Unintended Consequences of Regulation, Part “n”

I must admit, I lost count how many times we at Celent have written and talked about unintended consequences of regulation. This is the latest installment.

As most people know, PSD2 has introduced new card multilateral interchange fee (MIF) limits in Europe. Debit card transactions across Europe have been capped at 0.2% of transaction value, while for credit cards, the limit is 0.3%. This is often used as an example of regulators bearing down on the issuers, and in many cases, especially for credit cards, it is indeed a significant reduction of fees charged previously.

However, let's take a closer look at the UK. According to the UK Cards Association statistics, debit card transactions outnumber credit card transactions by 3.3 times (10.3 vs 3.1 billion in 2015), while the purchase value of debit card transactions was greater than that on credit cards by 2.4 times (£439 vs £181 billion in 2015). Furthermore, of nearly 100 milion debit cards issued in the UK, 97% carry Visa brand. In other words, Visa debit cards are the most popular payment cards in the UK.

Visa interchange rates have varied over the years, but immediately prior to March 2015, Visa interchange for consumer debit card chip & PIN transactions in the UK was flat 8p per transaction. In March 2015, those fees changed to 0.2% + 1p, but were capped at 50p. The extra penny could be charged, because the UK Payment System Regulator allowed an interim period where the cap of 0.2% could be applied at an aggregate rather than an individual transaction level. As the individual interchange fees were capped at 50p, that meant that in aggregate they didn't exceed the required 0.2% limit. However, we understand that as of September 1, 2016, Visa UK is removing both the extra 1p and the cap of 50p and setting debit interchange fees at 0.2% per transaction, as required by PSD2.

As the chart below demonstrates, transactions less than £35 become cheaper than 8p set prior to March 2015. At £41.34, which is the latest average debit card transaction value, the current charges are at 9p and new ones post September will be 8p, the same as before. However, transactions above that amount and up to £250 are already more expensive than 8p today and will remain so post September.


The real difference is for transactions above £250. The removal of 50p cap and charging at a straight 0.2% means that a £10,000 transaction (for example, when buying a used car) will now cost a merchant £20 in interchange versus the 8p the merchant paid before the regulation came into effect.


What about Brexit? Will these European regulations still apply in the future? The answer for domestic transactions is, yes. The interchange caps are now enshrined in the UK regulation and are independent of the UK's status in Europe. More broadly, the Payment Systems Regulator announced immediately following the referendum results that "current payments regulation deriving from the EU will remain applicable until any changes are made, which will be a matter for Government and Parliament." Perhaps a more interesting question is what would happen with transactions between the UK and Europe in the future. If the UK is no longer part of the EU, would the payment networks decide that such transactions should be treated as inter-regional rather than intra-regional? Only time will tell.

So, what are the merchants with larger than average debit card transaction portfolios going to do? In the short term, some might start surcharging to pass the costs on to the customer; longer term, others might start exploring other opportunities presented by PSD2, and consider becoming Payment Initiating Service Providers (PISP) to move customer funds directly from consumer bank account to theirs, shunning cards altogether. Almost inevitably, the most proactive ones will shop around to see which acquirers offer the best deals; remember, these are interchange fees, not the actual merchant charges, and it is up to the acquirers to decide how much they charge their merchants. However, once again, the consequences of a regulation are not quite as originally intended.

Apple Pay: welcome to the UK!

