The PEPSI or What is in a name ?

Twenty European banks, backed by the ECB, are currently working on an instant payment solution initiative, “PEPSI" – named for Pan European Payment System Initiative – that should compete with the dominant US players in international networks of cards, Amex, Visa, Master Card and pure cash transaction solutions like PayPal; but also to new giants out of Asia with the Chinese payment solutions like Allipay or Wechat Pay. 

This question goes beyond competition in financial markets and turn into a geopolitical one with current increase of political and commercial tensions, and the question of sovereignty and supervision of payment infrastructures and dematerialized cash flows in Europe, that are systematic critical assets to the economy like nuclear plants or electric power grids.

We could have some doubt on the project cost figures, estimated at this stage to be a few billions euro, or the curious marketing behind to choose for an European project an American brand (even if I agree it is the Greek word for digestion, a collateral benefit of classical studies and reading the works of Homer).

Meanwhile it is worth put a grain of salt looking at this initiative under two other perspectives: the characteristics of this business and the geopolitical dimension. For an appetizer, in this first article on the “Pepsi”, I will focus on the business perspective, after all the cash flows run my life.

A business perspective

If we look on the segment of the payment cards (a physical card or a digital mobile solution) we are in what marketing specialists define as a multi side market (most dummy product guys like me will define it as a multi side platform of services). The added value proposition in multi side platforms is it solves a transaction problems (and generates value) by bringing together two sides that need each other but cannot access easily on their own. 

The success condition of a multi side platform is to ensure that there are enough players on both sides that will generate a dual positive network effect. More card users will attract more merchants, more merchants accepting the mean of payment will attract more customers.   

You could have some flavours with additional services and nice reward points (and leverage on the psychological effect of grey metallic colour on your card) but the basics of your intermediation model will be a question of critical mass. This is a very simple and logic explanation of market dynamic that led to concentration of the players.

Considering Europe, you will compete in a very concentrated market (the ones that have more than two credit cards from a different issuer in their wallet please raise your hand; and for the ones that had enjoyed the zen experience of trying to use Dinner Cards travelling across Europe please stand up) with as target a structurally decreasing and aging population.

And with only a few distribution channels to reach your end users; you could opt for intermediation through banks or other channels like supermarket chains; or for a direct customer relationship either a personal card or your company professional card (or as a secondary card of your partner).

Fail to reach the necessary critical mass on a multi side service platform leads to exclusion from the market, or be a niche player ; in such market as a niche player, you could still say you are exclusive, sound a nice marketing pitch but you better review your business model.

This move of end users or merchants to the most valuable platform impacts the whole value chain as each time a competing platform is deprived of a given customer it loses both the actual and potential revenues from a customer but also loss in overall value of the platform for the whole network).

This network effect and critical mass constraint is an obvious case study of a barrier to entry for new candidates to this market. This does not mean you cannot enter in but you need some sound alliance strategy, scale up fast your client basis and distributions channels, and a business case with negative figures for the first three years.

This characteristics of two side market and network effect mean you should look for interoperability with existing infrastructure to lower cost and increase your network on the sell side and ensure your distribution and value proposal model can attract quickly a critical mass of customers on the buy side. This is not only technological and business constraints but also to be put in a regulatory and contractual perspective.

Then your strategy will be to opt or for a competitive or an exclusive model in your distribution of payment cards (will you impose the Pepsi card or let a choice to your customers), negotiating and closing the distribution agreements along the way, and to consider this not only within the club of twenty banks initiating the project but also with a major portion of the six thousand other European banks, with some big chains of supermarkets and other intermediaries playing a key role in the distribution network. 

Once you have a strategy and a mass of users in your domestic market, you can drop your sword and shield of defender of Europe, take a pilgrim’s rode (and a pen to sign agreements) and consider new frontiers over the horizon. Look up to sign some deals with tens of digital players (most of them non-European players) to accept the new payment channel. Then let’s build a concentric circle strategy, and go across seas and deserts as you need distribution agreement with banks at the borders of Europe, in the Middle East, in Africa, in Asia and the Americas to accept or interconnect with your new payment channel, so our flow of tourists, students and workers could spend their euro over there, and theirs over here.   

This strategy need of course a perfect timing and matching strategy between both sides of the network market , to avoid to end with a widely distributed card without supply side or a network of merchants with no customers using the new payment mean. Here more than in any other business case and success story, time to deliver and user/supplier experience  will play a critical part and create a virtuous circle.

Let's be clear, this is not to say that the project is not a valid one, neither than we do need ambition and dreams, or that payment is not a strategic asset; in fact the idea is quite exciting and challenging, and we have the means and people to achieve great transactional process platform in Europe, with Target2 for cash and securities to name a few.

But there is more at hand here than a feasibility study, a strange branding (I am sure there is some Greek philosopher or deity with P and E letters in the name that fits the job) and a technical solution to clear a way and create a major player in this arena. We will need a political will and a true European industrial strategy. More to come on this in a second article on geopolitics and payment flows.

So Godspeed to a Pan European Payment System Initiative, let’s turn ambition and idea into reality and business. As Lucius Seneca once said, it is not because things are difficult that we do not dare, it is because we do not dare that they are difficult.

Keywords: #banking, #cashmanagement, #financialservices