Third men

[Dave Birch] Way back in 2007, Peter Jones of Payment Systems Europe published a typically perceptive paper on the potential for European ATM networks to form the basis of the European Commission’s “third scheme” for debit cards. This has become a reality, at least in embryo, through the Euro-Alliance of Payment Schemes (EAPS). So will the existing banks and the existing switches become the unopposed third way? I suspect not, because more possibilities already exist. I wrote some time ago about First Data’s moves in that area and the possibilities that might emerge as they push their FirstNet offering in this direction. Now, with the landscape becoming richer — additional third scheme candidates Monnet and PayFair are in town (by which I mean Brussels, of course) — and the Commission continuing to press for a “European” SCF debit scheme, it looks as if things might get interesting. PayFair, a private initiative that is targeting merchants, is already trying to get off of the ground with a Belgian pilot in the autumn and Monnet has said that it intends to form a company in the not too-distant future:

However, Hermann-Josef Lamberti, COO of Deutsche Bank, is again talking up the prospect of a third pan-European debit scheme, telling a conference in Frankfurt that several financial institutions, including Société Générale and BNP Paribas, are planning to formally establish a group of banks by October 2009 to move ahead with the Monnet scheme.

[From CardsInternational.com – VRL KnowledgeBank]

Despite the economic circumstances, now is a pretty good time to be thinking about launching a new debit scheme, since customers are moving away from credit and toward debit in a big way in the US and Europe.

Quantitative consumer data indicates as a shift from “pay later” options (credit card) to “pay now” or even “pay before” options (debit cards and prepaid cards).

[From Javelin Strategy and Research » Thoughts on “Premium Debit” as a Component of an Enterprise Payment Strategy]

And whatever the rights or wrongs of the interchange debate, now isn’t a bad time to approach merchants with lower-cost alternatives either. So the European debit marketplace looks like it’s going to get interesting.

The idea of a new, competitive debit scheme, is not restricted to Europe. Celent, amongst others, flagged this possibility a year ago in their predictions of disruptive change in the sector.

First, Celent expects that interchange rates will begin to decline…

Second, Celent expects that a large payments company will throw its hat into the ring and launch an alternative network that will rival MasterCard and Visa.

Lastly, credit-only or credit-centric issuers are expected to diversify their payments mix (a necessity during this economic time and consumer trend to debit) and focus on building their debit payment options by way of decoupled debit programs.

[From Payments News: Disruption in the Payments World – May 09, 2008]

So you can put these together to make the prediction that there will be debit competition. But who from? In this coming reduced interchange world, whether in the US or in Europe, any new entrant hoping to make anything other than a niche play is going to have to achieve really, really substantial volumes in order to make any money. If you look at the general picture for interchange in Europe,

[From July 2009] on the Maestro network of debit card transactions, MasterCard has agreed to cut charges to 0.20% from the current range of 0.4% to above 0.75%. Currently, Visa applies a 0.61% rate for cross-border EU credit transactions, and an average €18 cents for debit payments.

[From EurActiv.com – Visa told to reduce transaction fees | EU – European Information on Financial Services]

A new entrant might decide, let’s say, to base its business case on 10 cents (or perhaps even 5 cents) per transaction. A combination of this substantial fall in debit interchage and more realistic pricing for cash could easy raise the number of debit transactions in the eurozone tenfold. Not ten per cent, but ten times. At this volume, even a 5 cent interchange delivers big money to issuers. But the question is how to get from here to there. History suggests that banks will end up lashing something together from the ATM networks, since the desire to make-do-and-mend in the short-term tends to outweigh longer-term strategic thinking: it’s a brave person indeed who goes to their boss right now asking for substantial investment in a new retail payment system. But this may be nothing more than a stopgap, unable to deliver new functionality attractive to other stakeholders. I think we may find ourselves looking outside the current spectrum of providers. There will be a new retail debit payment system (I am with Celent on this one) but there’s no reason to think that it will be driven by banks.

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