurt and it would take as long, and cost less, than a bank sending a few bits of data to the same place.

In addition to the European Commission, The European Central Bank (ECB) has been getting involved. Their work may yet bear fruit, but the problem of small payments is a problem with implications (and negative ramifications) outside of the banking sector. Intervention in the cross-border low-value payment infrastructure is justified precisely because the situation at present undermines free trade[5]. It is not just Europeans who think so. Earlier this year, the Clinton administration (in the person of Stuart Eizenstat, deputy Treasury Secretary), called for a new "standard-based mechanism" to handle retail payments on the Net because of the cost and inflexibility of credit cards[6].

While I am arguing that the situation demands attention, I am not arguing that government intervention take the form of regulation or legislation: far from it. I think that it ought to take the form of stimulating competition by removing regulatory barriers to non-bank entrants in the retail payments business. Just to pick one example, mobile operators are obvious potential providers of payment services. This is partly because the world of m-commerce is hampered by the lack of appropriate payment technology[7], and partly because they already have an appropriate technology platform (tamper-resistant smart cards, cross-border interoperability and so on) in the hands of 200 million Europeans.

The idea of the mobile phone as some kind of electronic wallet is already widespread and I would have thought that, for most consumers, the idea of paying for something using their mobile phone, and having the amount show up on their bill at the end of the month, is quite attractive. Early entrants into this field (e.g. Sonera's Mobile Pay[8]) seem to have had very positive results: yet in some countries operators are prohibited from putting anything on bills except for phone calls.

The mobile example is just one of many. Competition is needed to make real change. Until someone in the UK can e-mail E40 to someone in Frankfurt as easily as someone in San Francisco can e-mail $40 to someone in New York (i.e. very easily), how will the European e-economy begin to match the vitality and invention of the new economy across the pond?

Dave Birch