Who says there is no competition in the cards world?

Who says there is no competition in the cards world?
The European Commission has continuosly stressed the need for a pan-European card scheme as an alternative to Visa and MasterCard. The chief argument goes that the existing duopoly of the two giants limits competition and choices for the European banks. There was a time perhaps when the association status of both schemes used to colour their commercial judgement. I also remember their own messages at a time, which went along the lines “we are not competing against each other, we are both competing against cash”. Sure, cash remains an important target for both Visa and MasterCard, however, since their respective IPOs, I am seeing an increasingly fierce competition between these two firms. Both of them have been very active in staking the ground in contactless (Visa with payWave and MasterCard with PayPass) and mobile services. My UK bank has recently replaced my Maestro debit card with Visa debit – a clear sign that the competition between the two for bank accounts also remains strong. However, a number of recent announcements indicated that we might be entering a new phase in the “battle of giants”. It didn’t take long after Visa announced its intentions to strenghten its position in e-commerce with the acquisition of CyberSource, for MasterCard to follow with its own acquisition of Datacash, a European e-commerce service provider. And while MasterCard’s announcement on August 30th to partner with Borderlinx, a company that helps facilitate cross-border e-commerce, is still fresh in our minds, we should also note that Visa has done a similar deal with Borderlinx for its customers in the GCC region back in April 2010. Who says there is no competition in the cards world?

Paying to online merchants via your bank?

Paying to online merchants via your bank?
In the last couple of weeks, there have been a few announcements in the US and the UK about new ways to pay for e-commerce goods – via your online bank account. SafetyPay announced its formal entry to the US market and eWise, a company behind Secure Vault Payments in the US, announced a partnership with the UK’s VocaLink to develop a similar offering. They both promote a payment method, which takes the customer from an online merchant site to the customer’s online banking site, from which the customer can make a payment to the merchant. The attraction to the customer is that they don’t have to disclose the card details and they are safe in the knowledge that their payment has been authenticated by their bank. The merchant receives a guaranteed payment and in return pays a processing fee, which is shared between the payment provider and the bank. Such payments are reasonably well established outside of the US and UK – iDeal in the Netherlands and giropay in Germany are just two very popular examples. So, surely, the US and the UK must be ripe for these types of payments? I am not so sure though. I think these solutions will face a two-fold challenge: 1. Consumer adoption. Both the US and the UK have well established card markets, both debit and credit. Add PayPal into the mix and the consumer has a decent range of payment options online. Will they trust another unknown brand, even if it’s backed up by their bank? Just as some might be reluctant to enter the card details online, will they find it equally unnerving to type in their online banking credentials based on a link generated by an unknown online merchant? And will they find the whole process more convenient than paying by card? I doubt it… 2. Bank adoption. iDeal succeeded because the Dutch domestic debit card (PIN) had zero interchange and most of the cards could not be used online. Here, the new providers will have to convince the banks that it’s a good idea to cannibalise their card interchange fees for an alternative revenue source. Having said that, in the post-Frank-Dodd act world, these alternative revenues might actually be quite attractive. I would love to hear your thoughts on this. What do you think about payments online and specifically these new products?

Surcharging or discounting? The name should matter less than the underlying intention

Surcharging or discounting? The name should matter less than the underlying intention
I just came back from vacation having visited family and friends in Lithuania. There, at one of the retailers, I saw a rare sight – a list price and a discounted price if paying cash instead of a card. In Europe, I am very used to having to pay extra if paying by card, particularly a credit card. A number of online merchants, and especially the airlines, charge more for a purchase by credit card than they do for a debit card – a practice called ‘surcharging’. And having recently spent 6 months in Denmark, I learned to remember that I should add a card fee to the retail price I see in front of me, whether buying a coffee or paying a taxi fare. (The good thing about Denmark though is that you can pay by card for virtually everything – I stopped carrying cash at all after the first couple of months). Card companies understandably don’t like surcharging and explicitly prohibit such practices in many markets. If price discrimination is unavoidable, the card companies prefer ‘discounting’, i.e. cheaper prices for payment methods other than cards. The Frank-Dodd act in the US, which includes an amendment giving the Fed the rights to regulate debit interchange fees, has an explicit provision that the card networks cannot prevent merchants from offering discounts for different forms of payments. This is all well and good as long as the discounts truly reflect the differences in processing costs for different forms of payment. What we want to avoid is the type of ‘discounting’ when a plumber gives you one quote if you pay by cheque and a 17.5% discount (exactly the VAT amount in the UK) if you pay cash – we all know what’s going on here. In addition to many other advantages, cards create an electronic record of payment, and unfortunately, that is not always desirable by some of the merchants in some parts of the world. When I worked in Russia a few years ago, I was told by the locals that cash was worth ~10% of its face value on the Russian black market, which by the way, according to some observers, was among one of the reasons behind an enormous popularity of kiosks accepting cash for payments, such as mobile top-ups and utility bills. As we continue the debate about interchange and cards more broadly, it is worth remembering that cards have value beyond a simple payment function. They have also played an important role in reducing the share of ‘black’ or ‘grey’ economies in many emerging markets, a point perhaps not entirely irrelevant to keep in mind in the developed markets, such as the US or the UK, as well.

