Payments: at the heart of the digital economy

Transcription

1 EuropeanVoice Payments: at the heart of the digital economy Sponsored by

2 ACRONYMS CONTENTS EMV EPC HAC MIF MSC NFC NDR PIN PSD PSDII PSP SEPA TPP Europay MasterCard Visa standards for chip and PIN cards European Payments Council association of banks and payment service providers responsible for implementing the Single European Payments Area Honour all cards rule merchants are required to accept all cards within the same brand regardless of the level of fees Multilateral interchange fees fees paid by the merchant s payment service provider to the cardholder s payment service provider Merchant services charge fee paid by the merchants for use of a payment service provider s payment services Near field communication system which allows contactless payment No discrimination rule rule which prevents retailers guiding consumers towards the use of certain payment methods through surcharging, rebates or other methods Personal identification number number used to authenticate a user s identity Payment services directive 2007 legislation on creating a level playing field for payments services Term referring to proposals for revision of payment services directive Payment services provider company offering payments by credit or debit card, normally a bank Single Euro Payments Area area in which the cost of making transfers in euro is the same for domestic and non-domestic transactions Third party payment provider organisation offering payments services which does not directly service the user s account Growing trends...p3 Non-cash payments...p4 Innovation in the payments sector...p5 Interchange fees...p6-7 Reform proposals...p8-9 State of legislation...p9 Revision of the payments services directive... P10 Security and sharing confidential data..p10 Fraud and security...p11 SEPA...P12 Financial inclusion...p13 Conclusions...P14 Written by Simon Taylor Images: istock Publication of this report has been made possible by MasterCard. The sponsor has no control over the content, for which European Voice retains full editorial responsibility.

3 Growing trends PAYMENTS: AT THE HEART OF THE DIGITAL ECONOMY Making payments electronically has become a normal part of people s everyday lives. Businesses and consumers rely on the ability to make payments safely, conveniently and reliably without having to handle notes and coins. The average value of each card payment transaction in the European Union in 2013 was 49.40; the total value of card payments reached 2.2 trillion in Electronic payments now account for a growing share of the value of transactions. In the EU, card payments represented 16.5% of all transactions in 2013, according to figures from the European Central Bank (ECB). The United Kingdom, Portugal and Sweden were at the top of the league, but even in Sweden and Norway, which have the aim of becoming cashless societies, cash is still the most common means of making payments. In Germany, card payments account for only 8% of transactions. The use of cash remains very popular there because of the historical experience of hyperinflation and a fear of debt. This tradition comes at a price: a study conducted by Steinbeis University in Berlin estimated that the cost to the German economy of producing and handling cash was 8 billion a year. In recent years, payments via the internet have grown rapidly as more and more consumers make purchases online. Developments in mobile phone technology and growth in the ownership of smartphones have boosted mobile-based payments (m-payments), which is the fastest growing payments sector. The value of m-payments worldwide is expected to pass the $234 billion ( 186bn) mark this year. In Europe, 23% of electronic payments were made using smartphones or tablets in the second quarter of 2014, according to figures from payments processor Ayden. In the United States the figure was 17%. Several companies have emerged in recent years to provide new payment services offering quick and convenient ways to settle transactions in the digital economy. PayPal was launched in It quickly gained popularity as a way of making payments on ebay, the online auction site. It has grown into a company with annual revenues of $145bn ( 116bn); ebay is planning to spin off PayPal as a standalone company this year, reflecting the popularity of its service. This year Apple, the consumer electronics company, launched Apple Pay, a payments service on its iphones. The proliferation of card-based, internet and mobile systems demonstrates the importance of fast, efficient and trustworthy payment systems for the global digital economy. This report examines innovation in the payments sector and assesses how the regulatory environment in the EU affects the development of competitive services. Value of transactions as a ratio to GDP (percentages; total for the period) United Kingdom Portugal Sweden Denmark France Finland Estonia Cyprus Belgium Ireland Netherlands EU Slovakia Luxembourg Malta Latvia Slovenia Eurozone Croatia Austria Spain Italy Czech Republic Germany Poland Hungary Lithuania Romania Bulgaria Greece Source: ECB 3

