Development possibilities and customer expectations for card developments

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1 SMi s 7th annual conference Nordic Card Markets Development possibilities and customer expectations for card developments 22 January 2008 Harry Leinonen

2 Agenda 1. Statistical overview of card payment trends 2. New integrated service possibilities 3. Pricing issues

3 Agenda 1. Statistical overview of card payment trends 2. New integrated service possibilities 3. Pricing issues

4 Use of cashless payment instruments within EU15, number of transactions millions Card payments Credit transfers Direct debits Cheques Source: ECB, Blue Book publications. Card payments grow rapidly

5 Number of cashless payments per inhabitant in EU15 countries, 2006 Number BE DK DE GR ES FR IE IT LU NL AT PT FI SE UK Credit transfers Direct debits Card payments Cheques Source: ECB, Blue Book. Big differences in national payment habits. Will SEPA harmonise over time?

6 Number Number of card payments per inhabitant, BE DK DE GR ES FR IE IT LU NL AT PT FI SE UK Source: ECB, Blue Book publications. Good growth but big variations, the Nordic countries are leaders in card usage

7 2.5 Number Number of payment cards per inhabitant, BE DK DE GR ES FR IE IT LU NL AT PT FI SE UK Source: ECB, Blue Book publications. More even card distribution

8 Card usage frequency (payments per card per year), Number BE DK DE GR ES FR IE IT LU NL AT PT FI SE UK Source: ECB, Blue Book publications. Nordic countries and France have high number of transactions per card

9 Market share of credit card payments from total number of card payments % of the total value of transactions BE DK DE GR ES FR IE IT LU NL AT PT FI SE UK Source: ECB, Blue Book publications. % of the total volume of transactions Debit card usage grows rapidly in all countries (except Greece)

10 Number of cash withdrawal per capita, GR DE IT Use of cash and ATMs decreases when card payments increase IE AT ES BE PT UK LU NL FR SE DK Number of card payments per capita, Source: ECB, Blue Book publications and author estimation of DK ATM withdrawals. After about 70 card transactions per inhabitant ATM usage decreases FI

11 Value of ATM cash withdrawals and card payments in comparison to private consumption, developments Value of ATM withdrawals relative to private consumption, % GR DE AT IT ES IE PT NL BE FI FR LU SE UK DK Value of card payments relative to private consumption, % Sources: ECB, Blue Book publications, Eurostat and author's estimate for Denmark. In most countries card payments carry more value than ATM cash in relation to private consumption

12 Cash in circulation outside MFIs per GDP, % Cash card payment substitution levels GR ES IT AT DE IE NL LU Average substitution rate 1% increase in card payments = 0,17% decrease in cash stock SE BE FR FI PT DK Value of card payments per GDP, % UK Source: ECB's Blue Book, August 2005 and March 2006.

13 Number of ATM cash withdrawals per year per inhabitant, BE DK DE GR ES FR IE IT LU NL AT PT FI SE UK Sources: ECB, Blue Book publications and author's estimate of ATM usage in Denmark. Big variations in volumes among countries and growing downward trend in several countries

14 Average cash amount withdrawn from ATMs per year per inhabitant, EUR BE DK DE GR ES FR IE IT LU NL AT PT FI SE UK Sources: ECB, Blue Book publications and author's estimate of ATM usage in Denmark. Smaller differences in total withdrawals and a less obvious downward trend in value

15 Agenda 1. Statistical overview of card payment trends 2. New integrated service possibilities 3. Pricing issues

16 Mobile phones contain everything needed for paying Quality colour screen Pin pad and acceptance keyboard Mobile and internet distance communication Secure data storage (SIM + extension) Security, card, transaction and ticket data Proper keyboard inbuilt or separately Camera for scanning and photo recognition Encryption modules RFID, infrared and Blue Tooth near communication solutions

17 Will cards be digitalised and stored in mobile phone? Select - VISA - MC (Firm) - Credit A mobile phone could store hundreds of cards and select the correct card based on parameters and learning Easier to provide and update cards completely remotely

18 Mobile payments: Push & Go Receive payment information by phone via RFID (Radio Frequency Identification) Check that payment is ok Press ok, for acceptance Go Phone will consolidate automatically accepted payments with statements Real-time card or bank account debit for presented payment proposals with just one click or click+pin