Reporting from the field

Reporting from the field
Last week I attended “The Future of Cards and Payments” conference in London. Over two days, various speakers shared their perspectives on how they see the cards and payments market developing, particularly in the UK. Here is a selection of facts, which I picked up during the presentations and found especially interesting:
  • The crisis hasn’t changed the UK consumers’ behaviour that much. According to a study by Visa Europe, 56% of respondents in 2010 agreed with the statement “I save money so I have some protection in the future”, compared to 57% in 2008 and 24% are “open to borrowing to buy what I want today” (vs 23% in 2008). Having said that, more people are aware of their finances with 63% vs 45% two years ago “watching every penny they spend to avoid getting into debt”.
  • Cash is not going away. In the same Visa survey, 35% of people surveyed in 2010 stated that they “prefer to pay in cash for everything I buy”, which is down from 54% in 2002, but up from 18% in 2008.
  • Only ~50% of business accounts in the UK have a card
  • Identity fraud is up by 32% in 2009
  • Cheques are due to be phased out in the UK by 2018. However, it will only be done if by 2016 there are real alternatives in place, they are available to the users, well known and are being used. Heavy cheque users include charities (get 70% of their income via cheques) and elderly (may need another paper-based alternative, e.g. giro credit) among others.
  • UK market has ~4m prepaid cards.
  • Also, UK is on track to have 12m contactless cards in use by December 2011. Focus needs to shift now to acceptance.
  • Adoption of SEPA Direct Debit is partly an issue of interchange. 70% of euro-based DD transactions in the EU don’t have interchange, but the others do. The European Commission is firmly against having interchange for DD, but accept that a transition period may be required and there might be a case for it when dealing with rejected transactions.
  • To limit fraud, some online merchants and their PSPs are beginning to tailor availability of payment methods based on the consumer’s postcode, e.g. credit cards would be OK if you live in a premium address in Chelsea or Kensington, but only a prepaid electronic voucher (e.g. ukash) would be offered if you happen to shop from a council estate in Peckham.
  • And if you live with 20 other strangers in a room with no doors or windows in Asia or Africa and have no bank account, storing money is as important to you as being able to make payments.
I will be on vacation for my next blog post. See you in August!

Customer control in the ATM world

Customer control in the ATM world
I wanted to build on my earlier blogs about customers getting more control over their card transactions. I do think it’s a genuine trend, although I am conscious that the more you think about something, the more you tend to notice things which seem to support your argument, yet otherwise perhaps wouldn’t have caught your attention. This is one such example. I just came back from a long weekend in Brugge, Belgium. Just as an aside – if you haven’t been to Brugge, you should pack your bags and go as soon as you have a chance. Many years, before I even heard of it, when people described it to me as “Venice of the North, prettier than Paris, etc”, I could not believe it, but I’ve now been there three times and agree with all those accolades. Beautiful litte town. Back to cards though. Card acceptance is broad and you can use your plastic pretty much anywhere. You can also see the signs of Bancontact/ Mr Cash, a local debit scheme, all over the place, with the plans to migrate Mr Cash to Maestro having been shelved a few years ago. As a tourist though, you still feel the need for the safety of cash sometimes. So I went to BNP Paribas ATM, which if I remember it correctly was one of the Diebold models. Most ATM transactions, especially abroad, tend to suprise you only when for whatever reason they refuse your card and you can’t get your money. However, here I was positively surprised – after I entered the amount, I was given a choice of notes denomination. For 150 Euros I was given a couple of options – 3×50 or 5×20+1×50. As I changed the amount, the options changed accordingly, e.g. for EUR160 = 2×50 + 3×20 or 8*20. I am not sure, perhaps it is a standard ATM feature in some other countries as well, but I haven’t seen that in the UK or in any other countries I travelled recently and I thought it was a nice bit of functionality, making me feel that I have influence and control over the outcome of the transcation.

