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13 June 2007

Changes to the card payments landscape in Europe

[Dave Birch] I saw a typically excellent presentation by John Chaplin of First Data recently. 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?

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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.

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 he said this before Capital One's announcement of the disconnected debit card. You can see where this trend originates: in the 1950s, no bank could have built a network to every retailers, whereas now every bank is (in principle) connected to every retail and everyone else besides.

On this side of the pond, 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?

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]


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