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.

UK’s Oscar Gets a Green Light from Europe

UK’s Oscar Gets a Green Light from Europe
Another day, another interesting development in the mobile payments space. It was announced today that the European Commission “unconditionally approved” “Project Oscar”, a joint initiative between the leading UK telco operators to bring mobile payments to the UK. Earlier this year, the EC decided to investigate the venture’s plans citing competitive concerns. It’s clearly a welcome news to the operators. However, now that they are free to proceed, it will be interesting to watch what will actually emerge as a result. One of the key questions is how the individual efforts of each operator will fit with the JV plans. While the EC was probing Oscar, each MNO participating in the JV struck individual partnership deals with payment schemes (e.g. Vodafone and Telefonica (O2) with Visa and EverythingEverywhere with MasterCard) and some have launched their own wallets (e.g. O2 Wallet). Are we to expect another mobile wallet similar to Isis, this time from Oscar? Or will the JV focus its attention first on developing adjacent commerce services rather than payments – for example, targetting merchants with a proposition to bring their offers and coupons to a wide consumer audience? And what does that mean for the UK banks? As the experience elsewhere shows, collaboration is not easy. The Dutch version of a bank-telco consortium known as Sixpack has disbanded earlier this year. And the launch of Isis in the US has been delayed, although it is now expected to be launched this month. Lets hope Project Oscar has a recipe for success.

The New EC Green Paper: Missed Opportunities?

The New EC Green Paper: Missed Opportunities?
It was interesting to read the European Commission’s Green Paper “Towards an integrated European market for card, internet and mobile payments” published a couple of days ago. My colleague Gareth has already provided some insightful commentary in his blog below, and I wanted to add a few further points. My first reaction was to applaud the Commission for recognising the increasing convergence of physical and online worlds and deciding to cover in this paper three types of electronic retail payments, namely cards, internet and mobile payments. However, my excitment waned as I continued reading, as the paper is mostly dominated by card-related issues with relatively little attention on internet or mobile payments. Also, in contrast to some very specific issues around cards, such as MIF, cross-border acquiring, specific scheme rules, etc., the questions related to e- and m-payments are rather vague and quite high-level. As a result, we probably shouldn’t expect the consultation feedback and responses to be concrete and actionable proposals. The paper envisages that “an integrated EU market for payment services could also produce, as a by-product, administrative data that could be used for the production of harmonised statistics.” However, it completely misses the opportunity to recognise the complexities of gathering payment statistics in the converged world, where a card payment might be initiated via a mobile phone, or where an e-wallet might be used to pay for a purchase online, whilst at the same time trigerring a card transaction to fund the wallet. Harmonised payments market by itself will not be sufficient – a common taxonomy and agreement is needed to differentiate between payment instruments and channels, and how various transcations are going to be accounted for. I couldn’t help but think that a lot of the questions and phrasings in the paper were a thinly veiled swipe at Visa and MasterCard, two recognised international schemes on which Europe also relies to provide SEPA-compliant international payment instruments. It again raises many of the sensitive issues around MIF, surcharging, co-badging, Honour All Cards rule and others, and the reader is left with a feeling that the Commission would like to see a change in many of today’s practices. I could imagine that the schemes must feel rather aggrieved and probably feel that their efforts and investments in maintaining and innovating the payments infrastructure are underappreciated by the authorities. Continuing with the theme of what’s missing from the paper, one of the most interesting ommissions to me was the fact that nowhere in the document there is any mention of the need for a third European card scheme. There are probably good reasons for it – we have been conducting some very interesting interviews in the market and will summarise our views in a forthcoming report – keep an eye on it over the next month or so. This is a consultation document and interested parties are encouraged to submit their responses to the Commission by 11 April 2012. The Commission expects that any new proposals would be adopted by Q4/12 or Q1/13, and that “any future legislative or non-legislative proposal will be accompanied by an extensive impact assessment.” In other words, it will take some time. And the risk is that the grander the vision, the bigger the likely gap between that vision and the reality, and the longer until the actual changes take place.