Card Schemes in Europe: Consolidation or Proliferation?

Within the context of developments related to SEPA, a lot has been written and said about consolidation. The trend to consolidation in the payments industry is evident in many areas. In the retail banking space, Santander hardly needs mentioning in this respect, acquiring retail banks in Poland and the UK, consumer credit portfolios in Germany, asset management providers in Italy etc.

Other entities are also active: e.g. Credit Mutuel with Targobank in Germany and BeoBank in Belgium, Cajas de Ahorros merging in Spain and Deutsche Bank with Pago and Postbank to name but a few recent examples.

The same trend is undeniable with other players in the payment services industry such as POS terminal manufacturers, transaction processors, card production companies and merchant acquirers where we see regular announcements of take-overs and mergers leading to a higher degree of concentration.

In the area of card schemes, the conventional wisdom seems to be that the same trend will apply here because there is a consolidation process which is unavoidable with national schemes that are disappearing while there is nothing "new and european" to take its place, with the final outcome being a duopoly of VISA and MasterCard. [1], [2]
 

At first glance, there is evidence to support this view. Regulators want to have a new pan-european scheme but at the same time they undermine the business model by not providing very clear guidance on interchange, with vague statements on whether or not it is acceptable and no clear statement of an acceptable pricing model.

Given this uncertainty, while at the same time being faced with the need to be SEPA-compliant, it is not surprising that various countries in Europe have announced that they will abandon their domestic scheme, replacing it with one of the two international card schemes (VISA and MasterCard). Finland and the Netherlands are two recent examples of this. At the same time, others have announced that they are contemplating this; e.g. Ireland and Belgium.

In a few years, this argument runs, the card payments landscape of Europe will be that of a duopoly as all domestic brands have folded and made way for one of the two largest international schemes to become the national network for card payments.

Also, doubts have been raised around the viability of alternative pan-european schemes such as Monnet, EAPS and PayFair So is the inevitable consequence of this process really that there will be consolidation and that we are heading for a duopoly in Europe?

Market Developments

To start with, we first need to look at recent developments – some of which seem to have been overlooked or under-estimated by many of us who simplify the debate by reducing the outcome to the “inevitable” logic that there are too many barriers to entry to match the scale and scope of the two incumbent players, with the end-result that we are indeed heading for a duopoly of Visa and MasterCard.

This argument is too simplistic, however because, as we will see, there are many other serious contenders on the horizon. It is a fallacy for Europeans to think of the rest of the world as a place where every payment card carries either the VISA or the MasterCard brand. New research from RBR showed that there were 7.4 billion payment cards in circulation worldwide in 2009 and that less than half of these were affiliated to these two card schemes.[3]

The contenders in this race against duopoly can be split into 3 groups:

1.      Existing European schemes – the “European Champions”

2.      Established schemes from outside Europe – the ”International Champions”

3.      New entrants – the Challengers.

In this article we will show the proliferation that is at work here by looking at these different groups as well as the role played by issuers and acquirers. To begin with, we must make a three-fold distinction between what is happening at the national level, what is happening at the European level and what is happening in the rest of the world, before analyzing the impact all this has on issuers and acquirers.

Existing European Schemes

Because Europe is mainly about debit, any reference to the domestic schemes in Europe really means debit schemes with France probably being the main exception in the sense that payment cards in France are positioned as charge cards with either immediate or deferred payment options.

But we can argue that debit is different so to be transformed into a MasterCard or Visa brand is not a foregone conclusion; these organisations may have set the global standard for credit but not for debit. Hence it is not a foregone conclusion that all domestic schemes will end up migrating to Visa or MasterCard.

Moreover, debit is proving to be a better vehicle to shift consumer behaviour from cash to cards: it is more responsible, it avoids credit risk, regulators love it and most merchants often prefer it owing to the lower cost, it helps build a sticky customer relationship etc.

But there are three schemes in Europe that already stand out today; one is the French example with a large volume of transactions (Cartes Bancaires), the other is LINK in the UK with both a high number of transactions (albeit only ATM and not POS) and of cards, while the third one is Germany with a huge card account base, but a lower usage rate (partly explained by the fact that this number would be double in size if the so-called ELV transactions on these cards were included).

