What do we want? EMV! Where do we want it? Over there!

What do we want? EMV! Where do we want it? Over there!
In my last post, I talked about the experience of using my credit card in the US, and how just inconsistent it feels. Some of it was undoubtedly tied to security – using photo ID or entering zip codes – though I’m far from convinced that they provided any security at all. In some conversations we’ve had, there has been a feeling that US fraud is actually manageable at an industry level – a belief that they are in line or better than in many other countries. Yet the recent figures from Nilson seem to paint a very different picture. Whilst accounting for 21.4% or $6.187 trillion of total volume last year, the US accounted for 48.2% or $7.86 billion of gross losses worldwide on plastic cards. Zil has – and will! – discuss the implementation of EMV at length with anyone, so I won’t discuss that here. What struck me was how ineffective the checks were currently. As a consumer (rather than a payments geek) it struck me:
  • Asking for zip code as authorisation seems pointless – if I’ve stolen a purse or wallet with cards in, I’m likely to have either the zip code already or have enough info to find it within seconds on the internet
  • Asking for a signature, yet not even checking it seems odd. Perhaps I have an honest face or perhaps the risk didn’t warrant the effort
  • Photo ID, at least for non-US, seems pointless. How many people can spot fake ID, or know what a, say, Latvian national ID card looks like?
Another thought that strikes me is that the figures probably hide some other issues too. Traditionally, a third of UK card fraud takes place overseas (in 2014, £150m of £479m). And given that most other countries have EMV, of that, the majority takes place in the US – it has been ranked the country with the highest losses every year for as long as I can find records for. I suspect the figure above does not include this. The volume of fraud then that could be cut by EMV in the US would seem to be even higher. Whilst I know it’s not that simple, the US “accounts” for over 5% of UK card fraud. Full EMV in the US wouldn’t reduced this to zero – but equally, even if it halved it in the top 10 countries which lose most to the US, the reduction in fraud would easily be in excess of £100m a year. Visitors to the US aren’t just wanting the experience to improve, they’re wanting to stop paying for fraud that takes place in the US as well.  

Can’t Wait for the US to Migrate to EMV: The Musings of A Visitor

Can’t Wait for the US to Migrate to EMV: The Musings of A Visitor
Usually, during the Autumn season, I make a few trips to the United States for conferences and client visits. This year was no exception and I have recently come back from two trips to Las Vegas and San Antonio. EMV migration in the US was high on the agenda during both visits and I came back with two takeaways: 1) the US market is finally serious about EMV and preparations are going full steam ahead and 2) I am glad it is happening. All the data breaches at retailers, from Target to K-Mart Sears, have spooked the market and stirred it into action. Some of the major challenges, such as reconciling EMV with Durbin/ Reg II, have been resolved – on November 4, Vantiv announced it became the first US acquirer to successfully complete a debit EMV chip transaction compliant with Durbin. Most of the issuers are in the planning stages and beyond, even with debit. On September 30, Bank of America became the first major US bank to announce that all new debit cards with be EMV, while existing cards would be replaced at expiry. I am planning to soon publish a report on the US EMV migration, which will discuss what is happening in the market now and will address a number of questions we frequently get from clients, including some of the more advanced EMV topics, such as scripting, PIN management and multi-functional cards. In this blog I just wanted to share a personal story. Until the cards and terminals migrate, the fear of fraud at the US retailers is palpable, to the point where it is starting to impact consumer experience. During my brief shopping break I wanted to pay with my UK-issued chip card. As the amount was over $75, I was asked for a customer ID. I offered my UK driver’s license, which the cashier started diligently copying by hand onto the printed receipt. As it was a foreign license, he wasn’t sure which was what, so had to call his supervisor to check what exactly he should be copying. When he was done, I thought that would be the end of it, but unfortunately, I was mistaken. The cashier then took my card, placed the receipt on top it and started rubbing it with a pen to get the imprint of the embossed details on the card! Apparently, he had to do it because the amount was actually over $150… I could scarcely believe this was taking place in the 21st century… On a separate note, I must admit, 10 years of EMV in the UK made me deeply suspicious whenever at a restaurant I have to hand in my card and the waiter just runs away with it. In Europe, the waiter brings a handheld terminal to the table, I enter my PIN and the card never leaves my sight. I am not saying that this is an everyday experience for all US consumers these days. Perhaps I happened to go to a retailer with particularly strict anti-fraud policies, or they recognised a foreign card and wanted to take extra precautions, or I was simply unlucky. But I did not enjoy the experience. This is also not a smug boast how “we have it better here in Europe.” I actually think that the US is a hotbed of innovation and creative solutions emerging from the US such as Apple Pay are pointing to the future of what lies ahead for many of us. However, EMV will help with the “here and now.” Of course, there will be a learning curve for the US consumers as they get used to new chip cards, and there will be teething challenges during the migration, but it will be worth it for the market as a whole. And as a regular visitor, I just can’t wait for the US to migrate to EMV.

