Changes to the card payments landscape in Europe

[Dave Birch] I’ve been chairing the International E-Payments Intensive in the City, which is how come I saw a typically excellent presentation by John Chaplin of First Data. I’ve known John since his Visa days and I’ve always found his experienced and measured perspective on the payments landscape of immense value. Once again, he really made me think. John was talking about the impact of the Payment Services Directive (PSD) on the European payments card landscape. One key point that he made, which I’ve been reflecting on, is that that landscape just hasn’t changed that much in the last couple of decades. The market is not that open, particularly because the rules of the club favour the existing members. But all this is going to change because of the PSD. Isn’t it? Well, there are plenty of major pressures for change that are nothing to do with the PSD. Banking consolidation in the Scandinavian and Benelux regions is showing how thinking might change from national to regional and subregional organisation and then to pan-European organisation at the time when the IT infrastructure (built in the 1980s) is up for renewal and SEPA is pressuring them to change. There are commercial pressures that are nothing to do with regulation. There are technology developments. All of these combine with PSD to create the potential for change. But might there be disruptive change?

Technorati Tags: credit cards, debit cards, regulation, SEPA

I found the last part of John’s presentation to be especially interesting. John was talking about the potential for disruptive innovation in the European retail payments space and one of the scenarios he discussed was the melding of debit and ACH products to extend near-real time account-to-account transfers to POS. I can see at least two technology-driven ways that this could happen:

• The mobile handset. The mobile handset is the obvious means to implement secure, authenticated payments. I go to a shop, buy something, wave my phone over the POS, the bill shows up on my phone, I enter my PIN to pay it and the bank instructs an FPS transfer and confirm to the shop. This means that shops and banks have to agree on some sort of (presumably) XML-based standard for such data. (As it happens, there already is one: the Internet Open Trading Protcol, IOTP, that consumed a substantial fraction of my life a decade ago and may be better known to you as RFC 2801.) There are plenty of other models: the phone might implement a pre-paid account automagically topped up from the customer’s bank account or line of credit: you buy a pair of shoes for fifty quid, wave your phone at the POS, the phone grabs fifity quid from your bank account and then immediately sends it to the shop. This seems no big deal, but note that in this scenario, the money is switched between your bank account and the shop’s bank account outside of the bank network (ie, by your phone). It’s more radical than it seems at first glance. In any case, it’s only one of a number of potential implementations, all of which serve to support the main point that the mobile phone will inevitably become a means of instructing payments.
• The identity card. Suppose I’m a big retailer in the U.K. and suppose (this is a fantasy, remember) that the government has implemented a smart identity card with biometric PIN augmentation and it actually works. I register with the retailer by giving them my bank details (I might be incentivised to do this by a lavish helping of loyalty points) and authenticating myself with the card. Next time I go to buy my groceries, the retailer merely gets me to authenticate myself with the card. If I have a track record, they may not even bother to authorise the transaction: I’ll just save them up and drop the whole lot via ACH in the middle of the night. If you don’t have funds to cover the transaction — well, I have your ID card details so I can blacklist you, or have you blacklisted by all retailers or whatever. There’s no getting away! This kind of the service has begun to spring up in the U.S.A., using the “Real ID” drivers’ licence.

Therefore, one possible future is that banks disintermediate payment networks themselves. Whether you think this likely or not, you can see the rationale behind the thinking. In the 1950s, no bank could have built a network to every retailer, so it made sense to begin developing networks to connect banks and retailers. Now, however, every bank is connected (in principle) to every retailer because of the miracle of the Internet (and mobile, wireless, cryptography, smart cards and so on). They are also connected to customers and everyone else besides. Hence the alternative vision: when the customer pays the retailer, the retailer never sees any payment instrument or information because the retailer transmits the invoice to the customer, the customer instructs the bank to pay it, the bank sends the money to the retailers bank.

Isn’t only John who has spotted the potential for change here. Other observers also note that banks are beginning to think about using networks to connect more directly with customers in the payment space. Bruce Cundiff, of Javelin Strategy & Research, says that a shift in mind-set already is beginning in some banks:

You’re seeing a lot more focus on the demand deposit account (DDA) as the cornerstone of banks’ retail payments strategies, as opposed to their going out and starting a new credit card business… There’s a move away from a card-based strategy. Banks are seeing the DDA as the genesis of their payments strategies

And Bruce said this before Capital One’s announcement of the disconnected debit card, which provides another way to access the customer’s current account funds at POS. Building on debit is a no-brainer: Figures released by APACS show that there were 1.7 billion plastic card purchases made in the UK during the last three-month period, totalling £86.6 billion, and these accounted for 72 per cent of all plastic card purchases (up from 70 per cent in the previous comparable period). Customers continue to switch from credit cards to debit cards.

Talking about new debit cards, the Euro-Alliance of Payment Schemes (EAPS) has been set up to explore ways of linking existing national debit card schemes into a pan-European network following the introduction of the single euro payment area (Sepa) in 2008. Founding members of the scheme include Germany’s electronic cash, Spain’s EURO 6000, Portugal’s Multibanco, The UK’s Link Interchange Network, Italian card schemes PagoBancomat and Bancomat and European card payment processor Eufiserv. The consortium — a not-for-profit Brussels-based company that will promote “the interests of its members” — has developed a rule set and members have begun testing some bilateral cross-border transactions. A group of Europe’s largest banks (apparently, according to Lafferty, including Société Générale, Deutsche Bank, Dresdner Bank, Commerzbank, Unicredito, ABN Amro, ING and Rabobank) is looking at the feasibility of using EAPS as the basis of a pan-European debit scheme, a non-Visa and non-MasterCard euro “third way”.

If so, they’re not the only ones. Indian banks are looking at a similar move, setting up a domestic card payment settlement company, called India Pay, to compete with Visa and MasterCard. The plan, taken up under the aegis of the Indian Banks’ Association (IBA), comes amid estimates that payments through cards would increase three-fold over the next five years. A domestic card payment settlement company would save the “outgo on commission paid to Visa and MasterCard”, a senior banker said. Last year, this was around $50 million in India, so it’s serious business.

So will this kind of additional competition benefit consumers and merchants in the SEPA zone? It’s not a given, as Aneace has repeatedly argued. He’s at it again, drawing attention to the situation in Singapore where the domestic purse NETS charges merchants between 35 and 55 basis points (bp). Starting next month, this will be increased to 150 to 180 bp, to bring it in line with Visa and MasterCard debit card fees because, as NETS CEO Poh Mui Hoon says, NETS will be squeezed out of the market if it does not raise its rates, because banks may no longer issue NETS cards, opting instead for the more lucrative debit cards. Will SEPA be different? It may be. When a similar price rise was mooted in Belgium — dumping Mister Cash for Maestro — the retailers went bannanas and blocked it.

My opinions are my own (I think) and are presented solely in my capacity as an interested member of the general public. [posted with ecto]