Is Europe ahead of the US in payments?
Trick question! Both are modernizing within regulatory constraints
Key insights in this post
Neither Europe nor the US are materially ahead on payments as each model reflects their regions’ regulatory environment and banking industry structure, not an innovation imperative:
In Card issuing, Europe is less expensive to merchants than the US due to interchange caps but the systems operate almost identically
In Credit Card, Europe caps interchange at 30bps, but the savings go to merchants at the expense of lower rewards for consumers
In Debit Cards, both regions cap interchange at roughly the same level, but the US exempts small banks from the cap. Fintechs have taken advantage of the exemption to monetize their business models
In Prepaid cards, Europe has lower uptake because of their universal banking policies that leaves fewer unbanked consumers; however, they have innovated around multi-currency prepaid cards which have limited value in the US
In Merchant Acquiring, nonbanks led in the US before they did in the Europe
US restrictions on interstate banking pushed the acquiring industry towards non-bank leadership as they could more easily serve multi-state merchants
European countries each had a few big national banks that could serve their national retailers. But with the advent of eCommerce the biggest retailers increasingly need global acquirers — all of which are nonbanks
Innovation has occurred in both markets based on unique circumstances. In particular, Europe led on EMV & NFC, but this was to address the high telecommunications costs rather than specifically to improve cards
In non-card payments, key differences are in frontier payment methods rather than the legacy instruments which account for the vast bulk of volume and value
Paper instruments: Each region has a shrinking paper-based instrument, the costs of which have been addressed by regulation and innovation:
Europe is more dependent on cash, but government pressure led to the installation of Cash Recyclers to automate cash and eliminate bad bills
The US is more dependent on checks, but the Check 21 act allowed image processing which took most of the labor out of check processing
ACH & Wires, account for the bulk of value in both regions. Both regions have equivalent capabilities with minor differences:
Europe has introduced PE-ACH (Pan European) to link national ACH systems
The US has introduced Same-day ACH to speed up clearing and settlement
Instant Payments & Open Banking. Europe leads, largely due to government mandates; but, adoption of Instant/A2A is still modest and the US has addressed the same use cases in different ways:
Instant. Europe got a head start due to Central Bank mandates, but adoption is still modest. In the US, the private sector built an Instant utility well before the Central Bank; now it has both a central bank system (Fednow) and a private sector system (TCH RTP) that don’t interoperate. This has slowed down adoption
Open banking. Europe mandated this while the US let the market take the lead. Both markets have equivalent capabilities in Data Aggregation (AISP), but only Europe has the PISP variation which allows nonbanks to initiate payments from a consumer’s bank account with permission
A2A. Europe leads due to PISP mandates, but penetration is still modest. The challenge in the US is not technological, but rather consumer preference for credit cards given rewards and grace periods. A2A has only taken off in US sectors that don’t accept cards, e.g. online gambling
P2P. Most countries have at-scale P2P utilities. In Europe, these tend to be based on Instant rails, while Zelle gives equivalent functionality on ACH rails. Both provide real time availability to consumers
Introduction
I am often asked by European colleagues why US payments are so antiquated. Our Instant systems are barely off the ground (and we have 5 of them), Card interchange is high, and we still write checks (the horror!). On the flip side, about half of European point of sale payments are cash while cash is than less than 20% of US POS purchases. Europe is not monolithic of course: The Nordics have cash usage below the US, but Germany, for example is at 50%. So, the US loses points for checks while Europe, as a whole, loses points for cash.
Card usage is also different between the two regions. Europe is more debit-centric while the US has a big credit-centric segment. Germans use credit cards at the POS only 10% of the time. European banks tell me many consumers keep a credit card solely for travel abroad – otherwise it sits idle. Many European credit cards are also more like deferred debit cards, where payment is due at the end of a billing cycle – similar to a US Charge Card.
In Acquiring, Europe led on EMV and NFC while the US led on other aspects like algorithmic fraud prevention and the ISV model. Three of the four largest acquirers started in the US and one is a US/UK hybrid (WorldPay); but some of the leading insurgents, Adyen in particular, started in Europe and are growing fast. Of course, Stripe is also a leading insurgent but US-centric (with Irish founders).
Another key difference is Open Banking. The EU required banks to deploy open APIs while the US tech ecosystem got equivalent rights without regulation (move fast and break things!). Today, both regions have the AISP variation of Open Banking where data can be extracted from a bank account, but only Europe has the PISP version where bank payments can be initiated from outside the bank. That gives Europe a lead in so-called “A2A” payments.