4 Total value of card payments per inhabitant in 2012 Luxembourg Sweden UK Denmark Finland France Belgium Netherlands Ireland Portugal Cyprus EU Austria Euro area Estonia Germany Malta Spain Slovenia Italy Slovakia Latvia Czech Rep. Lithuania Poland Hungary Greece Romania Bulgaria 0 2,000 4,000 6,000 8,000 10,000 12,000 Non-cash payments The volume of non-cash transactions continues to grow, although the rate of growth slowed in 2012 to 7.7%, according to figures from the World Payments Report The total number of non-cash transactions reached 333bn. The slowdown in the growth rate is explained by trends in North America and Europe, where banks reduced their focus on credit-card business to cut their exposure to bad debt. The economic recession also caused consumers to cut back on credit cards in favour of debit cards as they sought to reduce their debt levels, according to the World Payments Report In Europe, the total number of non-cash transactions (including bank transfers) was 87.6bn in 2012, an increase of 4% on the previous year. E-payments and m-payments: M-payments are expected to register rapid growth as people make greater use of tablets and smartphones to manage transactions. According to the World Payments Report 2014, m-payments are forecast to grow by 60.8% in The growth rate in e-payments (payments made in the e-commerce market) will be lower at 15.9%, partly because of a migration of e-payments to mobile devices. Number of worldwide non-cash transactions by region (billion), Source: Statistical Data Warehouse Since the end of the recession, there has been an increase in the number of non-cash payments. The share of payment cards in non-cash transactions worldwide increased to 60.9% in 2012, up from 58.4% in Several EU countries have the highest rates of noncash payment transactions in the world. Finland leads the field with 448 transactions per inhabitant per year, an increase of 10.6% on an annual basis. The Netherlands, Denmark, Luxembourg, Sweden, the UK and France are all in the top ten. The three other countries in the top ten are the US, Australia and South Korea. In Sweden, the share of non-cash transactions continues to grow rapidly, with an 8.3% increase in Sweden is often referred to as a virtually cashless economy. Three of Sweden s four main banks are phasing out accepting and paying out cash North America Eurozone Mature Asia-Pacific Latin America Central Europe, Middle East and Africa Emerging Asia Source: Capgemini Financial Services Analysis, 2014; ECB Statistical Data Warehouse, 2012 figures released September 2013; Bank for International Settlements Red Book, 2012 figures released December 2013, Country s Central Bank Annual Reports,

