The future of instant payments in the EU: bank ownership, market contracting costs, and the accomplishment of financial regulation objectives

Abstract The purpose of this paper is to assess the business suitability and policy desirability of three models for the provision of instant payments in the European Union (EU), namely: (1) a single pan-European instant payment solution, (2) fragmentation of EU instant payment solutions with interoperability, and (3) fragmentation of EU instant payment solutions with competition. In order to do so, the paper first examines the suitability of each of these models through an application of Hansmann’s general theory on the ownership of the firm to private initiatives that correspond to each of the instant payment models. It addresses why and how bank ownership of instant payment solutions may impact both market contracting costs and ownership costs. The analysis shows that both the model of a single pan-European instant payment solution and the model of fragmentation with interoperability involve potentially major market contracting and ownership costs. Secondly, the paper assesses which among these models best contributes to the fulfilment of key financial regulation objectives. The paper argues that an EU instant payments arena based on intra- and cross-border competition among EU-based instant payment solutions brings about fewer prudential and consumer protection risks than the other two models; this challenges policy assumptions about the benefits of integration of instant payment solutions in the EU.