19 Mobile Payments: Push & Go + eticket Select event via network or locally from info-tags (RFID) Pay for ticket via mobile Receive ticket via mobile Enter event by showing mobile to automatic gate Check seat from mobile Ordering everywhere secure e-tickets, automated entrance control, black market barrier, etc electronic possibilities

20 e-account statements = e-invoice archives Credit transfers + e-invoice Direct debits + e-invoice Card payments + e-invoice e-statement 1 payments + invoices e-statement n payments + invoices Electronic account statement consists of individual payments incl. invoices plus totals ecustomers view ebank accounts like accounts Just adding the info for card payments Easy browsing of bank systems for invoicing information or customers copies of e-statements

21 I am interested in a new payment method if I can a) give up paper invoices and switch to e-invoices b) keep detailed information on payments in an e-archive 30 % 25 % 20 % 15 % 10 % 5 % 0 % e-invoicing & e-archives have big potential b) e-archive a) e-invoices Minor Major importance importance BoF Consumer Survey Oct/Nov 2005

22 The network of identification service providers The open internet Customer s Customer secure identification provider The network of connected identification providers Service providers identification provider Service providers identification provider Registration office Bank Taxation authority Insurance company Social security office Identification service provision will require the same kind of trunk network as payments and mobile phones

23 Internet and standard PCs are too open Relative easy to distribute viruses and spyware Trojan horses can seize control of the PC and e-identity read and change keyboard input change screen output change file content change sent transactions and information Customers will need hardware-protected keyboards, screens, storage and security processors

24 Mobile phones could become general authentication devices Authenticate Enter PIN * * * * Mobile phones can use an internal - SIM chip - separate dual security chip - Separate security processor for authentication services Which will be the preferred technical solution? TELCO-, bank- or handset provider-based development?

25 Stakeholders need to agree on technical standards business models pricing level (on a level of interest to customers) and ensure the critical mass A complex situation with many stakeholders and legacy systems/benefits at stake

26 Agenda 1. Statistical overview of card payment trends 2. New integrated service possibilities 3. Pricing issues

27 General pricing structure of payments Fund transfer Cost- system Costsharinsharing Payer s MIF-charge Payee s Cross-subsidisation bank bank or profit level Transparent Hidden Hidden pricing pricing pricing Embedded Payer pricing Payee Buyer Seller Cross-subsidisation or profit level Transparent pricing Transparent surcharging Non-transparent pricing Transparent pricing Payments show a variety of pricing methods with heavy cross-subsidising and lack of level playing field among instruments

28 Consequences of cross-subsidy and hidden prices Users experience no efficiency difference Users have no interest in economising on free services Users have no economic incentive to change behaviour Difficult to introduce new efficient instruments New efficient competitors have no interest in the market Customers start to view free services as privileges and oppose pricing attempts Service providers increase cross-subsidies as bonuspoints etc Cross-subsidies are huge development barriers and double waste of money As long as ATMs are free, customers use cash excessively. Cheques will also remain an efficiency problem in countries with free cheques.

29 Merchant fees in Finland (embedded in merchant prices as very little surcharging) Cash % (on returned cash) Domestic debit card 5 euro-cent/transaction VISA Electron/Debit 0.3% Visa/Mastercard credit 1.0-1,2% (about 10-12% p.a.) Amex/Diners credit % (about 27-40% p.a.) Would transparent pricing visible to consumers make then change their payment habits?

30 If I saved 10/50 cents per payment transaction by using a new payment habit, I would like to start using it If I got a 1%/2.5% discount from my purchases by using a new payment habit, I would like to start using it % saving 0.5 saving % discount 2.5% discount Disagree completely Agree completely Disagree completely Customers are sensitive to visible charges (compare with the old tariffs on cheques) Agree completely BoF Consumer Survey Oct/Nov 2005

31 Transparent pricing has proved to be the best way to gain efficiency It is also in the consumer s interest although reducing hidden pricing will initially look like a price increase There cannot be any price competition as long as prices are hidden Cost-based (=non-subsidised) pricing would speed up developments because of more change incentives than just convenience benefits

32 Technology changes New instruments New competitors Common payment areas and globalisation Very interesting card development perspectives ahead of us Consolidation Regulatory changes New market trends New business models Thank you!

Benefits of Real-Time Electronic Payments

Information Economy Real-Time Economy Seminar 23-24 Oct 2007 Benefits of Real-Time Electronic Payments Harry Leinonen Bank of Finland The views expressed are those of the author and do not necessarily