I hope to demonstrate below that these differences are more about regulation, government interventions, and banking industry structure, not innate dynamism in either region. Both regions innovate around their regulatory and banking constraints – which is what drives much of the divergence. I will structure this discussion by product area instead of a long walk through the US and another one through Europe.
Cards (debit, credit, prepaid)
Cards appeared everywhere at roughly the same time, but the fortunes of each product diverged from there.
Credit cards
Credit Cards capture about half of US consumer spending. They are almost as popular in other English-speaking countries and a few non-English speaking ones a well. All countries use the Visa or MasterCard networks which afforded high interchange to the banks and universal acceptance to the consumer. The Merchant paid for it all, but by doing so could avoid the hassles of cash.
The two regions diverged in the late 1980s when the US went all-in on Cobrand cards and Affluent Cards, both of which relied on ever higher interchange. Outside the US, events acted against the US pattern. First of all, there was political uneasiness about control of the payment systems by US entities. Most debit networks were local, but the two US networks were the only scale game in town for credit. Second, non-US merchants won the war on Interchange when, first Australia and then Europe capped credit interchange at low levels.
Finally, the emergence of Credit Card monolines, like American Express & Discover were a US phenomenon. In most other parts of the world, a consumer took their credit card from their primary bank; so, credit card share tracked deposit share. Where interchange was high, some local banks could take outsized share with cobrands, but the interchange caps ended that. The card-heavy US banks like Capital One & Citi have few corollaries outside the US.
The big US issuers went abroad at one point, but almost all closed up shop after interchange was capped. At capped levels, rewards were out of the question and cobrands were not economic. The non-US credit card business became more about lending and distribution and less about differentiated spend propositions.
Debit
US debit was similarly distorted by an interchange cap – the Durbin Amendment. Debit interchange rates were high enough before Durbin that some banks paid rewards or offered cash back programs; but, this was to gain DDA share, not specifically to gain payments share. Debit rewards became impractical post-Durbin, so, Debit languished as a product while credit became even more attractive to anyone who could qualify.
But Durbin created an opportunity for Fintechs. The law exempted small banks (<$10B in assets). As a result, Fintechs issued Exempt debit products as a to monetize. The big banks are competitively disadvantaged because they can only charge the capped (“regulated”) rate. The Neobank segment primarily monetizes from Exempt interchange which accounts for 75%+ of their revenue. Many other Fintechs monetize by “virtual cards” which are classified as Exempt business debit cards.
In order to serve up Exempt debit products, Fintechs need to issue through an Exempt bank as their “BIN Sponsor”, so an armada of such small banks entered the market. The most famous are Cross River Bank, Evolve, Celtic, Bancorp Bank, Pathward, and Sutton. An entire ecosystem of Fintechs and Exempt BIN-sponsors took advantage of the Exempt carve-out.
Durbin also created routing competition among debit networks. While Europe generally had one champion debit network per country, the US always had at least 5, which started as regional networks but are now national. Large merchants play the networks against each other to drive down acceptance costs -- however, Visa/Interlink still lead the pack. How they do that is described in the DOJ lawsuit post I wrote about a while back.
Europe capped debit interchange at 20bp, roughly the same as the US. But Europe has no equivalent to the Exempt carve-out, and therefore no competitive advantage for Fintechs or small banks. Most European banking markets are characterized by 3-5 leading banks having ~80%+ share. In the US, the top 10 banks have <60% share. Congress put a thumb on the scale that benefits small banks & Fintechs.
Prepaid
Prepaid has never been as strong in Europe as in the US due to national policies around universal banking. In Europe most residents have a bank account & debit card at low cost, while in the US, as much as 10% of the population is unbanked. The prepaid card emerged to serve that population. Because Europe didn’t have as many unbanked, they also didn’t evolve a major prepaid card business.
This is somewhat surprising given Europe for many years was overweight in prepaid cell phone plans. A entire top-up infrastructure emerged to fund these plans. There is also prepaid tolling, utilities, and other prepaid options that never migrated to cards. So it is fairer to say that Europe lags in prepaid cards but not in prepaid services.
Nonbanks took the lead in US prepaid. Companies like Netspend and Greendot emerged to issue them. And BIN-sponsors like Bancorp Bank & Metacorp (now Pathward) emerged to link them into MasterCard and Visa. This all set the stage for the emergence of Neobanks and other debit centric, pseudo-bank accounts later on.
An equivalent phenomenon is now emerging in Europe with multi-currency payment cards from companies like Revolut and Wise. Those products would have limited uptake in the US as most American don’t need FX. In contrast, there are still enough European currencies outside the Eurozone that multi-currency cards have high utility.
