The Merchant Acquiring Conference Cross Border Acquiring New Models Post 2015 Interchange Ruling 29 th November 2013
The European Commission s Game Plan The card regulation Caps have made the headlines but the detailed Rule Changes indicate a longer term Commission plan to change radically the structure of card payments in Europe The Commission s Targets The Commission s Case for Cards Cards Market Not Working Capping Interchange Change Business Rules Too Many Barriers Lack of Consumer Choice Zero Debit Encourage Non-Bank Competition Vertical Integration Concerns 2
Heat Map of Regulatory Impacts on Key Players All players will be impacted. The new CBA rules mean many acquirers and issuers could be hit first in 2015. A C Q U I R E R S Honour All Cards dropped & Merchant Steering impacts higher cost cards Non-Bank Account Access delivers new product features 7. BIN Blocking One licence removes country boundaries & impacts all players 8. Account Access Impact 1. Card Schemes Scheme Brand & Processing Separation Impacts Visa & MasterCard business models Capping of Interchange and Zero Debit Target impacts Issuer revenues and domestic schemes 2. IF CAP Multi-brands and Card Holder Choice new complexities at the POS I S S U E R S 6 Licences 3. Brand Choice Key Today Direction and extent of travel by 2020 CBA at acquirers home rates 2015-2017 impacts domestic only acquirers Source: PSE Consulting analysis 5. CBA 4. Exclusions Three Parties Commercial Cards, ideal and ELV exclusions generate work-arounds Key Hotter Cooler 3 3
Visa Cross Border Acquiring Concessions Visa pre-empted the Commission s new CBA regulations by offering major concessions in June 2013. These concessions are expected to apply even if the Commission s legislation is delayed. The Visa Concession The Commission s Variations Can use cross border IF of 0.2% to 0.3% Must be EMV/similar approved Must be Interchange Plus Plus framework Acquirer must have CBA licence Acquirer and merchant in two separate EEA markets Must have single merchant identifier Rules apply 1 st January 2015 Lacks the clarity of the Visa Concessions but objectives similar Perceives limited to large merchants Applies two months from date of regulation enactment Commission may not have fully understood impact of change 4
Interchange Arbitrage - Major Implications of Cross Border Acquiring Regulation - Impact Target Domestic Merchants Domestic Interchange Rates Acquirers Dynamic Routing Cross Border Acquirers establish outside country operations and cherry pick key merchants in vulnerable countries with compelling 0.2% to 0.3% offers. High credit card rate countries the target. Pressure on Issuers to reduce domestic IF rates to remain attractive to domestic acquirers. Cross Border Acquirers to implement Interchange Plus Plus processing to benefit from the lower rates. Domestic players become Cross Border Acquirers and relocate to protect revenue streams. Based on sector, average transaction values, acceptance methods, etc. Dynamic solutions could save large merchants significant interchange costs. Rule Variances The ICS rule variances between domestic and Intra EEA need to be addressed. For example, for Intra EEA CVV2 and UK CVV2 rates difference between the input methods for ecommerce qualifications. Settlement Merchants potentially to lose one day s settlement. 5
CBA Routing Illustrative Implications of New Rules If the current proposals are implemented then a retailer with locations in UK, Netherlands, France & Poland entering into a cross border acquiring contract could make significant savings from the new regulations. France could also be impacted. Current Domestic Credit ICS MIF* New Cross Border Credit ICS MIF Potential Merchant Saving Interchange Rate 0.77% 0.3% 61% UK Interchange Paid ( 100) 0.77 0.30 0.47 Interchange Rate 0.50% 0.3% 40% Netherlands Interchange Paid ( 100) 0.50 0.30 (see note) 0.20 Interchange Rate 0.90% 0.3% 66% Germany Interchange Paid ( 100) 0.90 0.30 0.60 Interchange Rate 1.30% 0.3% 77% Poland Interchange Paid ( 100) 1.30 0.30 1.00 Notes: Rate is based on current published ICS domestic Consumer EMV rate meeting qualification criteria (no sector specific) Netherlands rates for Maestro lowest in EU. Also default to the ICS s intra EU rates and therefore current credit card rates will be aligned to the new agreed rates Data correct as 14 th June 2013 Assumption 100/ 100 credit card transaction processed via ICS Merchant has outlets in each country and being acquired by a cross border acquirer 6
