A summary of the European Commission’s views on where we are now, and where they think we need to get to, brought to you by Anderson Zaks .
October 30, 2013
European Payments Market – where we are now
Secure, efficient payments are the lifeblood of business and commerce. They are crucial for business expansion and the export of goods and services, and support cross border trading. As the world moves beyond bricks and mortar into e- and m-commerce, having a dependable payments infrastructure becomes even more important to merchants, consumers and companies.
Despite progress in the development of a regulatory framework for a single or unified payments market across Europe, card payments and other new ways of paying such as internet and mobile remain fragmented. This can make it difficult for consumers to pay for goods across Europe unless they use a credit or debit card which can be expensive (more about that later).
The European Union’s retail payment market is one of the largest in the world involving millions of companies, and hundreds of millions of citizens. According to the latest European Central Bank (ECB) payments statistics, 8,829 institutions offered retail payments services in the EU27 in 2011 and 90.6 billion transactions were undertaken for a total value of €240.24 trillion. The benefits of integrating this market are driving the establishment of the Single Euro Payments Area (SEPA). A study conducted for the European Commission suggests that a move to SEPA for credit transfers, direct debits and payment cards could yield direct and indirect benefits of more than €360 billion over six years.
Currently payment cards, credit transfers and direct debits are the most popular non-cash methods of payment in the EU, making up 90% of all cashless transactions.
The level of integration across Europe varies depending on the type of transaction. Credit transfers and direct debit schemes are already established, however an integrated market for payment cards, internet payments (also referred to as e-payments) and mobile payments (m-payments) is still lacking.
The differences between card types
There are various types of payment cards, which operate differently, giving rise to some of the issues with integrating the payment market.
Debit cards are an immediate or near real time deduction. When they are used to make a payment money is withdrawn directly from the card holder’s account. Payments made with credit cards are a deferred payment, where individual payments are amalgamated at the end of a billing period and then a bill is presented to the card holder. The bill can be settled in full, or part settled, providing a credit facility to the card holder.
Payment cards are usually issued to the consumer by the issuing bank, and merchants/retailers may have one or several acquiring banks through which to accept the payment.
Payment using cards is made possible by card schemes at national and international level (such as Visa and MasterCard). Domestic debit cards can only be accepted outside the state of origin if they are co-branded with an international scheme.
These card payments schemes generally operate four party or three party business models. The four party model is the most common and used by MasterCard and Visa, and is so called because it involves four parties – the card holder, the issuing bank, the merchant acquirer and the merchant. Fees are charged at various points within the transaction. The merchant service charge is made up a variety of costs with the largest element being the multi-lateral interchange fee (MIF) that is charged by the issuer. This tends to act as a minimum floor price and tends to dictate the price charged to merchants.
The three party model involves just three parties, the cardholder, the merchant and a payment provider who acts as both the issuer and the acquirer. In this model there is no MIF, however, typically the cards carry fees for the holder, often annual, and merchant fees. American Express and Discover follow this model. For various reasons these schemes are often more expensive, particularly for the merchant.
The MIF is justified by the card schemes and issuers as either a way to keep costs down for the merchant and/or a way to encourage consumers to use the card. This encouragement could come in the form of lower fees and/or incentives such as air miles or cash back. The card schemes also contest that MIF funds investment and innovation. These fees remain contentious.
Payment cards – Market size & segmentation
According to the ECB, by number of transactions card payments represented 41% of all non-cash retail payments in 2011. There were 727 million payment cards in use in the EU, representing 1.4 cards per person. 63% of all cards issued in the EU were debit cards. On average, EU consumers spent €2,596 per year per card in 50 transactions.
The growth in this market in the last 20 years has been phenomenal, but the economies of scale expected have not been achieved, and nor have fees reduced for either consumers or merchants.
With the increasing growth of e-commerce, the internet payment market is becoming more important. E-payments can be based on card payments, credit transfers, direct debits or pre-funded accounts. According to Forrester Research the number of online shoppers in Europe is expected to increase from 157 million in 2010 to 205 million by 2015. Growth rates of 10% are expected for e-commerce markets over the next five years with average spending expected to rise from €483 in 2009 to €601 in 2014.
Payments have been identified as a significant barrier to the growth of e-commerce. Issues include the range of payment methods, the cost of payments to both consumers and merchants and payment security.
Mobile payments are another new and growing market. Like e-payments, m-payments can be based on credit/debit cards, or credit transfers and direct debits, using the underlying infrastructure of bank accounts. Pre-paid cards and payment accounts (e-money) are further alternatives. M-payments may also be settled through the Mobile Network Operator’s billing to the consumer.
Globally m-payments are now the fastest growing of all payment methods. Gartner estimates the worldwide value of m-payments in 2012 at $171.5 billion, growing to $617 billion in 2016. However, in comparison to other regions, adoption of m-payments lags behind in Europe. Several national initiatives have started, and a joint venture between EE, Telefonica UK (O2) and Vodafone UK, called Weve was launched in the UK in 2013. However, the lack of a European framework for m-payments that resolves issues like technical standards, security, inter-operability, and the risks associated with market fragmentation, is slowing wide spread adoption.
Reasons to change
The commission believes that developing a framework for an integrated European payments market that includes card, internet and mobile payments has many benefits.