Logic may suggest that they will follow the example of their smaller colleagues, but the market presence and inertia they have built up in the past is so high that this is doubtful.

Even if the initiatives we will mention later such as EAPS or Monnet develop momentum, that still does not mean that these schemes will disappear automatically. The role of inertia should not be underestimated here. Not only the sunk investments and low marginal costs of the old technology play a role here but there is also the consumer inertia. [4] Overcoming the inertia of tens of millions of consumers is very difficult and will never happen in a short time-frame.
 

It might be in a different shape or form , under a different brand, most definitely as a regional rather than a purely domestic scheme but these schemes will refuse to go away. Their cardholder and merchant base will prove to be an insurmountable barrier to exit. This “installed base of payment systems and infrastructures” can create a strong network effect making it difficult for the adoption of new payment instruments. [5]

Established schemes from outside Europe

If we look outside Europe we can see both existing schemes coming to Europe as well as new schemes emerging that try to be global from the beginning.
 

Amex already has a strong presence in Europe, UnionPay has ambitious plans to extend its footprint and Diners, ever since it was taken over by DFS in 2008, has invested an enormous amount of money in re-launching the Diners brand while at the same time positioning Diners as the acceptance brand for the Pulse and the Discover scheme.

These players are nearly all credit and not debit. Although it is fair to say that for that reason these international contenders will make inroads into Europe, but that they will not take over the debit space. However, the distinction is becoming less relevant anyway as the definition of debit is changing, as we will see later.

After the domestic schemes in Europe, these international schemes represent a second force against the perceived threat of duopoly in Europe.

 

Acceptance is key for these international brands as their customers travel outside their home country or market. Even for PayPal, where there is not an issuer as such because they operate in the online space where national boundaries do not exist, it is safe to say that a large part of their 200 million plus account base will emanate from Europe.

By the way, PayPal do not call themselves a Scheme and strictu-sensu it is not one. However, for all practical purposes they can be included here.

Challengers in Europe

If we go back to Europe and look at what is happening here we find quite a few challengers as well – and remember that a challenger does not have to be young and a champion does not have to be old; Paypal is young on most counts; Cartes Bancaires is not for example.
 

Apart from the expanding international schemes and apart from the larger domestic schemes that will refuse to go away, there are of course other candidates.

We all know about the 3 initiatives that have been publicised extensively recently (Payfair, Monnet, EAPS). There is a lot of skepticism around their viability, their business models etc. but suffice it to say that they are still around despite many critical comments a few years ago claiming that they “would be gone in a few months”.

But there are more than just these 3 alternative schemes on the payments landscape.

We already referred to the 3 existing domestic schemes above (Girocard , LINK and CB), but then there others we should not overlook.

Some of the other schemes we cannot dismiss either because some of them already have a pan-european dimension and/or volumes large enough to survive e.g. the petrol or fleet cards and the private label cards. Another good example of a successful scheme is iDeal in the Netherlands which has managed to capture more than half of the country’s ecommerce traffic.

Finally, if we look outside Europe, there are other initiatives that get seem to get overlooked.

These are especially strong on e-commerce and p-2-p and they can therefore be expected to penetrate sectors where traditional payment systems have been weak such as m-payments and social networks faster.
 

The whole of Africa is such a sector -- people have no landlines, no bank accounts and no credit or debit cards but they have a mobile phone more often than not.

Another interesting development is that “BillMeLater” was recently acquired by PayPal and

Revolution by Amex  - this also goes to show that there is a realisation on the part of the existing players that they cannot focus just on their own charge card or e-wallet space.
 

Alipay is part of the Chinese Alibaba group – their business is comparable to PayPal, albeit more skewed to the B-2-B space. You may not have heard of them but they process more payments than PayPal!

In addition to these challengers, we should not forget large domestic networks outside Europe either. Globally, the likes of InterAc (Canada) BC Card (Korea), Prosa (Mexico) as well as Star and Pulse in the US are faced with the same challenges as in the EU. They will look for ways to expand outside their borders one day as well.

Across the world other initiatives are also emerging. “Russia Pay” is back on the drawing board after Sberbank tried to implement something with no success a few years ago, in India RuPay  has been announced and also Nigeria and Brazil are reported to be looking for a domestic payment scheme.