Cross Border Example Potential Merchant Saving For a relatively medium sized merchants operating across the four countries their interchange costs could be reduced by over 60% based on the proposed changes. Merchant is present in 4 EEA countries Existing domestic EMV Chip Card rate Revised interchange rate acquired Retail Merchants Card Volume Current Fees New Fees Int Rate Current Fees Revised Rate Revised Fees Savings UK 5,000,000 0.77% 38,500 0.30% 15,000 23,500 Netherlands 4,000,000 0.50% 20,000 0.30% 12,000 8,000 Belgium 3,500,000 0.55% 19,250 0.30% 10,500 8,750 Germany 2,500,000 1.58% 39,500 0.30% 7,500 32,000 Total 15,000,000 117,250 45,000 72,250 Total Card Volume is 15M split as above Key Notes: Visa Consumer credit EMV rates only correct 17 th June 2013 No Scheme Fees or acquirer margin included with either example Domestic Volume Only Annual interchange fees for all countries Cross border acquirer in this example would be based in the Netherlands where both domestic and intra EEA rates are the same Revised interchange fees 7
Example - Transaction Routing By Transaction Value The current fixed fee per transaction for UK Debit transactions may also make it cost effective for CBA acquirers to dynamically route transactions based on transaction value. Merchant Transaction Amount Interchange Cost Optimised Solution 0.08 Transaction greater than 45* e.g. 100 Domestic Acquirer 0.163 Domestic Merchant Key: Interchange Category New Cross Border Rate Domestic Published UK Debit Transaction less than 45* e.g. 30 * ATV in UK is 45 Rate Comments 0.15% + 0.013 Current Intra EEA Chip Debit Rate 0.08 UK Debit EMV Rate 0.08 0.058 Cross Border Acquirer 8
Scheme Brand Processor Separation - Observations Separating scheme brand from processing will be a very complex operation and will be difficult to implement before 2017. Vision and strategy will be key but potentially a significant opportunity to add to shareholder value. Primarily targeted at ICS but will impact Denmark and potentially several ATM schemes. For ICS potentially significant issues relating to: Extra territorial and security issues/impacts (very important). Creation of multi-brand network and potential common carrier positioning. Rebalancing brand/processor revenue streams Separation of scheme risk/related activities Delivery of own brand product solutions Mechanism for new product releases and take up Generalisation of network standard and value added features Potential changes to member contract commercial terms Can all schemes be ready by 2017? What are the penalties for delay? 9
Multi-Brand Cards and Cardholder Choice - Impacts Multi-brand and co-branded cards may have less utility when country licences disappear. Domestic schemes, such as CB, will need to consider how their reach can be extended. Multi-Brand Cards Cardholder Choice Benefits Convenience one card, multiple brands Convergence with ewallet features Growth in single brand cards Most familiar brand selection Increase in incentives Cardholder preferences enabled Issues 4B CECA Why multi-brand when fewer borders? Potential for combined Debit/Credit cards? Consumer unaware of brand differences Enabling cardholder selection POS/eCommerce CB/domestic debit EU wide acceptance? 10
Regulatory Exclusion - Impacts Regulatory exclusions could be used by banks to build own brand three party card product, co-operate to develop ecommerce Account to Account platforms and increase the use of ACH/SDD acceptance at the POS. Impacts Outcome Opportunities Three Party Schemes Sheltered from Caps Reduction in four party franchises Market advantage for T&E schemes MSC differentials highlighted Merchant pressure for lower rates Modest decline in ICS credit issuance/usage Growth of T&E acceptance Increase in bank T&E co-branding Banks build in-house closed loop card products linked to acquiring. ecommerce Account to Account No impact on ideal very low bilateral IF MyBank believed no interchange Issuer incomes remain the same Growth in similar schemes Significantly higher interchange for new Germany ELV ACH/SDD GiroCard differential reduced by Cap Guaranteed ELV less attractive Increased usage of GiroCard Reductions in ELV pricing Increase in ACH/SDD Alternative Payment methods across the EU Commercial Cards Commercial & Business cards are subject to the IF Cap Merchants may decide not to accept card products Potential to be included in the regulations along side credit & debit cards Limited expectation is that Issuers may withdraw services being offered Kick backs to corporates will decline 11
Removal of Honour All Cards and Merchant Steering - Impacts The removal of the Honour All Cards rule and enabling merchant steering to lower cost payments is expected to damage all card products priced above the caps including commercial cards. In the period 2015 to 2017 dual branded cards could be routed via the ICS. Benefits Honour All Cards Outlawed Merchants decide card product acceptance within a scheme Potential for BIN blocking Reduced merchant costs Non capped cards surcharged Merchant Steering to Lower Cost Payments Potential for selective domestic debit routing 2015 to 2017 Already happens in ecommerce Increased competition and lower acceptance costs Increased acceptance of ACH/alternative payments Issues Provision of BIN tables by card schemes Impact on issuer revenues Demise of credit IF prepaid cards How to communicate with consumers Physical/online identification of card type Conflicts between consumer and merchant choice Exclusion of premium and commercial cards (even though exempt) Impact on T&E acceptance Impact on issuer revenues Merchant conflicts versus surcharging 12