Conclusions on Cards
European and US card markets were shaped by key regulations and industry structure rather than technological dynamism:
In Credit Cards, Europe capped Interchange at 30bp which made rewards and cobrands impractical. In most countries, credit cards have modest market share
In Debit Cards, The US capped large bank interchange at roughly the same level as Europe, but left smaller banks “exempt” at higher rates. Fintechs and BIN-Sponsors then emerged to take advantage of the Exempt price advantage
In Prepaid, Europe had a universal service obligation and therefore limited unbanked consumers while the US had lots of unbanked and introduced prepaid cards to serve them. More recently, Europe introduced multi-currency prepaid cards which have little utility in a US market
It is hard to argue that one of these models is ahead of the others as they are responding to different macro realities. The US model is more expensive for merchants but more generous to consumers.
Merchant Acquiring
Acquiring started out the same way in both markets, with local/regional retailers supported by local/regional banks. At the time, paper “vouchers” were still the norm, and since physical transport and processing of those vouchers had to be local, it benefited the proximate banks. Processing a voucher was similar to processing checks, so banks were skilled at it.
However, the emergence of EDC (Electronic Draft Capture), i.e., POS terminals, untethered acquiring from geography. In the US, the larger acquirers were free to serve the biggest merchants wherever they were. Because banks were restricted by law from branching outside a home geography – which could be a single state, city or even a single branch – nonbank tech companies took the lead in serving national merchants. At one point, First Data alone had over 50% share of the national acquiring market.
European countries did not restrict their biggest banks geographically, so national banks could serve national merchants. Banks kept acquiring as a relationship product along with Treasury Services and other banking products.
In the US, most banks exited acquiring so that today only three big banks have material, wholly-owned acquiring units (JPM, BAC, USB). Two more are in the acquiring business via JV with a non-bank acquirer (WFC, PNC). All the rest are distribution channels for a nonbank acquirer, usually Fiserv/Clover. The JV model has traveled to Europe where many banks partner to gain technology from a global nonbank.
The key driver to all of this is that Europe had smaller big retailers but big, national banks. The US had big national retailers and smaller, geographically restricted banks. That allowed the European banks to hold onto their acquiring businesses for longer without going outside for technology. In the US, nonbanks, unconstrained by geography, stepped in to serve the growing national retailers.
For a long time, Europe claimed a technological lead in acquiring due to the early adoption of EMV (Chip & PIN) and NFC (Tap-to-pay). In fact, EMV was a response to the high telecom costs in European markets rather than a competitive leap. The US deregulated its telecom market earlier, so our POS Terminals had real-time links to acquirers, networks and issuers. In Europe, telecoms were national monopolies for much longer and costs were much higher.
EMV solved that by moving authentication from the network to the terminal. The EMV chip authenticated the card while PIN entry authenticated the consumer. Because this took time, NFC was attractive because it sped up the process.
The US had much more fraud in absolute terms, but it was still not a catastrophic share of spend. Algorithmic fraud tools got better, but crooks also got smarter. Eventually fraud costs got high enough and public enough that the industry was forced to implement EMV, and NFC came along in the bargain. We never implemented the PIN part of Chip & PIN; nevertheless, POS fraud dropped 75%+ with Chip-only. Of course, neither EMV nor NFC helps in eCommerce fraud which is where the fraudsters has now gone!
eCommerce again shows that the acquiring markets in the US and Europe need different tools. Both the US & Europe have produced a strong eCommerce-focused insurgent, but each of those insurgents focused on a different segment of the market as their entry point. These of course are Stripe in the US and Adyen in Europe. These two are converging on similar business models but they had very different starting points for geographically-focused reasons.
Adyen emerged to serve global merchants that needed both broad geography and local payment methods. The early users were weighted towards digital goods companies that could go global because they had no physical fulfillment needs. So Adyen emerged in the same way that nonbanks did in the US – the local champions couldn’t serve a broad geography. Notably, Adyen started by serving an enterprise segment, because only they needed a global acquirer. It is rare for an insurgent to succeed in Enterprise
Stripe emerged to serve startup eCommerce retailers by simplifying the onboarding process in an API. It served both physical goods and digital goods companies. Some of its customers grew to be large enterprises that needed global support, so Stripe globalized to follow them. But the key to its very early success was a simple way to accept cards
One can think of this market shift as similar to the launch of EDC discussed above, where the incumbents didn’t or couldn’t master the new technology fast enough, it left the field open to more nimble, tech-focused insurgents.
