Cards play a significant role in driving non-cash payment volumes, which have continued to grow, with an increase of 8.6% globally to 250 billion transactions in 20081. The use of cards continues to be the single strongest driver for this growth. Global card transactions (credit and debit) grew 14.5% in 2007 and 11.6% in 2008.
In Europe, the number of issued cards has grown steadily at about 5% per year to 727 million in 2008, while the transaction volume grew twice as fast as the number of cards issued, to €1.68 trillion2. The financial crisis has also affected the card market. However, card payments are still expected to grow, although at somewhat lower rates over the coming years, as preliminary figures for 2009 indicate.
The UK, Germany and France make up 50% of the EU card market, with 149 million, 122 million and 85 million cards respectively. The UK is primarily a credit card market, while in Spain and France the delayed debit card plays a central role. Germany, on the other hand, is a debit card market, where the credit card plays a minor role.
Cards as Part of the Receivables Chain
Owing to the credit crisis, many corporate clients are now pushing for a wider range of cash management solutions, all rolled into one solution so that they have better visibility over their cash flows, such as accounts receivable (A/R) and payable (A/P) alongside a card proposition. Within this trend, the importance of cards is steadily increasing as part of the receivables value chain. In contrast to the steady decrease of other payment methods such as cheques (14% in 2002 to 9% 2007), cards rose from 28% to 32% in the same period.
Today, treasurers are dealing with a receivables chain that is already almost one-third card payments, a proportion which will increase over the next few years. Therefore, a cash management bank that intends to provide a complete cash management service to its merchant customers must also have a card proposition in its portfolio.
And yet, the European merchant acquiring market today is largely domestic and fragmented (see Figure 1) as a result of the special point-of-sale (POS) challenges of domestic debit cards:
- Terminal concept.
- Customer service, billing and reporting in local language.
- Legal restrictions.
A pan-European proposition for the POS business is, however, very complex. As long as the single euro payments area (SEPA) is not fully in place, there are no international standards; nearly every country has its own payments schemes, as well as different technical equipment and service levels. Historically, merchants have needed separate processors for each country because even international processors didn’t have domestic schemes on their platforms.
Additionally, even though the POS hardware is the same for each domestic scheme, they have different protocols that have to be converted to one understood by the bank. Plus, each domestic scheme transmits different amounts of information. For example, Switzerland provides additional data not provided in other countries. When a large merchant is accustomed to – and relies on – this level of information, then any bank interested in operating in that market must provide all the information to enter into the customer relationship.
Second, the array of European languages adds another layer of complexity. This may seem trivial, but if a bank wants to enter a new market, it must also deliver customer service. For example, hotels, petrol stations, restaurants and other similar businesses must be available 24/7, 365 days a year. A bank also needs this capability in billing and reporting, effectively having every language in its back-end systems.
Third, domestic legal restrictions, such as the data protection law in Poland, present further challenges.
In addition to the aforementioned issues, there are also pricing hurdles. Within the EU there is non-deductible value-added tax, which can put cross-border players at a disadvantage compared with domestic competitors. In some markets, where the issuing banks have a dominant market position, they have forced the (higher margin) issuing business by giving away the acquiring for free. This tactic makes it difficult for new players to break into these markets.
In summary, the European cards market has seen a number of years of double-digit growth in transactions, but still has a lot of untapped potential that will foster continuous growth. Additionally, the importance of cards in the receivables management chain will continue to grow.
Yet, many markets are still relatively undeveloped compared with the advanced UK market (especially credit cards). The domestic debit systems have led to relatively closed domestic markets and no pan-European players have yet evolved with substantial scale in various key markets.
Market Drivers for Pan-European Card Payments
The competitive landscape has changed significantly over the past two years, with much movement and some consolidation in the marketplace. For example:
- Deutsche Bank took over the platform of Pago eTransaction Services to form Deutsche Card Services (October 2008).
- HSBC sold its remaining 49% stake in HSBC Merchant Services to Global Payments (June 2009).
- easycash bought RBS WorldPay’s German POS acquiring business (July 2009).
- Elavon and Santander announced a new alliance to supply merchant services in the UK (September 2009).
- Elavon acquired Diners Club Merchant Portfolio from Citibank, including over 75,000 merchants in eight European countries (September 2009).
- Bank of America and First Data set up merchant processing joint venture (June 2009).
New players, such as payment services providers (PSPs), processors, and even terminal manufacturers, are entering the cards business. And while some banks are moving out, others are moving in, further increasing competition and driving market consolidation.
There has also been a flood of new regulations – the most significant being SEPA and its legal counterpart, the Payment Services Directive (PSD). SEPA, which aims to make cross-border payments the same as domestic payments, will force the domestic schemes to open up. Austria is a good example: what was still a relatively closed market until the beginning of 2009 has now opened up to external acquirers at fair pricing levels.