Another Look at the European Card Regulation Proposals

Another Look at the European Card Regulation Proposals
We already talked on this blog site about the latest proposals by the European Commission to regulate the cards business – see Gareth’s and my posts on this topic. However, I wanted to come back to a couple of points, namely:
  1. the decision to cap debit and credit interchange to 0.2% and 0.3% of the transaction amount respectively;
  2. the requirement to separate schemes from processing companies.

The Commission expects that the caps will cut total EU debit card fees from ~EUR4.8bn to EUR2.5bn and credit card fees from EUR5.7bn to EUR3.5bn. How big of a deal is it though? The answer is that the impact will vary hugely market-by-market. For example, in Germany average credit card rates stand at 1.8%, and given the country’s aversion to debt, most cardholders are “transactors”, i.e. usually pay their balances in full, so interchange is the main source of income for the issuers. Compare that to the UK where Visa’s credit card interchange rate for EMV cards is 0.77%, and while the number of “revolvers” (i.e. people who borrow on credit cards) and their outstanding balances have been declining, the revolvers still represent over 60% of all cardholders, making the issuers less reliant on interchange income.

For debit it gets even more interesting. While average debit card charges are 1.6% in Poland, many other countries already have low and flat (i.e. fixed irrespective of the amount) fees for their domestic debit transactions. For example, Visa dominates the debit market in the UK and its interchange fee for a debit transaction currently stands at £0.08. Given that the average UK debit card transaction is just over £45, it already works out as an effective rate of 0.18%, i.e. cheaper than the proposed cap. From Durbin experience in the US, the proposed fee ceiling quickly became effectively the floor as well, i.e. most transactions were priced at cap. If this were to happen in Europe, the fees on debit cards in many markets might actually increase! Of course, the EC hasn’t ruled out the possibility that it might decide to ban interchange fees on debit cards altogether, but we expect this to remain a prospect in the distant future.

The EC proposals also include a recommendation that ‘card schemes and the entities that process transactions’ be organizationally separated. It will be interesting to see the actual interpretation of this recommendation. A similar requirement is one of the fundamental tenets of the SEPA cards framework: “a scheme should implement a separation of SEPA card schemes’ brand governance and management from the operations that have to be performed by service providers and infrastructures without any possibility for cross-subsidisation.” Visa’s and MasterCard’s position has always been that they meet these requirements by not mandating their processing services and having separate pricing for scheme and processing services.

However, some commentators believe that this time the Commission might want to go further and impose legal separation of the schemes, processing assets and potentially even issuing and acquiring side of the business, which would have far reaching consequences to most players, from Visa/ MasterCard to American Express to local debit schemes to even banks. Given the lack of clarity in how this might be implemented so far, we expect a lot of lobbying on all sides in the coming months and years until the outcome is settled.