- A more competitive market will drive down costs and prices for payment users
- There will be more choice and transparency (of fees for example) for payment users
- It will encourage innovation due to increased scale and easier market access for payment service providers
- There will be more security and trust
Card issuers maintain that cardholders will lose out on benefits that they have become accustomed to receiving at zero cost. Indeed evidence from international markets has shown that cardholder fees become more common. Additionally transaction fees may be passed on by merchants to cardholders.
The commission highlights several challenges faced by the development of a Single European Payments Area (SEPA)
- The Payment Services Directive (PSD) needs revision to keep up with current trends despite being adopted just six years ago.
- The current Interchange fee business model.
- The market is currently dominated by the international card schemes, which the incumbent suppliers – including the banks – are keen to protect.
Looking to the future the commission is recommending the following policies in order to ensure that the European payments market becomes more efficient, secure and easy to access, facilitating the growth of business and commerce.
European Payments Council
A formal European Payments Council which will provide the necessary legal clarity on the roles of the various participants within the payments market (industry, European institutions and consumers). This would provide the necessary guidance for the standardisation of new means of payments, and to ensure that an integrated EU retail payments market covering card, e-payments and m-payments becomes a reality. This is supported by most stakeholders with the exception of the banks who prefer self-regulation.
Card standardisation is a pre-requisite for a fully integrated cards market, and this is recommended through a payments governance framework. This is supported by consumers, merchants and public authorities, however many banks and card schemes have a preference for industry driven standardisation.
Standardisation of m-payments market
A standardised European proximity m-payments market could be 70% larger in transaction volumes by 2016. European wide standardisation is supported by merchants and non-bank PSP including mobile payment providers and technical providers. Most banks and card schemes would rather see no change.
The level and variety of interchange fees for debit and credit cards needs to be addressed in order to promote pan-European market integration and to facilitate access to new players. The recommendation is to encourage cross-border acquiring, with some capping of fees for debit and credit cards, and exemption for commercial cards and three party schemes. This is seen as necessary to achieve a true Single Market for card based payments. However, regulation of interchange fees is generally opposed by banks and card schemes, which derive a large income stream from the practice.
Scrap Honour All Cards Rule
The Honour All Cards Rule is viewed by the commission to be restricting business, so it is recommended that this is prohibited. This move is supported by public authorities, merchants and most non-bank PSPs. Consumers generally support the move but fear that the choice of payment methods may diminish as a result. Most banks and card schemes oppose this change
Rationalise Charging Practices between Member States
The EU recommends banning annual surcharges on payment methods that carry a regulated interchange fee. It is estimated that annual surcharges are about €731 million, most of which would come back indirectly to the consumer. This measure is supported by consumers, banks and most payment service providers. Merchants and public authorities are divided on the issue.
Conditions of Access for Third Party Providers (TPP)
Lack of access to information on funds and lack of legal status hinders the entry of third parties such as new card schemes, payment initiation services and others. Defining secure access conditions, granting legal status and the consequential rights and obligations for TPPs will provide legal certainty to TPPs and banks, to the benefit of consumers. This is supported by merchants, consumers, public authorities and non-bank PSPs. Most banks and card schemes oppose this, but may change their position if there was a financial incentive for the access.
Recently the commission has announced proposals that for a transition period lasting 22 months debit card interchange fees will be capped at 0.2% and at 0.3% for credit cards, for cross border transactions. At the end of this period the commission intends that these rate caps should also apply to domestic card transactions.
The proposal does not extend these caps to three party schemes or to commercial cards. In these scenarios merchants will be allowed to apply surcharges or to refuse to accept the particular card types.
The commission estimates that this will result in a €4.5 billion reduction in interchange fees, pushing the total figure down to €6 billion.
The British Retail Consortium is pleased with these caps and believes it will deliver £382 million of savings annually for UK merchants.
The level of interchange fees has been strenuously contested for many years. We should expect further delays before any caps are finalised and the corresponding laws are passed.
Anderson Zaks opinion
We believe some changes are needed to the European payments market. The current card payments market is fragmented, largely still domestic in nature and dominated by the international card networks, who it appears have little interest in seeing change. This has created difficulties for international travellers and multinational businesses and resulted in higher costs both for merchants and consumers.
We want to see change but don’t want to throw away some of the things that are working well today. We feel that some of the powers currently held by the international payment schemes need to be relinquished but that the commission may be going too far too quickly in some other areas.
We understand the need for enhanced data security in order to maintain consumer confidence and prevent data breaches. We would like to see increased regulation and standards around internet and mobile payments. Currently we have a situation where new alternative payment methods are popping up almost over night with very little assurance for the merchant or the consumer. Regulation in this area would provide a level playing field for all PSPs and would ensure security for customers.
However, as with anything that involves so many different entities, change will take time and all parties will need to be patient. Clear communications and timelines should be adopted in order to transition to an improved operating environment.
In the meanwhile Anderson Zaks remains dedicated to providing our partners and clients with an independent payment processing service, supporting freedom of choice and promoting innovation. We also remain one of the few suppliers with extensive experience in cross-border transactions throughout Europe and the world.
Glossary of Terms
DSM Digital Single Market
ECB European Central Bank
HACR Honour All Cards Rule
MIF Multi-lateral Interchange Fee
MND Mobile Network Operator
MSC Merchant Service Charge
PI Payment Institution
PIS Payment Initiation Services
PSD Payment Services Directive
PSP Payment Service Provider
PSU Payment Service Users
SEPA Single Euro Payments Area
TPP Third Party Providers
Source: Anderson Zaks