The SEPA Cards Framework has set a target deadline for the end of 2010, when SEPA-compliant scheme cards must have the potential to be accepted at ATMs and POS in all 31 SEPA countries.
This will mean:
- Open participation for issuers and acquirers in all card schemes with a single licence.
- Transparent (unbundled) pricing without discrimination against cross-border transactions.
- All cards and terminals have to comply with the EMV standard chip technology.
- Merchants will be able to do business with one or several acquirers and choose which schemes to use from which acquirer.
There is a high probability that domestic schemes will be replaced by a Europe-wide scheme or migrate to existing international schemes. However, domestic systems will continue to exist, at least for some time, and so will the challenges – so it is important that banks deal with these challenges in a way that serves the customer.
Innovation is also having an impact on the marketplace. E-wallets and merchant service providers (MSPs), such as PayPal, Moneybookers and ClickandBuy are continually taking market share from cards. Online payment methods are becoming more popular, such as giropay (Germany), iDEAL (Netherlands), eps (Austria), etc. Mobile payments and near field communications (NFC) are also rapidly gaining in importance. These include mobile banking, mobile money transfers (person-to-person) and m-commerce (person-to-business) (see Figure 3).
Lastly, client demand is driving change. Merchants are demanding quality at a reasonable price. They want:
- Flexibility and quick time to market for innovation.
- Speed of POS settlement.
- High system availability.
- Low cost.
- High security standard.
- Secure and guaranteed settlement.
Although in some areas niche payment methods can be sensible and successful, consumers mainly prefer a multi-purpose payment method. They demand:
- Easy usage.
- Data protection.
- Low (or even no) costs.
- The possibility of retrieving payments.
Clients are also looking for payment services harmonisation to focus on their core competencies, allowing them:
- Streamlined vendor relationships and to offer cross-border acquiring from one hub.
- Standardisation of reporting, billing, processes and infrastructure.
- Integrated fraud prevention.
- An integrated receivables management solution.
- Safeguarded investments (e.g. terminals).
Therefore, in future, we predict that cards will see continued growth, especially in e-commerce. There will also be further commoditisation of acquiring, with respective margin compression. SEPA will open markets and foster a European debit scheme, but this will take time. The competitive landscape will change, with vertical and horizontal integration and new competitors etc. And new payment methods will change the landscape and compete with cards, while innovation and technology will bring opportunities and challenges such as mobile, NFC, etc.
Merchants will see a significantly lower cost of card acceptance. With fewer providers and optimisation of internal processes and cost, they will have the opportunity to consolidate their business. But merchants will need partners that help them to fully benefit from these opportunities and reduce complexity.
For acquirers, even though volumes will grow, the payments business will become tougher, with margins declining. They will also face increased complexity (and costs) through new payment methods and regulatory requirements. They need to focus on:
- Client demand and value added services.
- Cross-border acquiring.
- Fraud prevention.
- Reporting and process optimisation.
Although there is a high concentration of acquirers in each European market and the four biggest acquirers hold between 80-90% of market share, there is no real pan-European player yet. Therefore, domestic players are still dominant. SEPA, however, change this situation in years to come. There will be more pan-European players, some which may directly handle merchant relationships, or act as consolidators, similar to the situation in the cash management world today.
From a bank’s perspective, one of the main goals should be to ease the life of its clients by reducing complexity and realise true one-stop solutions that are not limited to a single country. An increasing number of merchants are now looking for a single payments provider that can operate on a pan-European basis. At the same time as they concentrate on acquiring relationships, merchants are also looking to consolidate their cash management relationships. The next logical step for them is to look for an integrated cash management solution.
Having one partner for all cashless payment systems allows a merchant to reduce internal complexity and process cost. If the merchant has pan-European operations, the concentration of acquiring services can save several million euros. In addition, an integrated cash management offering allows a merchant to benefit from seamless integration, thereby optimising its liquidity flows. To obtain this, it is important to have a strong, reliable financial partner that does not merely deliver the system stabilities needed, but is also considered to pose a low counterparty risk.
1World Payments Report 2009, from Capgemini, RBS and Efma (www.capgemini.com/wpr09).
2ECB Payment Statistics, September 2009.
To read more from Deutsche Bank, please visit their gtnews microsite.
Despite all the automation and improvements that digital banking has the potential to achieve, customers and their needs still form the very core of the banking sector.
Politicians have united in urging the Reserve Bank of Australia to lend its backing to the digital currency by officially recognising it.
In order to survive, banks must get ready for an open application programming interface-led economy and develop superior value propositions for their customers.
The banking industry will meet the challenge of the new era introduced by Europe’s Payment Services Directive, but it is up to its individual members to determine whether they sink or swim.