How banks can innovate through their core transaction banking services. Next Generation Cards and Payments. Brussels 2010 Deutsche Card Services

Transcription

1 How banks can innovate through their core transaction banking services. Next Generation Cards and Payments. Brussels 2010 Deutsche Card Services John Delaney

2 The Challenge World-wide, the use of credit cards has increased considerably during the last few years, particularly in online shopping. Total e-commerce sales rose to EUR 7.4 tr in 2008 globally, and in Germany alone the number of active online shoppers has more than doubled in the past five years. In bricks-and-mortar business, too, customers increasingly prefer non-cash payments, as the growing number of card payments at supermarkets and discounters shows. So far, merchants have had to involve one or more third-party service providers for card acceptance in bricks-and-mortar and distance selling. Credit card Bank transfer Debit card PayPal Cheque/ Direct Debit Cash 10% Preferred payment methods in online shopping in the EU7: Cards Source: Forrester, % 26% 24% 23% 40%

3 ... The Solution As market leader in European payment processing, Deutsche Bank has identified this problem. Its newly established subsidiary Deutsche Card Services (DeuCS) is fully integrated into Deutsche Bank s cash management services and offers wellestablished, comprehensive solutions for the card business. For all relevant distribution channels: E-commerce Mail order/telephone order Point of sale For all needs: Card acceptance, payment processing and other payment methods. Fraud prevention, in particular in more risky distance selling. Valuable additional services to ensure transparency and make administration easier.

4 Payment Methods Fraud Prevention Value Added Services DeuCS more than just acquiring E-Commerce/MOTO Consumer based Receivables Management Card Acceptance (CNP) Visa MasterCard Maestro UK + International Routing (CNP) Amex, Diners, JCB Ideal, EPS, PayPal, Click & Buy Carte Bancaire, Dankort, Mister Cash... Direct Debit Services (DE. AT, NL) giropay Acceptance Offline Payment Methods Pre Payment Cash on Delivery Invoice POS Card Acceptance (CP) Visa MasterCard Maestro International EC cash OLV ELV Routing (CP) Amex (incl. Acceptance Procurement) Diners Club JCB Address Check Name Check Consumer Check Consumer Score Card based Card Check Address Verification Services 3-D Secure Fraud Screening BIN Check IP Check Account based Account Check Direct Debit Check Accounting Payment Monitoring Pre-litigation Dunning Debt Collection Agency Transfer E-Commerce/MOTO Dynamic Transaction Reference Original Credit Transfer Pseudo Card Number PayShow PayPage Recurring MOTO SSL Terminal POS Processing Terminals Online Administration Tools Automatic Information System Business Information System Chargeback Information System Debtor Information System Payment Interfaces Smart Pay GUI Multi Pay GUI XML, SSL and GICC Gateways

5 What does a Merchant Customer need? POS One stop solution, all credit and debit methods (SEPA). An illusion.. All Debit methods: Multiple acquirers + terminals. TRXs cheap International schemes only: one acquirer+ technology. TRXs dearer CNP One stop full service solution Acquiring for major cards and important payment methods Provision of as many further payment (routing) methods as possible PCI-DSS solution Fraud reduction Online reporting and chargeback handling Sometimes accounts receivables services Many players seem to be developing in this direction

6 Where are the Risks? PSPs Merchant does not pay his bill Reputational risk for collecting PSPs Acquirers Reputational risk is a big problem for a bank Illegal business Unsavoury business Financial risks Unpaid chargeback's Organisation penalties Other card organisation disciplinary measures Merchant bankruptcy acquirer is co liable for non delivered goods TRAVEL: the risk factor creates difficulties in finding an acquirer

7 How to Quantify Risk? Multiple methods possible: Acquirer risk = p.m. volume * chargeback period * chargeback risk Example: Merchant has monthly volume of 10,000,000, chargeback period is 4 months. Low Risk Business model: Chargeback risk = 1% Acquirers Risk = 10Mil*4*0,01=400,000 High Risk: Chargeback risk = 100% (e.g. future business) Acquirers Risk = 10Mil*4*1,00=40,000,000 These can be seem as credits given by the acquirer to the merchant, i.e. as a form of lending.

