The competitive landscape for retail payments in Europe is in a period of considerable upheaval. This is due to entry by new providers (for example, digital wallets, credit-transfer-based payment methods, cryptocurrencies and peer-to-peer services), technological changes that have increased the importance of e-commerce (for instance, mobile payments technology), and regulatory initiatives—not least the recent update to the payment services directive, PSD2, which has reduced the costs of new payment service providers accessing the interbank processing infrastructure. What are the implications of such changes for market outcomes in retail payments? To understand this, Oxera was commissioned to analyse this competitive landscape.

Regulation and consumer preferences have had a significant impact on the payment value chain in Europe. With increased intermediation, increased competition, and the development of e-money, the economics of how payment methods compete has fundamentally changed. We provide a framework to assess what these economic considerations are likely to imply for market outcomes and the competitive dynamics between different methods and service providers, both now and in the future. We find that the changes in the retail payments market are to the benefit of consumers and merchants, who have an increasing choice of payment methods at a range of price points, reflecting differences in quality and consumer convenience. We would expect the existing trends in payments to continue and strengthen in the near future, and thus for competition between payment methods to further intensify across Europe. Four detailed case studies evaluate how these factors are shaping the market for retail payments in France, Germany, Italy and the UK.