Challenges facing card payments in the new regulatory landscape. Jan-Olof Brunila / Swedbank Group Cards for Riga payment conference in November 2014

Transcription

1 Challenges facing card payments in the new regulatory landscape Jan-Olof Brunila / Swedbank Group Cards for Riga payment conference in November 2014

2 Swedbank Group Cards issuing 2014 Issued number of cards in four states 8 million cards Card spending 50 billion Euro Of which point of sale spending 36 billion Euro Growth rate 4% ATM spending 14 billion Euro Shrink rate -5% Number of issued POS transactions 1,4 billion Number of acquired POS transactions 2,0 billion Growth rate 11% Average POS transaction value dropping - today 25 Euro some 63 % of transactions below 20 Euro some 44% below 10 Euro Average ATM transaction 70 Euro dropping Swedbank is highly dependable on card payments to service our 8 million customers

3 Cards are the dominant payment means in Sweden In % of all OTC POS payments are made by cards Number of payments with debit and credit cards has grown substantially since the 1990ies Number of transaktiones (million) Debit Credit and has become the dominant retailer payment method 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Share of value (POS-payment versus ATM ) Cash Cards Source: SCB (state statistics bureau) the Swedish financial markets 2012 Source: Riksbanken / Central Bank of Sweden Development: +11% card increase per annum for

4 Card payments per capita i the EU > Sweden 2. DK 3. FI > UK 5. EE 6. NL 7. LU > PT 9. FR 10. BE > IE 12. LV 13. SI 14. AT < ES 16. CY 17. LT 18. DE 19. MT 20. PL 21. SK 22. CZ 23. IT 24. HU 25. RO 26. GR 27. BG Source: ECB

5 Cards a beneficial payment service Cardholder Access to funds Safety Speedy payment Consumer protection Additional values Pre approved credit Merchant Payment guaratnee Efficiency Security Cost of cash avoidance Additional sales Consumer info

6 Common misunderstandings on card payments Claim 1. Too little competition in card payments 2. Banks earn too much on cards 3. Merchants pay too large share of all card fees 4. Cards blick for new innovations in payments Reality in mature markets e.g. Sweden 1. Multuiple issuers and multiple acquirers operate in competition 2. Swedish Central Bank 2012 study: Debit cards a loss, credit a small profit 3. Merchants pay 40%, consumers 60%, and pricing is set by the free market 4. Sweden leading innovation country in payments:svish,sequr,trustly,klarna In spite of 80% card payments

7 Merchants prefer cards Which means of payment do merchants prefer considering: 8% 23% 5% 92% 77% 95% Smoothness Source: Study What is the cost for cards HUI 2012 (Swedish merchant research institute) Time consumed Customer satisfaction

8 Cards provide major indirect advantages Higher share of electronic payments contribute to shrinking black/grey economy Black economy / number of electronic payments

9 Key to success = cooperation all merchants can accept all cards Four party model Multiple issuers Payment guarantee Multiple acquirers Card holders Millions Merchants Thousands

10 The EU sees problems in Europa Few card payments a lot of cash payments in the EU The transition to electronic payment is slow Different card payment solutions in almost every member state and many domestic debit cards Citizens cannot always get bank accounts and cards Expensive card services Card monopolies in some markets Limited access to e-commerce payments and proposes the solution: Regulate the market to achieve: Speed up the transition from cash to electronics Build the internal market for card payments within EU Increase the supply and competition to reduce pricing Payment Services Directive 2, Interchange fee Regulation, Bank account access directive, Secure e-commerce payments (ECB)

11 EU regulatory proposals... 1 Payment services directive V. 2 Go live 2016 Increases consumer rights and payment service provider liabilities New third party intermediaries are defined Regulated roles for new competitors among these over lay payments Cost increase for payment processing in the banks customers pay Bank account directive Go live early 2015 States that all EU citizens have the right to open an account + payment tools anywhere in the EU Regulates pricing for account holders and how such pricing can change over time New on-line only payment cards will be developed Increases risk and admin work in banks customers pay Secure Internet payments directive (SecurePay by EBA) Go live 1 August 2015 The purpose is to increase security when the internet is used for payments Demand for strong two factor authentication for all internet payments (user ID and password disqualified) Requirement for security monitoring, reports to FSA Requires new user interfaces for internet shopping with payment cards, mobile phones etc. Investments need to be made for e-commerce both in bank and merchant end for card payments = cost increase 11

12 The interchange fee regulation 1. Caps on interchange fees for card payments to be introduced: - Debit card transactions 0,20 % of transaction value or less - Consumer credit cards 0,30 % or less - Corporate cards out of scope of the regulatory proposal as are also 3 party schemes (where the issuer and acquirer is the same legal entity) 2. Sur-charging not allowed on regulated cards 3. Honour all cards rule Applies to regulated cards but not to unregulated cards Possible to accept credit and/or debit cards and /or corporate cards 4. Clear card acceptance agreements with merchants: Acquirers to specify pricing per card type, un-blending, IC fee ++, regular statements 12