There are many more. Classified generically by the underlying type of initiative we can group them into 5 segments:

Domestic debit space outside Europe	Pulse / STAR / Interac / Prosa / BC Card / Sbercard etc.
On-line payments	eBillme / Cards Off / Payoneer.com etc.
On-us networks	Bling Nation / First Data
On-line billing schemes	Zuora / Vindicia
M-Payments	Billing Revolution / Zong / Obopay / Boku / TextPayMe (Amazon) etc.

Describing the emergence of all these new schemes also begs the question: what is a scheme? Some are hybrids of different payment systems and, to think of traditional card schemes as the only schemes is becoming an obsolete paradigm. The new schemes emerging are not pure play card schemes

Forces for Change

Based on these market developments, at least 5 significant factors come to mind that will influence the shape of things to come:
 

Some domestic schemes will survive  in one way or another – they are big enough and motivated enough to survive.
 

Banks want to be more client driven in their issuance of card products; duality is no longer enough (it might even be argued that it did not add any differential value). If a customer wants a JCB card he should have one instead of being told that he does not need it.

This will mean however that those customers wanting fewer cards in their wallet will be offered a co-brand; it remains to be seen how happy, say, Amex will be to lose its corporate identity on a card co-branded with VISA debit.
 

A card scheme is a payment scheme and in future will not be limited to cards only – hybrid solutions will emerge.

As is clear, the entire paradigm of card payments is changing.

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[1] EuroCommerce is worried that schemes will cease to exist resulting in price rises for all participants. (Ruth Milligan, Legal Advisor on Payment Systems, EuroCommerce, Brussels

Lafferty Cards & Retail Banking Europe 2010).

[2] “there are Visa and MasterCard, and I would like to emphasise how essential they are to Europe, since they are currently the only schemes that offer a pan-European card payment solution. But we also need a sufficient degree of competition. The reasons for this call for an additional European scheme are well known and are economically well-founded. The main economic rationale is the possible lack of competition should national card schemes be wound up in the years to come”.

Speech by Gertrude Tumpel-Gugerell, Member of the Executive Board of the ECB, at the Monnet Symposium organised by The Monnet Project, Madrid, 5 May 2010.

[3] Retail Banking Research Ltd. 2009 Worldwide Payment Cards.

[4] Innovation & Evolution of the Payments Industry, p.48-49. David Evans & Richard Schmalensee; in: Moving Money; Ed.R. Litan/M.Baily,2009

[5] You can’t get there from here: The role of the installed base in payment system adoption; Gottfried Leibbrandt, p.6-16, Journal of Payment Strategy & Systems, Vol. 4 Nr. 1

How the Entire Paradigm of Card Payments is Changing

For a card scheme to survive tomorrow, today’s success criteria do not necessarily apply. And new payment innovations will likely come from the outside. Together, these are two strong pointers to a paradigm shift.

The example about mobile phones and payments in Africa is a case in point here. David Evans & Richard Schmalensee argue that the real revolution in the payments industry is not going to come from improving the basic payments transaction  between consumers and merchants but from new technologies and business models that have their origins outside the traditional payment cards industry.

For a start, the legacy platforms of today’s credit and debit card schemes do not lend themselves to encourage external development and will risk losing out to new payment services that easily integrate with modern platforms open to external developers (cf. Google, payPal, social networks, web 2.0).

The incumbent schemes with their legacy infrastructures share a weakness in the sense that they are not set-up to allow developers access to their core infrastructure. Cloud computing will also promote payment innovation that benefits open networks.

Putting the user or customer in charge is also evident in the way in which people will expect to pay: more push instead of pull. And if it is pull, then it is more likely to be the cardholder, who, at the point of sale, decides what payment application to use.

Also, part of this trend is that users will decide with what devices they access the network, i.e. how to pay, and this will lead to a blurring of the line that divides CNP from POS. In a way this is already happening with payment services such as Billmelater and Paybycash.

The black/white distinction between credit/debit/charge and prepay will disappear as well. Tomorrow’s scheme will be expected to offer a combination of these , if possible all residing on the same card/chip. Openness of platforms will accelerate this development.