I would argue that Adyen emerged in Europe due to the fragmentation of European markets while Stripe emerged in the US because of the earlier growth of eCommerce and startup culture. In other words, they were each responding to geographically unique opportunities. One wasn’t a better strategy than the other when you consider the local trends.
The final acquiring development is the ISV phenomenon. No government or regulatory action was involved here. My sense is that the ISV model worked in the US because our internal market is integrated and large. The ISV model is differentiated by vertical software but monetized by horizontal payments. Because software is a fixed cost business, the bigger the market the more the profit potential. While some ISVs emerged in smaller markets and then went global, in general, the direction of travel is US to non-US. So, the US leads because it has a bigger TAM.
Conclusions on Acquiring
European & US acquiring markets were both shaped by geographic constraints that led the US to move towards Nonbank, technology-led acquirers while Europe kept Acquiring in banks until quite recently:
Geography and regulation shaped early developments
In the US, banks were limited by interstate banking restrictions, so nonbanks emerged to serve the national retailers
In Europe, banking was concentrated and merchants were relatively smaller, so acquiring remained a bank-centric, relationship product
Both markets have moved towards bank/nonbank partnerships where the nonbank provides technology while the bank provides distribution
EMV emerged in Europe because it saved on high telecom costs. It were resisted in the US due to the cost of re-terminalization and other tools for limiting fraud
The two most prominent insurgents (Adyen & Stripe) emerged to solve eCommerce problems idiosyncratic to their home markets
Non-card payments
This could be a huge topic and this post is already long, so I will focus on the past and the future more than the present.
The Past – Paper methods
As we saw in the intro, the US still uses checks while Europe still uses a lot of cash. This characterization hides a lot of innovation around these payment methods that have extended their life – and the role of regulation in triggering that innovation.
Checks in the US
Checks have declined significantly in the US. The Fed claims checks are now just 3% of POS volume. Direct Deposit now accounts for ~93% of payroll. Bill Pay has moved to Direct Debit and Cards. But, Checks are still common in two use cases:
Small Businesses still use them because it allows them to time payments
Consumers still use them for big bill payments, like mortgages and taxes. They do this because checks can be timed and cancelled checks serve as proof of payment
What is often not considered is how much technology and investment went into making checks less costly. This innovation was released by the Check 21 Act in 2003 that made a check image a legal substitute for the physical check.
When I started in the industry, checks were physically transported from the payee to the payor. Starting in the 1990s, checks were imaged at the point of presentment and eventually, only the images were transmitted to endpoints, not the physical check. Check images were returned in statements rather than physical checks. Eventually, checks were converted to ACH and cleared just like any other ACH. So the cost of physically moving checks largely disappeared.
The other major expense of checks was “proofing”. Rooms full of people would type the dollar amount of a check onto the check itself using an “MICR encoding machine”. MICR allowed for efficient sorting and data capture by massive, mechanical “reader sorters” like the IBM 3890. Eventually, handwriting recognition software replaced most manual proofing. The exceptions were sometimes offshored to lower costs further.
While the end-to-end cost of a check has declined, check fraud is still an issue. Databases like Telecheck, EWS, and others help with fraud detection. Checks are still more fraud prone than ACH, but they are less fraud prone than they used to be.
Cash in Europe
According to European central banks, cash usage at the POS varies from 50-70% in the major countries. According to the Fed, the equivalent number in the US is 16-20%. Of course, the Nordics are the real champions -- but their cash usage is closer to the US share than to the rest of Europe.
As with US checks, technology has been thrown at this problem to address some of the issues. Cash recyclers are common in European retailers and banks. These “reverse ATMs” take old bills out of the system and detect counterfeit bills. As in the US, this innovation was a response to regulation.
The EU requires banks to verify the quality and authenticity of bank notes. Cash Recyclers were the only way to do this efficiently. While the technology has come to the US, there is no legal incentive to use it. The business case here is about security and efficiency.
Conclusions on paper payment methods
Cash recyclers take some of the risk and expense out of cash handling in a similar way that image processing did for US checks. The difference is that US banks lobbied for a Check 21 law to allow image processing while the European cash handling standards seemed to be for the governments’ benefit rather than the banks.
Current electronic payments – ACH & Wire
The bulk of B2B transactions and overall payments value traverse these systems. These operate in a similar fashion on both sides of the Atlantic, so neither region can claim much of a lead.
