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QR codes have major potential in the single market, but regulatory intervention may eventually be necessary, EU payments players have warned.
QR code technology has been successfully adopted for payments in multiple countries, but in Europe, its scalability is jeopardised by a fragmented landscape, a new report from Copenhagen Economics has said.
According to data presented by AksjeBloggen.com, global QR code payments are expected to reach $2.21trn in value this year and then continue rising to $2.71trn by 2025. As the world’s largest QR code payments market, China is forecast to generate 85 percent of that value.
“QR codes are having their moment. I’m sure most of us have already scanned one of those little squares to settle a bill, send money to a friend or make a purchase online,” said Agnès Bastaert, government relations chief at Ant Group, during the launch event for the report.
She quipped: “I doubt any of us want to go back to manually entering payment details.”
In Europe, QR codes could be a powerful tool for the transformation, she continued. “With great potential for merchants and consumers. But, that potential needs to be tapped.”
However, despite the change in attitude that was spearheaded by COVID-19, the payments method has not yet taken off in Europe.
According to Statista, $1.6bn was spent using QR codes in Europe in 2021, and it is forecasted to rise to $2.3bn by 2025. This is just a small fraction of total retail payments on the continent.
Part of the reason behind slow take up of QR codes has been the success of near field communication (NFC) contactless payments in Europe. Initially when these solutions were first expanding, many considered NFC and QR codes as competing solutions. Card companies heavily pushed NFC and were largely successful in Europe and other card dominant markets such as Australia, Canada and North America, while QR codes typically won the day in Asia and parts of Latin America.
Increasingly, however, many industry players are expecting there will be co-existence between the two checkout methods. This can be evidenced by EMVCo’s move to create its own QR code global standard in 2017.
QR codes typically offer a lower barrier to entry for merchants, and alongside the development of open banking and other account-to-account payment products across Europe in particular, they could offer new opportunities for QR code-based acceptance.
The need for EU QR standardisation
“We are highly favourable to the standardisation of QR codes,” said Alexandra Madeline, payments expert at the Banque de France, adding that the central bank backs the prospects that QR codes pose for SEPA products in the EU, as well as offering more support for small and medium-sized enterprises.
Within the Single Euro Payments Area (SEPA), there are several payment services that use QR codes, but they have not gained the same popularity as QR code payment services in many parts of Asia and Latin America.
According to Copenhagen Economics, this is partly because the QR codes used by payment service providers in Europe are not interoperable.
“The issue at the moment is that, with a wonderful instant payment scheme and infrastructure in place, it is still pretty difficult in traditional bricks and mortar retail for me to make a QR code payment,” said Antti Lemberg, financial services economist at Copenhagen Economics, adding that this is certainly the case in a cross-border context.
“The European payments market is still hindered by fragmentation,” agreed Bastaert. “Most of the time, each payment provider brings their own QR code format.”
For example, a merchant wishing to accept QR code payments needs to implement different QR codes for each separate provider. This constitutes a significant barrier to entry and expansion and leaves the market faltering.
“Without a common standard, accepting QR code payments means implementing different hardware and software every single time a merchant wants to add a new provider,” said Bastaert.
The economic benefits from a common, open European standard for QR code payments have the potential to reduce the investment needed to accept QR code payments and the cost of accepting and making payments overall, Copenhagen Economics believe.
For example, merchants would face lower costs, and consumers would face lower prices. “At the lower end, with a European QR code standard in place, we estimate the total annual cost savings to be up to €3bn for merchants and €2bn for consumers.”
Meanwhile, if the take-up levels reached the higher end of market observers’ estimates, these savings could be as high as €7bn and €5bn for merchants and consumers respectively.
However, Madeline rode back from the prospect of QR development being seen as exclusive from the use of other technologies, and in particular NFC, which has driven the popularity and adoption of products such as Apple Pay.
EU legislation, such as plans for a digital wallet solution as well as the Digital Markets Act, could mean that Apple Pay in particular would need to open up its NFC infrastructure to competitors — arguably making it as strategic to the EU’s retail payments ambitions as a possible standardised QR code.
“Most payment terminals in France are already equipped with NFC technology,” she pointed out.
However, the central banker did suggest that QR codes would be helpful to the rollout of instant payments in the EU.
The fraud factor
It is not just merchant and consumer savings that should incentivise QR code adoption, there is a security argument as well. QR codes present opportunities to tackle payments fraud, the report suggests.
The evidence on payment fraud from China suggests that fraud losses for card payments amount to around €1,200 per €10m of card payments, whereas the fraud losses for QR code payments is less than €1 per €10m spent, according to Copenhagen Economics’ findings.
“What we observe in places in China as well as Brazil, where QR code payments are more popular, there are much lower fraud rates,” said Lemberg.
Fraud losses for card payments in Europe are just over twice as high as those in China, the think tank said, suggesting there is significant scope to reduce these losses.
For example, even if higher take-up of QR code payments only reduced card-present fraud, which accounts for around 15 percent of card fraud losses in Europe, the total potential savings from reduced fraud would still account for more than €500 per €10m, Copenhagen Economics suggests.
What happens next?
With the EU’s new legislation for instant payments due this year, as well as the review of the revised Payment Services Directive (PSD2), there are ample opportunities for the EU’s regulators to introduce legislation.
Yet, the question remains whether they will choose to take a hardline, interventionist approach by forcing a common standard or whether they will leave it to the market.
The problem so far with many market-led initiatives in payments is that the EU’s authorities often believe they will offer payments sovereignty, only to find these initiatives stall and fail to get off the ground, as has become the case with the European Payments Initiative.
In other examples, competing priorities end up causing more problems than anticipated, as with the application programme interfaces (APIs). Regulators have expressed concern with how poorly APIs have developed across the EU, creating fragmentation in the payments ecosystem.
However, top-down rules from the EU can also cause issues. If a QR code was developed by one of the supervisory authorities, there could potentially be the same concerns raised as there have been with the introduction of strong customer authentication (SCA).
Although regulators have heralded it as a method of reducing payments fraud in the trading bloc, consumers, merchants and payment service providers alike have found it, at best, a headache to implement.