This week Apple announced that Apple Pay will finally make its debut in the UK. Most of us expected that after the US launch, Canada and the UK would be the next countries for Apple Pay as it expands internationally. Those of us here were hoping it would happen by April, but it looks like it will now finally be arriving in July. The UK market has many ingredients for Apple Pay to succeed. Apple’s market share is over 40%, having climbed upwards in the last 9 months on the back of strong sales of the latest Apple 6 and 6+ devices. And the acceptance environment is rather “contactless-friendly”: about 250,000 merchant locations already accept contactless transactions in the UK, including leading retailers, such as Boots, Tesco, Marks & Spencer, and many others. Importantly, Transport for London has upgraded its infrastructure last year to start accepting regular contactless bank cards, in addition to Oyster, its own prepaid travel card. TfL confirmed that Apple Pay will also work on the London transport network, which should be a significant contributor to Apple Pay transactions in the early days. Most of the leading issuers are also on-board. Customers with cards from American Express, First Direct, HSBC, Nationwide, RBS Group and Santander will be able to use Apple Pay at launch, with the Lloyds Group, M&S bank and MBNA joining later in the year. One notable omission is Barclays, although apparently the two companies are continuing the dialogue. What is not clear yet is the commercial terms between issuers and Apple Pay – everyone remains tight-lipped about it. I would be very surprised though if the UK banks end up paying any transaction fees to Apple. As I already called out in my report on Apple Pay, interchange rates in the UK and Europe are simply not high enough to support any revenue sharing. Furthermore, post Android Pay and the networks dropping charges for their tokenisation services, any wallet fees are looking increasingly unlikely. Most contactless terminals today have a £20 transaction limit, which makes sense when you accept contactless cards, which offer no cardholder verification mechanism. It doesn’t make sense for an Apple Pay transaction which uses biometric cardholder authentication via Touch ID. That is, assuming Touch ID works – I’ve been struggling badly with it lately, as my shiny iPhone 6 simply refuses to recognise my fingerprints most of the time. If I can’t resolve it, I might have second thoughts about using Apple Pay, as the last thing I would want is “faffing around” trying to pay with my phone which doesn’t work… The transaction limit in the UK is going to £30 in the autumn. And those retailers who upgrade their terminals (at least, the software bit) should be able to decide against imposing any limits for Apple Pay transactions. We’ve had options to pay by phone in the UK for a while now, such as paym, Barclays’ Pingit, PayPal and a few other solutions. Zapp, a mobile payment method that would allow customers to pay directly from their bank accounts, is also due to finally launch later this year. Still, Apple Pay’s arrival is major news, and should give a much needed boost to the UK’s mobile payments scene. Exciting times!

Recapping Future of the Bank Account Roundtable

We just assembled a group of UK retail bankers for a discussion on The Future of the Bank Account. Against the backdrop of the month-old implementation of the directive that bank switching be seamlessly completed in seven days , banks were keen to understand the implications of changing consumer needs and behaviors, evolving regulations, and new competitors. Celent see a consumer’s bank account serving three main purposes:
  • Receiving funds (money in)
  • Storing and Managing funds
  • Paying funds (money out)
We were interested in exploring how these key functions might evolve and what banks need to do to respond. The group crystallized three key notions central to making tomorrow’s bank account a success:
  1. Trust
  2. Perceived fairness
  3. Value added services
Customers must trust their primary account provider to keep their money safe and to do right by them.  The opportunity lies, though, in not avoiding breaches of trust, but in seizing the opportunity to do the unexpected right thing – going above and beyond to earn customer loyalty.  Trust also implies transparency: being upfront with your customers about how you’re going to deal with them, and demonstrating the value that you provide. It’s all too easy for customers to take for granted something marketed as “free.” Banks need to do a better job demonstrating that there is actually a lot of value in a “free” banking account (which is admittedly much easier said than done). The psychology of retail consumers generated a good discussion, particularly around the notion of fairness, which in the end comes down to perceived fairness.  Tied closely to trust, fairness means that consumers have to feel that they are being treated the way they deserve, not in a series of one-off transactions, but in the context of a continuing relationship. Finally, because bank accounts (and payments, the most salient feature) are, by and large, commoditized, the opportunity for differentiation comes from value added services.  Still nascent, most of these services will revolve around relationships and data (in one form or another). Banks will need to determine what their portfolio of value added services will be. In conversation there was a clear belief that proponents of the seamless switching scheme, and the potential idea that bank account numbers be make portable if not enough people start to switch banks, may fundamentally misunderstand people’s relationship with their bank. In mandating that everyone have access to a free account, regulators may have inadvertently made it harder to compare accounts on an apples-to-apples basis.  Additionally, banks face the challenge of serving these accounts in a cost-effective way, no small task. Inertia is an extraordinarily powerful force in personal financial services; getting people to change banks or the way they do things with their bank is hard.  However, the right value added services might be enough to persuade consumers to switch banks, although the jury is still out.  The challenge that many new payments schemes face is, “why is this different than simply tapping your card.” There was some belief that success and failure will be determined at the bricks and mortar side of the bank, rather than through digital channels. Many would dispute that notion; they next few quarters will give us an indication of whether that’s true. Clients who’d like to explore this further can read Zil Bareisis’ report, The Rise of the New Bank Account?