Geographically, the domestic card schemes will not transform into one large European system; instead a more likely development is for several to emerge, each with its own strong and weak segments, but none of them likely to be as dominant in one particular market such as a CB in France today or Bancontact in the low countries.

Finally, the revenue base will shift towards transactions. Interchange fees and annual fees will not be where the critical mass of the revenue comes from. Instead, the  type of payment and the contextual value add around it (in other words, data) will generate revenue.

Processors themselves will see a stronger argument for standardisation as they begin to process across multiple payment networks as a result of this convergence of direct debit, card and credit transfer payments.

And this reinforces the view that processors need to unbundle from schemes and become platform providers for different payment instruments.

Understanding the Role of Payment Tokenization in the Payment Industry

Whatever the payment industry might think of Apple Pay, and opinions vary from Forbes' contributor's  largely positive stance to the PYMTS.com web site pointing to low take-up ("How Many Consumers in Apple Pay's Bushel Basket?", Karen Webster via PYMTS.com), one interesting side-effect is the conversation unfolding around tokenization.

For the uninitiated, tokenization in this context is simply the act of replacing the card number with something meaningful only to the token supplier, who has the sole possibility and responsibility of matching the token with the original data.

As more and more transactions are conducted online, and as processors move towards using internet connectivity to exchange transaction data, tokenization becomes more and more important. The industry also has a set of security standards, known as PCI DSS which in broad terms encourage (or even require) replacing sensitive data with tokens whenever that data is stored, in,  for example, a database.

The Apple Pay tokenization model is understood to be something like this: the cardholder enrols their card with the Apple Pay app, which both confirms the physical ownership of the device, and links the phone and card with a token that acts as a temporary card number with which to execute payments.

When the phone is tapped (like any other NFC card) on a compatible terminal, the token, plus the transaction data, is forwarded to the local processor in the usual way. At some point (usually as close to the point of issuance as possible) it is necessary to swap the token for the card number so that the cardholder's account can be debited.

All this takes place, naturally, for a fee.

Even those who aren't participating in the Apple Pay ecosystem are discussing tokenization as a way to protect their transaction data. Subsequently, there is a renewed popularity of search terms such as "tokenization as a service" and "tokenization solutions".

Unsurprisingly, this interest is matched by advertiser spending, with around a quarter (based on research derived from Google AdWords data)  going on "tokenization pci", a further quarter on terms related to specific applications of tokenization and brands (such as RSA, VISA, tokenization appliance and servers) and the remaining half on four evenly matched chunks.

It's those chunks which provide the most interest; specifically, "tokenization payments", "tokenization vs. encryption", "tokenization credit card" and "tokenization vendors". These keyword chunks are evidence that there is interest in tokenization outside of Apple Pay.

There are several conversations here -- tokenization of payments in general, the discussion of whether tokenization is merely a form of encryption (and if not, which is better), how tokenization can be used with credit cards (there is little evidence of a parallel discussion being applied to debit cards), and finally, there are people looking for tokenization solution vendors.

The following graph shows approximate interest levels for Debit Cards, Credit Cards and Payments, using Google search data for the past 12 months for various keyword combinations:

Clearly, this has become more than just a buzzword; it's a service that both the industry, and it's suppliers see merit in providing. The search volume graph illustrates this quite appropriately:

Search Volume for Tokenization Related Keywords March 2013 to February 2015

Derived from Google's search and advertising statistics, and with non-payment industry terms removed from the results, the graph shows that people were talking about tokenization before Apple Pay (the red line is on the Apple Pay Press Release date)... and they're still talking about it, even more,  after Apple Pay has become another means of payment.

Issuers & Acquirers Can Only Survive by Becoming Multi-Brand

Legal and business developments in the ATM and payments card business obviously have an effect on both issuers and acquirers. The first development in this respect relates to schemes making inroads into Europe.

The acquiring side is where the inroads that these international schemes are making is most obvious, which is serendipitous  for acquirers because there is also a growing desire for them to be able to offer as many brands as possible. Merchants then only have to sign one contract for multiple brands with an acquirer, making card acceptance both easier and more cost-effective at the point of acquisition.

Acquirers have a clear vision in most cases: they offer one contract with merchants, and let them tick the boxes of all the brands they want to accept. If we look at some of the largest issuers in Europe, we can see that this process has already started.