Customers getting in control of their cards

Customers getting in control of their cards
In my last blog post, I talked about a Lloyds TSB Airmiles Duo card, which gives the customers a choice of using either MasterCard or American Express card for their purchases. I believe this is an example of a broader trend in card issuing – giving the customers more control. Here are a couple of other examples of card issuers giving customers more control: – Control of funding and settlement timing. Chase Blueprint card is a product combining a traditional credit card with debit, installment loan and financial planning functionality. It allows the customer to bucket payments into different categories – for example, everyday payments to be cleared in full or large one-off items to be paid off over time. It also offers tools to assist the cardholder in managing finances, such spending trends analysis and ability to set goals and set up payment plans. – Control of spending patterns and limits. Barclaycard and Orange have implemented the MasterCard’s inControl technology for their contactless card – the first deployment of this functionality for consumer cards. It lets cardholders set personalised controls, such as blocking a transaction made abroad. The customers can also set spend budgets and choose to receive instant SMS alerts or e-mails when these are exceeded. Regulation is also pointing in the same direction – Reg E in the US requires banks to let their customers choose whether they want to use the overdraft facilities on their ATM and one-off debit card transactions or not. I expect to see customers taking more control over their cards in the coming months and years.

American Express customer in a small village? Lloyds TSB might have just the answer

American Express customer in a small village? Lloyds TSB might have just the answer
It was my wife’s birthday this last weekend, so as a special treat, I arranged a romantic getaway, just for the two of us, without the kids. On the way to our weekend destination, we stopped for lunch at a rural ‘gastropub’, a very nice place with some excellent if slightly exotic dishes (haggis cottage pie anyone?). At the end of our lunch, I wanted to pay with American Express. Now, I do have a few cards in my wallet, but my Amex card collects points with Nectar, one of the UK loyalty schemes, so I quite like using it when I can. However, the owner of the place who came to collect my payment said, “I am sorry sir, we don’t take Amex. They still charge us for taking their cards”. The fact he wasn’t accepting Amex was not too surprising – while the gap is narrowing, there are still quite a few more places accepting Visa or MasterCard than American Express, especially among the smaller merchants. What I did find interesting was the phrase “they still charge us”, as if it was something unique in the market. I challenged that he surely got charged by his acquirer for accepting other cards as well, but he said it was a lot less, and generally sounded as if he has fully accepted that charge as a cost of doing business. Given the occassion, I wasn’t in the mood for an impromptu market research on MSC rates across different schemes, so I just simply paid the bill with my Visa. Lloyds TSB, one of the top UK banks, have an interesting solution for situations such as this – Airmiles Duo Credit Card. Anyone signing up for this card gets in fact two cards – one American Express and one MasterCard. What’s interesting is that the rewards the customer gets from spending on Amex is five times better than the ones on the spend through MasterCard. In other words, the customer is incentivised to use his/ her Amex card wherever it is accepted, yet they have a MasterCard as a fall-back option in those places where it’s not. Both cards are linked to the same account, one credit limit and one statement. And both cards do earn rewards, albeit it at different rates. I might have to consider getting one myself next time.

Payment infrastructures – do we care enough about their risks?

Payment infrastructures – do we care enough about their risks?

This week I attended one of The Financial Services Club events in London – a debate on whether payments infrastructure risk has been largely forgotten. The debate’s outcome was “no, it hasn’t been”, but the discussion raised some interesting points and provided a lot more colour to the answer.

The general consensus was that operational risks are well understood and mostly well managed. At least in the UK, the interbank infrastructures for BACS, CHAPS and Faster Payments schemes are very resilient with glitch events extremely rare. The very fact that the payments infrastructure works so well can lead to complacency and the impression that the risks they pose might be forgotten.

Layered resiliency is certainly one way of managing business continuity risk; the other is to have multiple providers with easy interchangeability between them – currently, that’s not the case in the UK, as the schemes are too different to just simply redirect say BACS traffic to Faster Payments infrastructure and vice versa. Could and should these schemes converge going forward?

On the other hand, liquidity risk certainly can generate shocks in the system. Do banks know how to manage counterparty risk from the operational perspective? What happens if one party cannot settle intraday? How do you know if and when to pay out? In crisis situation, is straight through processing (STP) really that good or would you rather approve outgoing payments manually?

Again, the participants were confident that banks would know what to do, but all agreed that many of them would rely on individual rather than institutional knowledge, i.e. on those deeply experienced people that all banks have somewhere deep in their payments and risk departments. But will this enough to satisfy FSA and other regulators? Banks have to take stress testing seriously and put their payments infrastructures through challenging but realistic scenarios to increase confidence in the whole system.