Saddling up the hobby horse again

Wednesday saw the Government announce  ) its plans to overhaul UK payments. Regular readers of the Celent blog will know I’ve commented on this several times – here, here, and here. In short, the Government asked the industry, in a poorly formulated consultation, whether it wanted to be regulated or not; unsurprisingly, the industry said no. The Government then launched a second consultation, and asked the industry whether a) it wanted to be regulated or b) whether it wanted to be regulated. As one response said “….we believe the aims of Government in the current consultation are weakly defined, naive and rather generic.” And that from a non-bank and who would potentially benefit from the changes! It came as no surprise then that the Wednesday that the Government has chosen to regulate the industry. Coverage in the press has been less than helpful. One small bank was quoted in The Times as saying that they had to pay 40p for a Faster Payments whilst the big banks got them for free, and that was symptomatic of the issue. Indeed, that comment is symptomatic, being incorrect, illogical and unhelpful. The big banks do pay for every transaction, also paid large amounts of money (>£200m) collectively to create the system, and the small bank would be most welcome to join the scheme, and pay lower transaction fees (albeit accompanied by large running costs for the system!) Previously, I challenged the Treasury to come up with some clear objectives, with transparent ways of measuring success in achieving those objectives. These still don’t exist – indeed, in the release they use a bizarre example from Sweden which isn’t even successful in Sweden as justification. I think therefore we need to start from even further back. Firstly, let’s get our facts right. Get an independent auditor to level set the assumptions and data they’ll be building from. Secondly, let’s be clear of the purpose. Much of what the regulator is proposing will have no positive effect for the consumer, and likely a negative one, as ultimately someone has to pay for these changes, and it’ll be customers. Thirdly, use the correct analogy. A utilities regulator assumes it’s a utility, but payments isn’t and never has been. The payment system is a private enterprise, run by a group of banks, for a group of banks. Could we imagine the local corner shop trying to force Tesco to let use its online shopping site to sell its goods? No, but that’s essentially what the regulator is trying to do here. The regulator will never succeed unless it’s sets off on the right foot, and in the right direction. There is little evidence of that so far.  

Barclaycard Launches Bespoke Offers in the UK

Yesterday Barclaycard launched a new service in the UK called Bespoke Offers. The website will feature a range of deals from some of the UK’s largest retailers, including Tesco, British Airways, Virgin and Starbucks. Participating merchants will be able to target offers to consumers, who will be able to select the offers they like via the website or mobile app. The offers will include merchant discounts as well as deals which the customers have to purchase in advance, similar to daily deals offered by the likes of Groupon. My immediate thought was that merchant-funded rewards (MFR) have finally landed in the UK. However, after the first inspection, it seems that it’s MFR with a twist. Most MFR programmes in the US are focused on issuers and their cardholders. Barclaycard’s offers are available to any UK cardholder; it would appear that Barclaycard is building more on its acquiring rather than issuing assets – it is one of the largest UK acquirers and sees a lot of credit and debit card transactions through its merchant relationships. The other difference is that the offers don’t appear to be linked to the card for seamless redemption. Instead, they are delivered as vouchers which the customers have to present to the merchants to qualify for a discount. Finally, at least at the start, there are offers which are generic and available to all customers – all I had to do to get a 5p off per litre of fuel at Shell was to enter my email address and the PDF voucher arrived promptly for me to print it out and present to the cashier. The website did not know anything about me and the offer was not targetted to me at all. Apparently, if and when the customers register and provide more details about themselves, the website then uses that information to target; until then, the customers can get access to generic offers. Another interesting thing was that Barclaycard appeared to be introducing a new digital wallet called bPay. According to Bespoke Offer website, bPay “can be used with Bespoke and other retailers, where you see the bPay button.” Customers “can add new and additional cards to bPay anytime they are at the checkout.” The strange thing is that information about it was hidden deep inside the FAQ section of Bespoke Offers, so I wonder if this is something that Barclaycard will be officially launching later? There is no shortage of voucher schemes in the UK. Weve, the JV of leading UK MNOs is just one the latest examples of companies ramping up its mobile voucher solution. After pulling the plug of Freedom, Barclaycard was always going to come back strongly with the loyalty proposition. Only time will tell if the new Bespoke Offers proposition will stand out in the increasingly busy space.