CBA 2015-2017 Who Will Feel the Most Pain The new CBA rules will impact high credit card usage countries that have high domestic interchange, followed by high debit countries, which may include France. Acquirers with CBA licences and domestic licensed operations in low interchange countries (Netherlands, Luxembourg, Malta) and with existing CBA deals A Little Pain Passported CBA licences and existing CBA deals Some Pain CBA licences as part of Group membership Quite Some Pain Non-bank CBA acquirers in issuer JVs where lower rates will damage partner s revenues Maximum Pain Domestic bank acquirers with no CBA licences and large acquiring and issuer portfolios 13
New Cross Border Acquiring Rules - Initial Reaction Across EU Markets We are already operating out of Luxembourg Swiss acquirer Either accept competition or reduce domestic rates to match European Commission Too early to say as many points unclear Portuguese acquirer Relocating to Luxembourg is not an option for us UK acquirer Now is the time to enter acquiring EU PSP Do nothing is not an option UK acquirer Why do we have to wait until 2015 major UK merchant We are unable to deliver Interchange Plus Plus billing Scandinavian acquirer No way we will reduce interchange to 0.3% from 2015 onwards major UK issuer Now the French market is open to everyone French bank German acquirers already planning to relocate German Subject Matter Expert 14
Domestic Acquirers Strategies and Actions Acquirers will need to carefully defend existing markets from attack from predatory Cross Border Acquirers and new players entering the acquiring space as well as building strategies to attack their home and cross border markets if they are already a CBA player. Domestic Acquirers Strategy. Domestic acquirers will have to compete/defend/attack under the new rules. A key issue will be to build a new commercial model which balances a reactive strategy (i.e. CBA bids only when competitors threaten), or a case by case proactive strategy (first mover) targeted at particularly vulnerable sectors and merchants within the portfolio. New CBA Entrants. New CBA entrant acquirers will re-examine markets and decide to enter using low credit card rates to build new relationships. Domestic Banks Relocate. Domestic banks that already CBA and have operations in low rate countries can now attack non-cba. Non-CBA banks will seek to relocate to build a defence. Interchange Plus Plus. Interchange Plus Plus delivery capabilities must be available to construct a defence. Knowledge and skills to support such offers and services will be required. Merchant Education. The new regulations are complex to understand. Already large merchants recognise the savings potential. Acquirers will need to proactively communicate to its merchant base to ensure a clear message. Cardholder Scheme Selection and Merchant Card Product Steering. New features and functionality will be required at the POS, ecommerce and mobile. Players who are first to market and compliant with the regulations may win competitive advantage. Platform Functionality. Acquirers platform must be able to support the standard features of CBA language, reporting, statements, payments, etc. along with the ability to price products separately on contracts, statements and reporting. Retain Acquirer Margins. Price will remain a key factor and even under Interchange Plus Plus, the acquirer margin must be retained where possible. Retailers must value the service they are receiving. 15
New Regulations - Key Challenges and Possible Outcomes Uncertainty Plan A. At this stage the timing and implementation of the new regulation is uncertain. The EC are targeting mid April 2014 but this is close to the European Parliamentary elections. Lithuania has the Presidency and may not see interchange as a key issue, as will Greece who follow. Commission s Position. The Commission is pushing Lithuania to set up working groups. Barroso has written to member states emphasising priority. UK asking for speedier implementation and impact of credit card annual fees. If April is not achieved the legislative schedule may slip 6 to 12 months. Chances of Plan A s success about 40%. Visa Concession Commission s Plan B. The Visa concessions on CBA will probably proceed in any event. However, will both card schemes make the same offer? The Commission will need scheme cooperation