5 Innovation in the payments sector In the past ten years, the market for electronic payments has seen an explosion in the development of new services, largely driven by the growth in e-commerce and the need to make online payments. There were 25.4bn e-commerce transactions worldwide in 2012 and this number is forecast to increase to 38.5bn in 2015, according to the World Payments Report PAYMENTS: AT THE HEART OF THE DIGITAL ECONOMY One of the best-known payment services that has emerged in response to the e-commerce boom is PayPal. It was developed in 1998 by a group of software designers who were working on security for handheld devices and were looking for a secure means of transferring funds electronically. PayPal was bought by online auction site ebay in 2002 and last year it generated 41% of ebay s revenue, handling 6.6bn in transactions. It has now moved into offline payments by offering its payment services in shops, and this year ebay is planning to spin off PayPal as a standalone company. The popularity of the service has been driven by its electronic wallet function, by which users add funds to their PayPal account from a credit card or bank account and use the funds stored with PayPal to pay for online transactions without having to enter bank account or credit card details each time. In recent years, a number of other companies have developed electronic wallet services. One example is Google Wallet, which was launched in It enjoyed an initial surge in users but struggled to expand its share of the market, partly because of consumer concerns about the security of mobile payments. The next stage of innovation was the development of contactless payments that allow card holders to authorise payments to retailers by passing their cards over a reader rather than having to insert the card and type in a personal identification number. This is known in the US as tap and pay and works using near-field communication (NFC) technology. One of the challenges for Google Wallet and other early contactless systems was that only a limited number of retailers in the US 220,000, around 10% of all retailers have had NFC readers installed, limiting the scheme s usefulness for consumers. Apple Pay, Apple s payments system, which was launched in the US on 20 October, is expected to gain a large share of the payments market in a short time. Apple Pay will benefit from the huge numbers of Apple product owners and the trust that users have in the company to win a major share of the electronic payments market. It is available on iphone 6, the latest model, Apple Watch and the forthcoming new version of the ipad, giving the system a potential market of 200 million Apple consumers worldwide. It offers the option of making contactless payments. The scheme is accepted by a number of major US retail chains, including McDonald s, Walgreens and Subway, although some chains for example, Walmart, 7-Eleven and Best Buy have said they will not operate the system. According to press reports, Apple Pay is expected to launch in Europe in Apple is notoriously coy about the launch dates of its products. In order to ensure that Apple Pay achieves rapid market penetration, Apple has struck deals with the three main credit card companies, MasterCard, Visa and American Express, to interoperate with Apple Pay. The companies cover 83% of all credit card purchases in the US. PayPal, Google Wallet and Apple Pay have been built on the existing payment infrastructure established by the major card companies. Carsten Sørensen, a reader in the department of management at the London School of Economics and Political Science and an expert on digital innovation, says that no payment scheme can be successful unless it involves card companies. Companies offering payment services prefer to link up with established payment providers and build their services on the back of existing payment infrastructures. Sørensen says that Apple Pay will be able to leverage the popularity of Apple s consumer products and reinforce their desirability. It will be another reason to want to own an iphone, he says, referring to Apple Pay. The usability of the system will be crucial to its take-up by consumers, as ease of use is the determining factor for users, he says. He notes that Apple has a track record in making things easier to use for consumers. 5

6 Interchange fees Multilateral interchange fees (MIFs) are central to the card payments industry. They are a major source of revenue for banks issuing payment cards together with annual user fees and the interest earned on credit cards. Every time a consumer makes a purchase from a retailer using a credit or debit card, the retailer pays a fee to its bank called the merchant service charge (MSC). The MSC is made up of different elements, which is determined by banks accepting card payments, such as: the interchange fee, which is paid by the retailer s bank to the consumer s bank; a fee paid by the retailer s bank to the card scheme (Visa or MasterCard or domestic schemes such as Bancontact in Belgium) for using the card; a fee paid by the retailer to the retailer s bank for the payment processing services of the retailer s bank. The consumer s bank pays the retailer the price of the item bought minus the interchange fee. The main element of the MSC is the interchange fee, which is set by the card companies. Banks earn a percentage of the value of each transaction so they have an incentive for the fees to be as high as the market can bear. If they are too high, retailers will refuse to accept card payments. These arrangements are known as four-party schemes as they involve two banks (the consumer s bank and the retailer s bank), the consumer and the retailer. The card companies operate the scheme and make their revenue in fees from banks based on the number of cards issued, the volume and value of transactions made using the cards. Three-party cards also exist, where one organisation offers payment services to both the consumer and retailers. This is the structure used by American Express and Diner s Club. In the EU, the level of MIFs varies from member state to member state. In the UK, for example, the rates are around 0.95% of the value of the transaction for a credit-card purchase, according to Europe Economics. Fees in Denmark, Belgium and the Netherlands are some of the lowest in the EU at around 0.2% for a debit-card payment. How MIFs work A multilateral interchange fee (MIF) is a fee a retailer s bank must pay to a consumer s bank for each card payment. MIFs typically involve four parties: Retailer Retailer s bank Customer Customer s bank 1 For every individual card payment the retailer pays a charge to its bank called a Merchant Service Charge (MSC) As a result, the final amount received by the retailer is less than the amount paid by the consumer* 3 2 most of which the retailer s bank passes on to the consumer s bank under the name of an MIF Source: BEUC * Usually, consumers also pay an annual fee to their bank for using the card the cardholder fee 6