The Power of Headlines

We are all familiar with the power of a good headline – it grabs our attention and compels us to read the rest of the story. In the world of printed newspapers, front-page headlines are there to sell papers. And it seems that ability to write a witty headline is a pre-requisite to getting a job at any of the UK’s tabloid newspapers. Headlines also have the power to mis-lead. Just a few days ago, a news story caught my eye, which implied that 42% of the US POS terminals were infected by malware. With a healthy dose of disbelief, I clicked on the link and sure enough, it became clear from the article itself that 42% of all known instances of a single malware type were detected on the US terminals. The story and the headline’s implication couldn’t be further apart. As someone who keeps an eye on the developments in mobile payments, naturally, I was intrigued by some other recent headlines announcing that “the UK banks were to launch mobile P2P network next year.” Did I miss something? No, there was indeed a new announcement by the UK Payments Council, but it was talking about the same initiative announced nearly a year ago on 21st Feb 2012. And it became clear shortly thereafter that the service would likely be launched in 2014. As far as I can tell, the main piece of news this time is the list of 8 banks who have now committed to launching the service. Again, given that it was expected to be an industry-wide initiative from the start, it is no surprise to see all the major UK banks signing up to this, including Barclays, which has its own P2P service, PingIt. For our non-UK readers who may have missed the story last year, The UK Payments Council has commissioned VocaLink to build a central database that will allow bank customers to link their mobile phone number to their bank account. Having done so, they will be able to send a payment from their mobile phone by simply entering someone else’s mobile phone number and would not need to know their banking details. The actual payment would run over Faster Payments, a system that’s run by VocaLink and settles payments in nearly real-time. Is P2P really that important in the UK? Despite some early successes of PingIt, I think the jury is still out. Obviously, it simplifies making a payment to another person (or potentially, business) which is a good thing. However, in the UK it is already quite common to tell someone your bank account details for them to make a one-off payment. As I pointed out in my blog commenting on the original announcement, the ever-popular “splitting a restaurant bill” example is over-used – most people in the UK would settle the bill by asking the waiter to split the total onto multiple cards right there at the restaurant. And the popularity of Direct Debit drastically reduces the need to proactively pay regular bills. Paying to a small business/ merchant/ tradesman appears the most promising scenario, but there this payment method is going to compete against the new mobile POS solutions, which enable those same tradesmen accept cards, and more realistically, cheque and cash payments, the ingrained practices of today. Having said all this, it’s a very welcome initiative and it could be just a start. As the service grows, I would expect it will allow use of other proxies in addition to the mobile phone number (e.g. email, Facebook account, etc.) and will enable them to be linked to multiple bank accounts. And once the infrastructure is built, other services (e.g. merchant payments) can be developed, which would help the UK banks maintain their leadership in payments. I am looking forward to the real news announcing the launch of the actual service in 2014.

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.