13 Interchange fee regulation continued 2 5. Product identifier in the chip and on the card 6. New pre purchase process in terminals to allow for merchant steering practices 7. Reporting routines to merchants changed each settled transaction to be listed 8. New common data interface between merchant and acquirer 9. New common data interface between acquirer and issuer 10. The definition of debit and credit card transation changes the practice in many markets

14 Time table and process in the EU The EU decision making process: EU Commission makes a proposal done on July 4, 2013 The EU Parliament decides on its opinion done in April 2014 The EU Council of member states decides on its opinion in the making by X-mas The three bodiers align the Trilogue - to be done after Council (early 2015?) The Regulation becomes valid after publication in 20 days after publication in the EU official journal A possible early go live date date can be in April 2015 and a late date in December No national legislatory work needed the EU Regulation applies as national law

15 Added cost impact from the regulation High level calculation of the major cost components All cards in Europe to be reissued prematurely 2,5 billion Euro All merchant terminals to be updated /redeployed 3,0 billion Euro All processing systems for cards to be updated +0,5 billion Euro New merchant contracts to be issued + 1,0 billion Euro Loss of efficiency for every card payment converted to cash remaining as cash 0,30 Euro each 5,0 billion Euro

16 Card issuers need to consider their strategy Revenues drop due to the interchange caps Investment needs triggered by the technical requirements (cards, interfaces, (new (new cards and new processing interfaces ) Cardholder contracts have to be rewritten How to go ahead: Bail out due to hopeless business case? Cut down product features to cut cost? Stop all business development? Increase cardholder pricing? Fundamentally change the card product? Issue unregulated cards? Replace cards with non-card services? or all of the above?

17 Likely outcome for issuers in the market Card scheme business model changes -The payment guarantee from issuer to acquirer ends? -The services not rendered guarantee from acquirer to issuer ends? -Issuers pay acquirers when cardholders have paid issuers (push clearing)? -Issuers pay less and acquirers pay more to card schemes (e.g. authorisation cost)? Issuers shave off all extra features from the cards and price these separately -Travel insurance, purchase protection, cash back, bonus points need to be paid for by cardholders -Third parties may step in and offer services to cardholders e.g. bonuses for loyalty -No new product development -Big data commercialisation? Issuers increase cardholder pricing Cardholder fee hikes are inevitable Debit cards may rely on periodic fees Credit cards may use Day 1 interest -Both may charge for LVP Technical requirements with product flag and new interfaces cannot be met No issuer can re-issue its cards or change its interfaces in 20 days post regulation

18 Acquirer impact Acquirers will have to reshape the merchant offering: Payment guarantee to be offered on acquirer risk - if wanted Pay out to be delayed until issuer pays to acquirer Acquirer to offer factoring to merchants for next day settlement Acquirer scheme fees increase Merchant contracts to be rewritten to reflect IC fee ++ Acquirers will not meet the technical requirements in 20 days Change of the merchant acquirer and acquirer issuer interfaces lengthy Re-ceretify merchant terminals and interfaces Acquirer development focus will be on tech requirements not business development Acquirer pricing impact Merchant commission cost to increase including next day value, guarantee

19 Other effects Issuer willingness to pay to card schemes will be reduced Issuers demand to pay less to schemes due to value reduction Acquirers can end up paying more merchant price increases Card scheme business model comes under pressure The payment guarantee is revoked no pay no cure Issuer pay to acquirer is delayed (credit/charge cards) 28 days Market impact Acquirers to offer merchants factoring on credit card settlement Acquirers to charge for its own merchant guarantee Carholders can file chargeback requests up to 13 months post payment for any transaction (PSD rule) Card payment contains less service than today Cardholders use cards less and pay more cash Merchants end up paying more than today Cards become less effective as payment means and less attractive the only option in the market is cash

20 The Regulation, good intention, wrong mearures Good intentions Increased card card usage Press on consumer price Increased competition Counteractive measures Less revenue to issuers LVP unprofitable Settlemet days? Payment guarantee? Major tech investments Expected outcome No LVP, card usage drop No business development Smaller banks exit issuing EU objectives fail

21 Cards in 2020 Card payments dominate in retail not withstanding the form factor Other electronic payments complementary takes time New rules and technical development will redistribute the markets and the payments methods Swedbank in 2020: We will be offensive and provide excellent services to our retailer customers. We are the largest player in the Nordic area We will follow our custiomers into Europe Swedbank in the new card payment landscape 2 Swedbank Today: Nr 5 in Europe in acquiring Nr 10 i Europe in issuing 4 times bigger than the closest competitor Cost efficiency top class