Table 1 lists some of the more active acquirers in this respect. As we mentioned before, acceptance is key for these international brands as their customers travel outside their home country or market.

Table 1 : Acquirers Are Becoming Multi-Brand

Judging by the number of brands in Table 1, the Acquirer that has gone furthest in this respect is SixPay; they acquire all of the most active international brands.

I remember my first credit card – it was a VISA card because that was all that Barclaycard had to offer. Had I been a client of Credit Agricole – it would have been a MasterCard. Next, the concept of duality was introduced, allowing the choice of two issuing brands, and now what we see is that more and more issuers want to be able to offer the client an ever broader portfolio of products. If the customer wants Amex or JCB then it should be made available to them.

(Duality is not such an old concept, and certain markets (notably Canada) still operate under an either-or arrangement with choices sometimes depending on which bank the cardholder is with.)

Table 2 shows the emergence of multi-brand issuance across some key European players:

Table 2: Issuers Are Becoming Multi-Brand

So, what are the significant forces for change?

Shaping the Future of the Cards & Payments Industry

There are several key factors that will influence the ongoing development of the industry:

• Survival of the largest and most motivated domestic schemes;
• Banks abandoning duality to offer a portfolio of card issuance products;
• Multi-brand contracts leading to Acquirers being able to offer merchants acceptance choice;
• Hybrid payment schemes (of which PayPal has emerged as a front-runner) where schemes are not limited to cards as payment methods.

Of course, there are also some unanswered questions. For example, what effect will offering multiple issuance brands have on co-branding, and how will issuers with strong brand recognition react to effectively losing their corporate identity on a card?

Answering such questions will likely be dependent on some other forces for change which will help to further colour the decisions taken as the industry embraces new paradigms and technologies:

• Regulatory and/or legal intervention;
• Changing economics and business dynamics;
• Influence of schemes that are demutualising.

These are complex issues on their own, and only time will tell how much of an effect they have on the ongoing multi-brand and hybrid payment developments in the industry. As a multi-brand processor, Trionis is in an excellent position to observe and comment upon the changes as they occur, so be sure to bookmark this blog and keep abreast of an exciting industry.

Trionis to Help JCB International Increase European Acceptance

Following successes in extending the reach of card issuers such as Diners and China's Union Pay, Trionis has now been contracted to provide a European Gateway for JCB International. Another example of Trionis' approach to providing any-to-any protocol connectivity, the Press Release sets out the purpose of the agreement in more detail:

"JCB recently announced that Trionis, the pan-European inter-bank processing network, will build a gateway to JCB to enable JCB merchant acquirers across Europe to easily connect with the JCB payment network.

"The Trionis gateway will function as an easy access point and a message format conversion. The JCB licensed acquirers can route JCB transactions without having to develop the JCB proprietary message format by working through Trionis. "

In fact, any licensed acquirer will be able to use one of a variety of supported protocols, including Trionis' own proprietary format, to forward ATM cash withdrawal and POS transactions to JCB International. This represents a significant coup for Trionis, as CEO Ernst Verbeek explains:

“We’re very pleased to be able to add a brand as prestigious as JCB to our multi-brand portfolio of services to issuers and acquirers and we look forward to becoming actively involved in expanding the use and acceptance of this important card."

JCB indicated that the choice may well have been at least partly made on the basis of Trionis' approach to completing interconnectivity projects - concentrating on lower delivery times and costs - as well as a high level of flexibility:

 “We are pleased to work with Trionis who provide professional and high quality services. I am sure that this gateway will enable JCB to provide our partners with a quick and easy solution when they implement JCB card acquiring services.” Ryuji Shinzawa, Executive Vice President, Head of Sales and Marketing Headquarters / Americas and EMEA of JCBI

This is yet another good example of the trend among issuers and acquirers to become multi-brand and offer as many payment schemes as possible to both merchants and cardholders. Rather than requiring separate connections, across different protocols, systems and even connectivity methods, Trionis delivers a single connection to all participating partners.

To find out how Trionis can become your single connection gateway to the world of cash withdrawal, ATM services and payment transactions, please visit the Trionis web site.https://en.wikipedia.org/wiki/Communications_protocol#Protocols_and_programming_languages