UK Mobile Payments

In the last few months the UK mobile payments scene has really come alive. Assuming I have the right combination of phone/ card/ MNO/ etc., as a consumer today I can already sign up to and start using:
  • Quick Tap, an NFC payments solution from Barclaycard and Orange
  • PayTag, a contactless sticker from Barclays
  • PingIt, a mobile P2P service from Barclays (see my earlier blog)
  • Simply Tap from Mobile Money Network (see my earlier blog)
  • PayPal mobile app
  • O2 wallet, launched just last week
… and I can also look forward to the future services:
  • Mobile wallet from Vodafone and Visa partnership announced in February
  • V.me wallet from Visa – UK will be one of the first countries to launch in Europe
  • Bank account-based P2P services built on the Mobile Payments Platform being developed by the UK Payments Council and VocaLink
  • Any services built on top of the infrastructure provided by Project Oscar, a JV from the leading MNOs, provided they get the necessary approvals from the EC (see my earlier blog)
I am sure I probably missed something, but in any case, the picture is clear – many competing iniatives, both at the infrastructure level and at the consumer level. With the exception of Quick Tap and PayTag, none of the other solutions today is very useful at the point-of-sale, as most of them are either designed or launched so far as wallets for P2P money transfers and online shopping via mobile. And many suffer from early glitches around registration, or consumer experience around the application itself. I was at the UK Payment Council’s Driving Change in Payments Conference yesterday, chaired by a well-known BBC technology correspondent Rory Cellan-Jones, who joked that “you should try everything once, except for incest, line-dancing and mobile payments.” I know Rory was being deliberately provocative, but he was also highlighting some of the real issues and frustrations consumers have experienced with some of these new offerings – “1.5 hrs to register”, “days until the payment even leaves your account”, etc. Some of the challenges are understandable – if the registration process was too easy, there would be those that would complain that it’s not secure enough. Others are less so. Gareth’s 13-year-old daughter perhaps summed up the consumer sentiment best with her very sensible question “why anyone would want to deface a beautifully designed iPhone with a sticker?” For now, many consumers are hungry for new products and are willing to try things out. But if they continue to be bombarded with offerings that don’t quite deliver, there is a risk that the consumers switch off and their goodwill evaporates by the time the industry is truly ready. Many of us remember a WAP banking disaster, which put mobile banking back by nearly a decade. Today’s mobile payments don’t deserve the same fate.

P2P Payments Come To The UK

There were two interesting announcements this week heralding the dawn of the bank account-based P2P payment era in the UK. The first announcement came from Barclays about the launch of a Pingit service, which allows consumers to send and receive money using mobile phone numbers. Five days later, the UK Payments Council announced that it has commissioned VocaLink to build a central database that will allow bank customers to link their mobile phone number to their account for person-to-person mobile payments. Until now, if I wanted to make a payment to another person in the UK, I typically would have to give them cash, write a cheque or make a bank transfer using their bank account details. The recipient would have to share their bank account details (sort code and account number) with me in advance. These new services link the bank account details to a mobile phone number and that’s all I would need to know. Sounds much better, doesn’t it? It does, and Barclays should be congratulated for continuing to innovate and push mobile payments frontiers in the UK. From the first credit card and ATM in the UK to contactless cards, from NFC payments to now mobile P2P payments, Barclays (and Barclaycard) have been spearheading the payments innovation in the UK. However, the first question is why have two initiatives? While Barclays application is targetted at the end consumers, the UK Payments Council and VocaLink database will be a service to banks. It would appear that the Barclays service does not rely on the UK Payments Council initiative and will be asking the customers to register separately. Does it mean these two services eventualy are going to be competitive and the other banks will have to make a choice which one to use? A centralised database is a technically elegant solution, although the requirements for securing such a database are immense. On the other hand, as an individual bank handling the registrations you also want to be absolutely sure that when someone is trying to link their bank account details to a mobile phone, they are definitely the legitimate owners of both. The initial signs that the registration process with Barclays is somewhat cumbersome, perhaps deliberately so, which could yet prove to be a barrier for consumers willing to try this service. According to Finextra, “Barclays claims to have logged 20,000 downloads of Pingit in the first three days after its launch.” It is very encouraging, but these are likely to be only application downloads; it’s not clear how many of these end up getting registered and activated. The actual transfers are done over the UK’s Faster Payments service, where the transfers are irrevocable and final. This puts the onus very much on consumers to make sure that they select the correct mobile number and enter the right amount, as mistakes may not be easily reversed. Finally, it will be interesting to see whether there is a genuine bank account-based P2P market in the UK. The traditional P2P example of “splitting a restaurant bill” is overused. In the UK, a group of friends after a meal would just ask the waiter to split the bill directly on their cards. The more likely users would be small businesses, such as mobile tradesmen (e.g. plumbers), but I suspect it will take some time to displace cash and cheques from that segment of the market.