7 PAYMENTS: AT THE HEART OF THE DIGITAL ECONOMY Retailers complain that MIFs prevent competition in the payments sector by fixing a minimum price for the cost of handling card transactions and by posing obstacles to new entrants. Ruth Milligan, at Eurocommerce, says that when credit cards were first introduced, the interchange fees functioned as incentives to consumers to obtain and use cards. Part of these fees were used to pay for cardholder rewards such as air miles. But now everyone has a credit or debit card. The current interchange fee business model has run its course, she says. Interchange fees are set by the card companies, and retailers are not able to negotiate to have them lowered. The banks who issue payment cards have a financial incentive to keep MIFs as high as the market can bear and therefore less incentive to work with other payment-service companies that pay lower fees, retailers argue. Retailers claim that they would pass on the benefits of lower costs to consumers in lower prices, although this view is challenged by the card companies who say there is little evidence that this has happened in countries that have capped fees. BEUC, the European consumers organisation, says that MIFs are a barrier to competition. Several national debit schemes have disappeared, says Farid Aliyev, BEUC s financial services officer, and banks in many countries are reluctant to adopt other payment solutions that generate less revenue. Some consumer groups such as BEUC argue that the cost of MIFs is borne by all consumers, even those who do not have cards, because retailers pass on the cost in the form of higher prices. The card companies argue that interchange fees spread the costs of providing payment services among all parties involved: card companies, banks, retailers and consumers. Interchange fees also cover the cost of other services that are essential if consumers are to trust payment systems, such as security precautions and insurance against fraud. The card companies argue that costs may even rise for consumers if fees are capped, as banks would have to replace the revenue from interchange fees with higher user charges or interest rate increase. MIFs are a barrier to competition. Several national debit schemes have disappeared. Banks in many countries are reluctant to adopt other payment solutions that generate less revenue Farid Aliyev, financial services officer BEUC, the European consumers organisation 7

8 Reform proposals The European Commission investigated interchange fees as part of an inquiry into retail banking in After a twoyear investigation, the Commission concluded that the fees limited competition and were a barrier to other payment services. Using EU competition law, it ordered credit-card companies to cap the fees at a relatively low level. MasterCard contested the Commission s decisions in the EU s General Court. But the court ruled in 2012 in favour of the Commission s analysis and upheld the decision to cap the level of interchange fees. In July 2013, the Commission followed up the rulings with a proposed regulation legislation that is directly legally enforceable in the EU s member states capping interchange fees at 0.3% of the transaction value for credit cards and 0.2% for debit cards. The Commission said that the caps would save consumers 730 million a year. Threeparty schemes would be exempt from the caps on fees unless they resembled four-party schemes. This would include cases where the card-scheme operator used a fourth party, such as a bank, to market its cards and paid a fee to the bank for doing so. The Commission argues that these are disguised interchange fees and should therefore be covered by the caps on fees. The regulation on interchange fees was published at the same time as changes were proposed to the EU s payment services directive, originally agreed in 2007, which aim to foster the creation of an effective single market for payment services in the EU. The proposed changes would extend existing requirements on security and consumer protection to new payment service providers (see page 10). The European Commission argued that interchange fees restricted competition because banks, which issue credit and debit cards, had no incentive to support new payments schemes. Announcing the proposals in July 2013, Joaquín Almunia, at the time the European commissioner for competition, said: Breaking up this cosy system between banks and card schemes Use of payment instruments in the EU 40,000 All cards Compound annual growth rate: 10.2% 30,000 20,000 Credit transfers Compound annual growth rate: 5.1% Direct debits Compound annual growth rate: 5.5% 10,000 Cheques Compound annual growth rate -6% E-money Compound annual growth rate: 23.1% Sources: ECB and Statistical Data Warehouse 8