The Latest Assaults on Card Fees

The Latest Assaults on Card Fees
I said last year that I can’t really take a summer vacation – too many things seem to happen in payments while I am away. This year was no different with many interesting stories to catch up with from new chiefs at MCX and Visa Europe to PayPal trying out check-in payments in the UK to the latest announcements from Isis (I will try to review those in a separate blog.) However, two big news items really caught my eye, both to do with further assaults by regulators on card interchange fees. As Gareth already described in his blog, the European Commission confirmed its intentions to cap interchange fees across Europe to 0.2% for debit and 0.3% for credit. The enactment is expected to take one to three years for European Parliamentary approval and approval by a majority of EU member states. Caps will start applying to cross-border transactions two months after final approval and for domestic transactions after 24 months, so some of the caps could be introduced as early as late 2014. If and when this happens, it will have major repercussions to the industry – the banks will have to seriously question the viability of offering credit cards, are likely to be more open to experimenting with non card-based solutions (e.g. bank account), yet the merchants incentives to accept anything other than cards and card-based solutions would be seriously diminished, dampening the prospects of innovation and start-ups. If the EC announcement was expected, the news from the US was anything but. While the industry was still getting to grips with the aftermath of Durbin amendment, the District Court Judge Richard Leon threw out the $0.21 debit interchange fee cap set by the Federal Reserve and suggested that the Fed should review and lower the cap further. If the cap went down to $0.12 or even lower, the banks would stand to lose another $4bn or more in revenue. The Judge’s decision also appears to impose more routing requirements than the Fed’s ruling did, which even in the original implementation turned out to be a big stumbling block for EMV. What will this latest turn of events do for EMV prospects in the US? If there is one thing certain is that it will only create more uncertainty for the industry, making the original dates for the liability shift even more difficult to achieve.

Of Eggs and Omelets – Interchange Legislation Recipe for Disaster?

Of Eggs and Omelets – Interchange Legislation Recipe for Disaster?
On Wednesday, July 24th, the European Commission will publish 2 widely anticipated documents. The first is the PSD II, updating the existing PSD (Payment Services Directive). The second is a new piece of proposed legislation around interchange. Interchange in Europe has long been an area of focus for the Commission, with over 30 significant investigations in the last 15 years at either country or European level. Many of these have been very public and, perhaps “personal”, with Visa and MasterCard receiving the majority of the attention. The interchange regulation therefore is  anticipated with some trepidation as the Commission is seeking to draw a line under the investigations once and for all. Last week, the FT ran article based on a leaked copy of a draft of the proposal. That draft contained a range of issues, but those that have grabbed the biggest share of attention are:
  • Domestic interchange rates for debit and credit to be capped at 0.2% and 0.3% respectively
  • Legal separation of schemes/networks and processors
A third, but now discounted element, was a belief that these rules also applied to 3-party schemes such as Amex. So what does this mean? Firstly, the devil will be in the detail. Those of us who’ve been round the block a few times will know that drafts usually get amended before publishing – the last draft of the New Legal Framework (the original name for the PSD) had over 200 amendments between draft and final version. Many of those changes were very minor, but when every word is poured over, those differences can be very important. Secondly, these are proposals for legislation. Based on the gestation time of the PSD, even with the political will to drive this through, this will take at least 5 years to come into force, and will not be exactly as published on Wednesday. If anything, this is probably the only thing that is certain in the whole process! Some potentially significant impacts A sweeping statement (because rates vary by country, category and negotiation), but my first back of the envelope estimate suggests that the majority of the credit card volume in Europe is currently at higher rates than the proposed cap. I also believe that there are significant numbers of debit cards subject to higher rates as well – the FT suggests that debit card interchange in Poland, for example, is 1.6%. When banks are already struggling with the economics of the card already, this may result in consumers paying more having a card, and potentially, using the card. At first glance, this may seem fair – the people who use it, pay for it. But what the proposal does not seem to allow for is the fact that it’s highly unlikely that the merchants will pass on those savings, plus there seems to be a suggestion that surcharging may be allowed. The customer could potentially lose out 3 times over. That in turn creates a “ripple” effect. Banks may not offer cards to everyone and/or customers may not use the cards. After all, these are choices both parties make. At the same time, the economics of cards may have changed sufficiently that existing national debit card schemes decide to call it a day, and the economics of cards today had already killed off any chance of a home-grown debit card scheme. What we may find is that there is a move away from cards, to other payment types. As debit cards are seen as a form of electronic cash, cash is a likely winner, almost certainly not what the regulator wanted. And in certain countries, such as France, by focusing the legislation on cards, not interchange more broadly, we’ll see further growth in payment types where there are greater levels of interchange, such as cheques. Additionally, card issuers may focus on corporates going forward. Not only do they currently have greater levels of interchange already, they are not subject to the legislative proposals, plus they have much lower levels of fraud than consumer cards. In short, more money and for less risk.   Whilst I understand that the regulator wants to improve transparency for consumers, and to provide them with a better deal, I feel that this legislation is more likely to make things worse, not better. Whilst, as the saying goes, you have to break some eggs to make an omelet, the regulator would seem more interested in the egg breaking rather than a successful recipe. A great chef doesn’t use a recipe, and is willing to experiment and take risks. I think this is shaping up more for a recipe for disaster.