if Plan B is to be successful. Split Cards/PSDII Commission s Plan C. An option is that the more lengthy PSDII element might be delayed to the next Parliament (will be resisted by DG Competition/DG Markets) and just the cards regulation is passed. Delayed Cost of Cash Study. The Commission exposed because of lack of empirical evidence for caps. Long (four years) delay in Cost of Cash study an embarrassment. If study shows cash lower cost than debit, the basis of the caps undermined and potential embarrassment. If higher, then Merchant Indifference model substantiated. DG Competition may delay release if results unfavourable! Potential Changes. Many parties will lobby the Commission and the European Parliament for changes during the consultation and for PSDII - over 500 amendments were tabled. Lobbying could radically change the legislation. The two rapporteurs are Jose Zalba (cards) and Diego Fele (PSDII). Reaction of the ICS. Both schemes have yet to provide guidance on the management and implementation of the new regulations and particularly cross border acquirers will be able to operate in the interim period. 16
Opinions Possible Amendments? The European Parliament Internal Market and Consumer Protection Committee (IMCO) has published its opinion on the proposed regulation on interchange fees for card-based payment transactions. A number of amendments have been proposed by Rapporteur Adam Bielang. Focus Area Proposed Legislation Proposed Changes Transitional Period Two year period after the new regulation comes into force. Reduced to a one year period following introduction of the new regulations. Net Compensation Currently the assessment of Net compensation is for an Issuing Payment Services Provider only. The removal of Issuing part which leaves just the Payment Service Provider only and will ensure that the acquirer or any other party is also covered by the net compensation clause to avoid collusion and price fixing. Commercial Cards Commercial Cards are excluded from the regulation. Commercial Cards to be part of the proposal with the relevant caps, etc. Definition Clarification New Card Scheme Current rules apply to debit and credit card transactions. N/A Amend the rules to define card based payment transactions to ensure that all payment instruments are included even products that store data Mobile phone, Wallets, etc. It is proposed that the CAPS being introduced would not apply to newly established payment card schemes for a limited time period. 17
The New Regulations - Some Key Questions The proposed new cards business rules are complex and thus there are many questions remain unanswered. For Card Schemes What Impact will ICS brand/processor Separation have? Will the Capped Rates cause more Domestic Schemes to exit? How will marketing incentivisation rebates operate within the Cap? How will the Cap limits be managed and can premium products exist within the Cap? For Card Issuers How to replace lost Interchange and should Issuers plan for Zero IF? What will be the impact of Three Party Exclusions and Non-Bank Access to the account? Do they create Opportunities? How will Card Multi-Branding and Consumer Choice impact Offers and Usage? For Acquirers Can Domestic Acquirers defend against Cross Border/Cross Border Acquiring attack 2015 to 2017 and the Removal of Country Licenses in 2018? What is the impact of dropping Honour all Cards and Merchant Steering? What changes are needed to support Interchange Plus Plus charging? 18
Winners and Losers - Summary of Conclusions Changing the Business Rules is simple but the Regulators must watch out for severe collateral damage. Player Winner or Loser Degree of Inhibitors Degree of Opportunities Consumers Few, if any, immediate benefits, payments more complex and potential confusion. Longer term lower cost of living. Cards Generally Medium level of short term damage, longer term Zero IF for debit a great concern. Domestic Card Schemes Domestic schemes under pressure unless they take pro-active action. International Card Schemes Loose vertical integration benefits but gain from new processing opportunities. Merchants Large merchants have won and major beneficiaries; SMEs small improvement. Issuers Major losers in credit card countries and in some debit from 2015 onwards. Domestic Acquirers Domestic acquirers defenceless lose customers to international acquirers. Cross Border Acquirers Potential short term winners, enter new markets, win new relationships 2015 to 2017. ACH Payments Potential winner in retail payments but not yet fit for purpose. Alternative Payments Significant benefits from account access can compete with banks without risks and costs. Key: High impact/opportunity Moderate impact/opportunity Low impact/opportunity Source: PSE Consulting Analysis 19
Luke Purser +44 (0) 20 8891 6244 luke.purser@pseconsulting.com 20 20