The major difference I can detect is nomenclature. In Europe ACH is called credit transfers and standing orders while in the US we call the same things direct deposit and direct debit. Oh yeah, the UK calls its ACH “BACS”. Minor differences include:
The US introduced Same-Day ACH (SD-ACH) to clear transactions faster. Europe is going straight to Instant Payments
Europe introduced PE-ACHes which are Pan-European ACH networks. The US also had fragmented ACHes at one time, but they all interoperate now
It is worth noting that ACH is very inexpensive everywhere, so it can be difficult to wean businesses away from it without other inducements.
Future methods – A2A is the combination of real-time payments and open banking
A lot of the claims about who has more modern payment systems comes down to this topic. Since these systems are nascent and don’t process much volume yet, the claims are true, but almost irrelevant. A few European countries, led by the UK, pioneered the real time payment method. US adoption was a response to keep pace. I call it “payment systems envy”.
Instant payments are an end-to-end digital payment method with embedded ISO 20022 messaging – 20022 allows the data supporting a payment to travel in the same message as the payment itself. Instant will eventually displace ACH & Wires everywhere, but “eventually” is a very long time away. Adoption today is light in all both regions, including the leading innovator – the UK. But growth is high from those low base levels.
Instant is a B2B phenomenon everywhere, but its adoption for C2B or P2P payments differs materially between the US and Europe. Blame this on different approaches to Open Banking:
In Europe, the EU mandated that banks open a free API into consumer bank accounts that third-parties could access with consumer permission. That access had two use cases:
AISPs (Account Information Service Providers) could take data out of the consumer’s bank account to establish or support other financial services
PISPs (Payment Initiation Service Providers) could initiate a payment from the consumers’ bank accounts. PISPs have to be licensed by a regulator
In the US, technology companies (“data aggregators”) developed AISP-type services without government intervention. While the banks resisted at first, they eventually agreed to open their data under controlled conditions. Government was not involved until CFPB Rule 1033 in the fall of 2024. That rule may be dropped under new CFPB leadership, but without or without Rule 1033 open banking is the AISP model is already active here
The US does not have a PISP option, but it has ACH debits and Visa Direct AFTs to serve the same use cases. ACH is not instant and AFTs are not as data rich as Instant payments. Further, the US now has two mutually exclusive Instant systems: TCH Real Time Payments (RTP) and Fednow. European countries all have one. Fintechs have navigated around these quirks to offer A2A anyway. Request for Payment (RFP) will help with this once it proliferates in TCH RTP & Fednow.
The problem in both regions is that A2A has low uptake:
In Europe, A2A does not cost that much less than debit (capped at 20bp) and it is more expensive than ACH; while it settles in real-time, that is only important in some use cases. 20022 is not used in most consumer use cases. A2A is most popular in P2P applications although it is beginning to penetrate C2B (Commerce)
In the US, consumers with credit cards earn rewards and capture the grace period — both of which they are reluctant to give up. A2A is not much less expensive that regulated Debit at ~25¢; It settles by ACH but relies on Open Banking balance checks to limit Returns – which makes it more expensive than standard ACH. The biggest P2P is the Zelle network, not RTP or Fednow. Zelle settles via cheap ACH, but still gives instant availability to consumers
Neither region has a good solution for exception processing. Instant payments have no equivalent to returns, chargebacks and other disputes that the card networks do have. In the US, that puts A2A payments in tension with Reg E. A2A has taken hold primarily in use cases that don’t accept cards, such as online gambling. In Europe, it is gaining traction mostly at small businesses who accept P2P payments for purchases. I cover some of this ground in my post on US Instant Payments adoption.
Conclusions on A2A
Europe is indeed ahead on A2A payments because its governments pushed for Instant systems adoption and Open Banking. The US took a more laissez faire approach but now has equivalent AISP & Instant capabilities. If anything, US regulators slowed down Instant by developing Fednow in competition to RTP and may now burden Open Banking with bureaucratic Rule 1033. The US has no plans for a PISP equivalent, but is engineering around this using other methods. The two regions have equivalent P2P systems albeit using different approaches.
Both markets have low adoption for A2A in commerce. The US may be slowed by Reg E challenges for valid reasons – and it will be tough to convince Credit Card users to convert anyway. Europe reduced the merchant A2A business case by capping interchange at such a low levels (20-30bp), but consumers lose nothing by converting. The race isn’t over.
Overall conclusions
Regulation is key in setting the trajectory of change in payments. As a gross generalization, Europe governments force the industry to adopt new methods early while in the US, tech firms force the pace of change while government catches up and, sometimes, slows things down. But the differences in modernity are not that material between the two regions. The bulk of volume moves the same way in both markets.