Holiday Cheers for Consumers from the UK Treasury

Holiday Cheers for Consumers from the UK Treasury
Just before the country stopped to celebrate Christmas, the UK Treasury announced that the government plans to ban the ‘excessive’ fees for card payments before the end of 2012. Essentially, this is the ban for card surcharging, i.e. fees that get added to the transaction if the person chooses to pay by card. Unfortunately, in Europe surcharging is quite widespread. When I was regularly travelling to Denmark, I used to pay a fee for pretty much all card transcations. Here in England, consumers rarely get charged by brick-and-mortar retailers, but are quite often hit by charges from online merchants, especially the airlines and various ticketing agencies. As a consumer, I find it really annoying, as these fees are not made transparent until late in the checkout process. So, you think you are getting a good price, only to find out that you’ve been slammed with an extra fee just to pay by card. The surcharges have already come under scrutiny. Earlier this year, Which?, a consumer group, complained about the surcharges which prompted an investigation by the Office of Fair Trading (OFT). The European Union also has approved the new rules giving the European shoppers more rights when returning goods or paying by card, but the rules are unlikely to be implemented until 2014. So, the latest announcement by the UK Treasury expected to come into force by the end of 2012 is a welcome step towards limiting surcharging and increasing price transparency. It will be interesting to see how this will be implemented – what level will be deemed as “excessive”, how the compliance will be monitored and how any breaches will be penalised. There is a clear difference between a small mom-and-pop store charging £0.35 to recoup their additional cost of a card transaction and the likes of Ryanair, a so-called “budget” airline, charging £12 per person for booking a return flight. The other question, of course, is that of the alternatives – at a physical store, I can perhaps pay cash to avoid card fees, whereas online, the card is often the only payment method available. The Office of Fair Trading report has been arguing that the fees should not be applied to at least debit cards, as they represent the equivalent of cash in the digital world. The Treasury’s proposal seems to go one step further and limit the fees to credit cards as well. Will it reduce the ultimate price consumers have to pay? Possibly not, as the retailers can easily just add the today’s fees to tomorrow’s prices. Yet, it would be a big improvement, as consumers could more easily shop around and compare prices knowing that they wouldn’t be charged for the privilege of parting with their money. Given the background of all the gloomy reports about recession, rising unemployment and other bad news, the Treasury announcement should bring the holiday cheers to the UK consumers.

The Unintended Consequences of Regulation

The Unintended Consequences of Regulation
Last week I attended Celent’s Innovation and Insight Day in Atlanta and had an opportunity to catch up with many of our clients, both banks and technology vendors. One of the banks told me an interesting story how after Reg E came into force, they saw a drop in debit card usage and a significantly increased demand for cash. As many of you know, Reg E requires a customer to opt-in to an overdraft facility for debit transactions at the point-of-sale. The regulation’s intention was good – to protect consumers from unexpected overdraft charges. However, the outcome was an unintended steer back towards cash at the point of sale. Many consumers didn’t understand the requirement to opt-in and having had their card declined at the POS due to insufficient funds in their current account, lost confidence in shopping with the debit card. If there is no easy way to check balance and there is a risk that the transaction might be declined, then it is easier just to withdraw cash and use that for purchases instead. As a result, the bank is faced with an unexpected increase in costs and efforts to forecast cash demand and replenishing ATM’s in time to meet that demand. According to a meeting notice published on its website, the Fed plans to meet on June 29 to discuss “Debit Card Interchange Fees, the Fraud Prevention Adjustment, Routing and Exclusivity Restrictions and related matters”. As the Durbin saga is nearing conclusion with the final rules expected to be announced after the meeting, there is a risk that this regulation will also have far-reaching and unintended consequences. Celent has just re-published an Oliver Wyman article series called “Durbin Second-Order Effects“. Oliver Wyman’s partner Andrew Dresner and the series’ author argues that by reshuffling the relative costs between debit, credit and alternative payments, Durbin will have as profound an impact on other actors in the payments ecosystem as it does on debit issuers. Do you agree? Do you have other examples of unintended consequences of regulation?