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