9 PAYMENTS: AT THE HEART OF THE DIGITAL ECONOMY will allow new providers to enter the market. The Commission argues that banks and card companies want consumers to use cards with high fees. The cost of these fees is then passed on to consumers through higher retail prices as retailers seek to recoup the cost of the fees. Credit-card companies have criticised the proposals for a lack of supporting data to justify capping interchange fees at the levels proposed and have brought a court case to get the Commission to publish its studies. The Commission has not yet done so. MasterCard cited a study by the Brattle Group, a macro-economic consultancy, which found that the Commission had overstated the degree to which fees should be capped. The Brattle Group argued that fees should be well over 1%. Daniele Condorelli, an economist at the University of Essex, who has studied interchange fees on behalf of MasterCard, says that the Commission has no empirical evidence that capping interchange fees will benefit consumers. You want to regulate something if there is a market failure. But there is no empirical evidence that the market is not working well and no evidence capping will work, he says. Condorelli says that the payments market is highly competitive, as the emergence of services such as BitCoin, PayPal and Apple Pay illustrates. The Spanish consumer rights organisation ADICAE is also critical of the Commission s approach. Fernando Herrero, ADICAE s director of communications, points out that capping interchange fees does not automatically lower costs for consumers. He cites the example of Spain, where the cost of using credit cards rose in when the government brought in caps on interchange fees. We saw that the impact of the regulation of interchange fees has consequences: higher costs for consumers for credit and debit cards in the annual fees and the interest rate. He says the Commission s proposals should have been accompanied by additional measures to limit banks potential to increase other charges. ADICAE has sent studies of the Spanish situation to the Commission, arguing that there should be measures to prevent banks increasing annual fees and the interest rate charged. The Commission has responded by saying that because there was little competition in the Spanish market for credit and debit cards, it was easier for banks to increase fees charged to consumers. State of legislation The Council of Ministers and the European Parliament have been examining the Commission s proposals. The European Parliament has backed the Commission s approach to cap fees, but voted to exclude all three-party schemes from the scope of the regulation that were below a certain market share. The Council also supports the Commission s approach and excludes three-party schemes and commercial cards from the scope of the caps unless they are acting like four-party schemes. Member states can also exclude these schemes if they have less than a 5% market share. This would mean American Express would be exempt as it has around 3% of the EU cards market and would gain a significant competitive advantage over rivals, such as Visa and MasterCard. MasterCard and Visa argue that three-party schemes should be covered by the fee caps. Otherwise the number of three-party schemes using four-party models would increase. As they tend to have higher fees and charges, the cost to consumers of using cards will rise, undermining the intended result of the regulation. Javier Perez, president of MasterCard Europe, said in June that the proposals risk playing directly into the hands of the most expensive market players. Retailers also argue for three-party schemes to be covered by the regulation. Eurocommerce and the European Retail Roundtable say that exempting these schemes would allow them to market themselves aggressively as low-cost in terms of upfront fees, but with high hidden fees. Merchants would come under pressure to accept them and their share of the market would increase, even if their fees are higher than four-party schemes covered by the cap. The Council of Ministers and MEPs aim to reconcile the differences between their positions so that the regulation can be adopted next year. Retailers and online merchants such as airlines have sought to recoup some of the cost of interchange fees by adding on surcharges that are passed on to the consumer. With the capping of interchange fees, the practice of surcharging will be banned for all cards covered by the caps. 9