8 How to Secure Risk? Multiple methods possible: Proper checking of the merchant and his business case Rolling reserves Delayed payouts. Bank guarantees Charge on merchants physical possessions Bank credit limit Payment only on delivery of future services Such methods tend to reduce merchant liquidity

9 The Risks of Securing Risk. Reputational risk control leads to inconsistent messages: We are happy to have your account We do not want your card transactions (e.g Gambling) Same problem with credit risk We want you normal business We will give you business credits The credit risk of card payments processing cannot be accepted These themes, badly handled, can Damage, if not destroy, the overall relationship Actually damage the merchant. Example is Frontier Airlines, forced into chapter 11 by the decision of its acquirer to better secure its financial risk

10 Debit Cards Basically two types: International Card Schemes - Maestro - vpay - VISA Debit Local (domestic) schemes Girocard (DE) Maestro UK and Solo Carte Bancquaire (F) PIN (NL) Most local scheme cards are co-badged with an international scheme Some migrations to international schemes are just really a repackaging of the local scheme in another brand (maestro powered by X)

11 International Debit Schemes Acquirers and Issuer have different risks and costs for these cards : Issuers Little to no credit risk Same processing costs, similar scheme fees as credit cards Potentially profitable even with fixed interchanges. Acquirers Same processing costs, similar scheme fees as credit cards Basically the full risk of a credit card transaction! Merchants expect everyday low prices (fixed) as they know that the interchange is low. This can be bad business for an acquirer.

12 Delivering Debit Cards Issuing was clearly a cultural issue: DE a debit country USA credit UK credit really? New customer data from a UK merchant: TRX Credit Debit % Corporate and Business Consumer maestro, VISA Debit MCI 0,7 43,0 56,4 VISA 1,1 6,1 92,8 Not truly representative but shows the trend Issuers also reducing risk by migrating to debit However consumers are also voting with their cards

13 Delivering Debit Cards Acquiring simple? Technically little difference in processing Need to ensure that terminals perform properly (always authorise) Merchant price expectations are the problem Interchanges for UK domestic VbV ecommerce with a VISA consumer card are 0,87% (Credit) and 10p (Immediate Debit) Volume, clearing and settlement fees etc. are also charged: e.g. VISA UK TRX in GBP External Credit Cost Debit 5 6,48 12, ,00 12, ,04 12, ,16 12,98

14 Delivering Debit Cards How can an pure acquirer explain to the merchant. Please pay more? Processing costs Risk costs (similar chargeback rules to credit cards in the schemes Situation is, in principle, somewhat better for the combined issueing and acquiring banks as interchange stays in house But market developments move against this. These figures deliver an argument for the new schemes: EAPS PayFair Monnet etc. In principle cheap mass transaction processing, without the risks that an international scheme acquirer takes

15 New Schemes These schemes are all still in their initial phases Some successes show schemes can work However real roll out still not achieved The schemes follow different principles Rescue existing national schemes Create a new scheme parallel to the banks Create a new scheme driven by the banks The price economics of the current international debit schemes dictate that a new solution must come This would be more closely linked to the traditional cheap mass transaction processing of the banks

16 Prepaid Cards This looks like a good business case for the issuer No credit risk Float But not so good for the cardholder Cash like Prefunded The system has brought new niche players onto the market, serving The unbanked Special applications (e.g. Travel) We are now being approached with new niche applications Potential has not yet been realised but simple card replacement strategy is not the future

17 Mobile Payments To date not a real success in northern Europe Technology can solve many problems Security (physical device) Presence: who goes out without a mobile? Authertication, everybody knows their mobile phone PIN However we are not in Africa there is an existing payment solution, cards, which works New attempts in Europe from device producers Telcos Generally involve support for existing schemes to fund mobile wallet Long term subject to same cost pressures as card payments

18 Conclusions A transaction bank may not ignore in house acquiring as Opens corporate customers to other relationships Growing market Risk control can damage merchant relationships The provision of such services demands ever more complex technical services Debit card growth threatens to traditional acquirer business case New SEPA schemes obtain a practical rather than just a political justification Prepaid has a future as a niche product Mobile payments are coming sometime. Who will be the winner is not yet clear