10 Revision of the payments services directive The European Commission published in July 2013 a proposal to update the existing law on payment services to take account of developments in the payments sector, in particular to regulate new kinds of payment-service providers that have emerged. The main targets of the proposals are third-party payment providers (TPPs) that provide access to payment accounts indirectly. They include payment-initiation services such as ideal, based in the Netherlands, SOFORT in Germany and Trustly in Sweden that offer a means of paying for goods and services online without a debit or credit card. These providers arrange a credit transfer from a user s bank account to the account of the e-commerce retailer. When consumers want to make a payment online, they are presented with a choice of payment service providers. If they opt for a TPP it will use its software interfaces to link banks online facilities. To make a purchase, consumers enter their online banking credentials (eg passwords and/or personal identification numbers) to approve payment transfers. The proposals to revise the payment services directive would place TPPs under a legal obligation to meet standards of security that already apply to traditional payment-service providers. They will be required to guarantee a range of consumer rights, including the right to refunds, dispute settlement rules and complaints procedures. The revision also proposes standard rules on who has liability in the case of fraudulent payments and data breaches. The customer s first claim would be on the banks, which may in turn make claims on the TPPs. Security and sharing account data When consumers use third-party payment providers, they send information about their bank accounts through those providers. The proposal from the Commission to revise the payment services directive states that sensitive payment data or personalised security credentials should not be stored by the third-party payment provider. The aim is to guard against possible security breaches that would give criminals access to data about clients. The way in which data is shared with third-party service providers is the subject of heated debate while changes to the payment services directive are being negotiated. The European Payments Council (EPC), a body that represents the European banking industry on payments issues, says that consumers should not share their confidential data with a third party, ie, organisations that are not banks. In the case of ideal, an online banking system developed and owned by Dutch banks, consumers provide their authentification data within the 21.3bn banks own online banking system. In ideal s view, this arrangement means that users do not have to provide confidential information to a third 2011 party. 25.4bn 2012 the rule-books for payment service providers, was trying to exclude competition in the payments sector with a requirement that all payments systems should be linked to banks. The inquiry had been triggered by a complaint from SOFORT, a TPP based in Germany. The EPC dropped the requirement in 2013 during the course of the Commission s investigation. Georg Schardt, deputy chief executive of SOFORT, argues that, even before TPPs come under the remit of the payment services directive, his company s system of security protection is high. Personal authentification data such as log-in details have to be entered anew by the consumer for each transaction and are not stored by SOFORT. What is stored are the transaction details IBAN and/or Bic numbers, names, references, amounts. The authentification data are encrypted by SOFORT before being transmitted to the consumer s bank for approval. Number of global e-commerce transactions (billions), bn 34.1bn 38.5bn Forecast Forecast Forecast But not all TPPs conform to this bank-owned model. Indeed, in 2011 the European Commission launched an investigation into whether the EPC, which draws up Note: E-commerce includes retail sales, travel sales, digital downloads purchased via any digital channel and sales from businesses that occur over primarily C2C platforms Source: Capgemini Financial Services Analysis, 2014 Note: E-commerce includes retail sales, travel sales, digital downloads purchased via any digital channel and sales from businesses that occur over primarily C Source: Capgemini Financial Services Analysis,

11 Fraud and security PAYMENTS: AT THE HEART OF THE DIGITAL ECONOMY One of the major incentives for consumers and businesses to make electronic payments is that they avoid the need to handle cash, which carries the risk of loss or theft. But electronic payments are also a target for criminals. Card fraud is a major problem for the payments sector and the level of fraud is increasing for online payments. This year criminals hacked the customer databases at US retailers Home Depot and Target, and gained access to credit card details of 56 million and 40 million customers respectively. The data breaches are estimated to have cost the companies hundreds of millions of dollars for measures to protect customers. At Target, CEO Gregg Steinhafel lost his job over the handling of the breach. According to figures compiled by the European Central Bank, the level of card fraud within the Single Euro Payments Area (SEPA) increased in 2012 for the first time since 2008, mainly because of higher levels of internet fraud. The total value of card fraud reached 1.33 billion in 2012, an increase of 14.8% compared to In 2012, 1 in every 2,635 spent on credit and debit cards issued within SEPA was lost to fraud. That represented 0.038% of the total 3.5 trillion value of transactions, up from 0.036% in Fraud in cases where the card was not physically present (ie, for telephone or internet payments) accounted for 60% of the total value of fraud, an increase on 56% in The volume of payments where the card is not present has been increasing in the past few years and rose by 15%-20% a year from Ajay Bhalla, president, enterprise safety and security at MasterCard, says: Not only are retailer data breaches rising, but they are becoming larger in scale. He points out that technology making fraud possible is becoming more sophisticated and criminals are using it. Retailers are working more closely with banks to tackle fraud, he says. Johannes Kleis, a spokesman at BEUC, the European consumers association, says: Card payments over the internet are a huge security issue. Fears about fraud and the safety of online payments are deterring consumers from making more purchases online. A Eurobarometer opinion poll carried out for the European Commission in May-June 2013 on cyber-security found that the misuse of personal data and the security of online payments were the two biggest concerns of people making online purchases. Fraud involving cards being used in shops and in cash dispensers has declined because of technological changes in recent years. Magnetic strips in cards have been replaced by chips, and cardholders are required to enter personal identification numbers (PINs) to validate transactions. Chip and PIN technology has been developed using the EMV standard, which refers to the consortium of three card companies responsible (Europay, MasterCard and Visa). By the end of 2010, around 90% of all transactions in retailers and 80% of all payments cards in the EU were EMV-compliant. Fraud in cases where the card was present (ie, in cash machines and in shops) fell in 2012 compared to the year before, according to the ECB. Fraud involving cards is higher in the US because the chip and PIN system is not as common as in Europe. Ensuring that consumers feel that they can make online payments without fear of fraud is crucial if the e-commerce sector is to continue to grow. To improve security of online payments, banks and card scheme operators have introduced additional measures such as requiring extra forms of authentication like text messages or a card reader that generates an encrypted authentication code. However, often this means a trade-off between ease of use and higher security measures. If the additional security measures slow down the payment process, consumers will be put off. Biometric technologies offer one way to improve security protection while ensuring that payments remain quick and easy. Zwipe, a Norwegian company, has developed a fingerprint reader that can be incorporated into payment cards or attached to payment terminals in shops. The system is currently being tested in Norway and the company hopes that it will become operational in The system s great advantage is that it is quicker than the existing chip and PIN system: it takes three to four seconds to approve a payment compared to 30 seconds for chip cards. 11

12 The Single Euro Payments Area (SEPA) The introduction of the euro in 1999 was meant to deliver savings for business and consumers as they would no longer have to pay transaction costs for making payments and transfers within the eurozone. But the architects of the euro realised that consumers and businesses would not enjoy these savings if banks and other financial institutions continued to charge more for non-domestic transactions than for domestic equivalents. From 2003, EU legislation banned banks from charging more for cross-border transactions than they would charge for domestic ones. To make the process of making transfers and payments within the EU as simple as possible, the EU has created a Single Euro Payments Area (SEPA). The deadline for ensuring that credit transfers and direct debits comply with SEPA rules was put back to August this year after it became clear that the initial February 2014 deadline would not be met. The later deadline has been met. The ECB is concentrating on implementing SEPA for cards. A report published by the ECB in April showed that there is potential for growth in card use in the EU. This is illustrated by the wide discrepancy between the use of cards in different EU countries. The average Swede makes 230 card payments a year while Bulgarians, Romanians and Greeks make on average fewer than ten payments. The ECB has supported the European Commission s proposals on interchange fees and the revision of the payments services directive as a way of harmonising the rules for payment services and the business practices of payment service providers. Number of card payments per inhabitant in 2012 Sweden Denmark Finland UK Estonia Netherlands Luxembourg France Portugal Belgium EU Ireland Eurozone Latvia Slovenia Austria Spain Cyprus Lithuania Germany Malta Poland Slovakia Czech Rep. Italy Hungary Romania Greece Bulgaria Source: Statistical Data Warehouse 12

13 PAYMENTS: AT THE HEART OF THE DIGITAL ECONOMY Financial inclusion As the European economy relies less and less on cash, the ability to make electronic payments becomes ever more essential if people are to participate fully in society. To take one example, in Sweden, which has become a virtually cashless society, most public toilets require an electronic payment card. There are an estimated 2.5 billion people worldwide who do not have access to bank accounts 44 million in the US alone. Electronic payments offer a means of bringing financial services to people who do not usually have access to banks and bank accounts. In African countries, the M-Pesa system, launched by Vodafone and Safaricom, provides banking and payment services via mobile phones. Users register their phones at a mobile phone shop or retailer and top the phone up with funds by exchanging cash for electronic money. The funds can be sent by mobile phone and the recipient can redeem the electronic money for cash at an M-Pesa agent. The scheme launched in Kenya in 2007 (pesa is the Swahili word for money) and since extended to Tanzania, Afghanistan, South Africa and India has 18 million users. This year M-Pesa has been introduced in Romania, its first incursion into Europe. Pre-paid cards are another means of providing payment services to people who do not have access to bank accounts. Funds such as welfare benefits and pension payments are transferred from governments directly onto cards and can then be used to pay bills and perform other financial transactions that require electronic payment. The use of these cards helps to ensure that social payments are spent appropriately. The EU has approved legislation to give all citizens access to payment accounts. The rules, approved in April, aim to ensure that, even if they are not citizens of the country in which they live, people have access to accounts that can be used for basic financial services, such as receiving salaries, pensions and welfare payments and paying utility bills. The rules include requirements on the transparency of fees so that people can choose the best-value provider. 13

14 PAYMENTS: AT THE HEART OF THE DIGITAL ECONOMY Conclusions The degree of technological innovation in the payments sector over the past ten years has been phenomenal. Where once shoppers had to run their credit cards through a card-reader and sign a slip of paper, the advent of chips in cards led first to the use of personalised identification numbers. Near-Field Communication technology now means that payments can be made by passing cards over a card-reader. Buying goods and services online has been made quick and convenient by the development of systems such as PayPal and Amazon s One-Click functionality. The crucial elements for successful payments systems are security, ease of use and availability. Consumers need to know that their accounts are protected from attempts to defraud. They need to be able to make payments in what they consider a reasonable period of time. And they need to be able to use the payment method wherever they are. Modern electronic payment systems go a long way to meet these criteria. The launch of Apple Pay in the US and its probable launch in Europe next year will probably lead to further improvements in user experience. But in the EU, the reality of a single payments market for retail transactions is still some way off. Consumers stick with domestic payment schemes that they know and trust. Popular national payment schemes include Bancontact in Belgium, Giro in Germany and Dankort in Denmark. The goal of EU-wide competition among payments systems is still to be achieved. In some countries, schemes have had a hard time dislodging domestic services. In others, domestic schemes have withered. The EU has taken steps to boost competition in the payments sector and to create a level playing-field among the different types of payment providers. One of its main targets has been interchange fees, which are set by card companies or domestic schemes and which generate revenue for the banks issuing credit and debit cards. The Commission argues that interchange fees prevent competition among payment service providers because banks have limited incentive to work with low-cost schemes and lose the income from interchange fees. The card companies argue that capping fees will not necessarily lead to lower costs for consumers. Charges may even rise if certain types of cards, such as American Express, are excluded from the caps and the cost of using cards in the form of user fees and interest charges increases. Interchange fees have proved to be a reliable source of income for the card companies. In some EU countries, such as the Netherlands and Denmark, non-card payment schemes have built up a large share of the domestic market. This is because they are cheap or free to use, convenient and reliable. Few of these have managed to expand their services outside their home market. This suggests that there is not yet a competitive single market for payment services in the EU. The European Central Bank estimated that processing retail payments can cost as much as 1% of gross domestic product or 130 billion a year. A competitive payment sector would have significant economic benefits and would contribute significantly to exploiting the potential of e-commerce and the digital economy. The Commission estimates that capping interchange fees will save consumers 730 million a year. The emergence in the payments sector of new services and technological innovations has, over recent years, been striking. In the context of the arguments over card fees, that innovation has been cited as evidence that the European market is competitive, but the card-fees discussion perhaps poses the wrong questions, or the right questions in the wrong order. The truth is that the European market is still in formation. For the most part, the markets are still national and some of them are still dominated by national payment schemes, while others are more open to new entrants. If the benefits of technological innovation are to be taken up and applied across the EU, and if European consumers are to avail themselves of a richer variety of services, then Europe needs both more competition and greater market integration. 14

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