from gtnews.com

Cards now constitute almost one-third of receivables, yet European treasury departments are still faced with a multitude of acquiring relationships when working cross-border. What is holding back a simplified pan-European cards payment environment?

Cards play a significant role in driving non-cash payment volumes, which have continued to grow, with an increase of 8.6% globally to 250 billion transactions in 2008. The use of cards continues to be the single strongest driver for this growth. Global card transactions (credit and debit) grew 14.5% in 2007 and 11.6% in 2008.

In Europe, the number of issued cards has grown steadily at about 5% per year to 727 million in 2008, while the transaction volume grew twice as fast as the number of cards issued, to €1.68 trillion . The financial crisis has also affected the card market. However, card payments are still expected to grow, although at somewhat lower rates over the coming years, as preliminary figures for 2009 indicate.

The UK, Germany and France make up 50% of the EU card market, with 149 million, 122 million and 85 million cards respectively. The UK is primarily a credit card market, while in Spain and France the delayed debit card plays a central role. Germany, on the other hand, is a debit card market, where the credit card plays a minor role.

Cards as Part of the Receivables Chain

Owing to the credit crisis, many corporate clients are now pushing for a wider range of cash management solutions, all rolled into one solution so that they have better visibility over their cash flows, such as accounts receivable (A/R) and payable (A/P) alongside a card proposition. Within this trend, the importance of cards is steadily increasing as part of the receivables value chain. In contrast to the steady decrease of other payment methods such as cheques (14% in 2002 to 9% 2007), cards rose from 28% to 32% in the same period.

Today, treasurers are dealing with a receivables chain that is already almost one-third card payments, a proportion which will increase over the next few years. Therefore, a cash management bank that intends to provide a complete cash management service to its merchant customers must also have a card proposition in its portfolio.

And yet, the European merchant acquiring market today is largely domestic and fragmented  as a result of the special point-of-sale (POS) challenges of domestic debit cards:

• Terminal concept.
• Customer service, billing and reporting in local language.
• Legal restrictions.
• Pricing.

pan-European proposition for the POS business is, however, very complex. As long as the single euro payments area (SEPA) is not fully in place, there are no international standards; nearly every country has its own payments schemes, as well as different technical equipment and service levels. Historically, merchants have needed separate processors for each country because even international processors didn’t have domestic schemes on their platforms.

Additionally, even though the POS hardware is the same for each domestic scheme, they have different protocols that have to be converted to one understood by the bank. Plus, each domestic scheme transmits different amounts of information. For example, Switzerland provides additional data not provided in other countries. When a large merchant is accustomed to – and relies on – this level of information, then any bank interested in operating in that market must provide all the information to enter into the customer relationship.

Second, the array of European languages adds another layer of complexity. This may seem trivial, but if a bank wants to enter a new market, it must also deliver customer service. For example, hotels, petrol stations, restaurants and other similar businesses must be available 24/7, 365 days a year. A bank also needs this capability in billing and reporting, effectively having every language in its back-end systems.

Third, domestic legal restrictions, such as the data protection law in Poland, present further challenges.

In addition to the aforementioned issues, there are also pricing hurdles. Within the EU there is non-deductible value-added tax, which can put cross-border players at a disadvantage compared with domestic competitors. In some markets, where the issuing banks have a dominant market position, they have forced the (higher margin) issuing business by giving away the acquiring for free. This tactic makes it difficult for new players to break into these markets.

In summary, the European cards market has seen a number of years of double-digit growth in transactions, but still has a lot of untapped potential that will foster continuous growth. Additionally, the importance of cards in the receivables management chain will continue to grow.

Yet, many markets are still relatively undeveloped compared with the advanced UK market (especially credit cards). The domestic debit systems have led to relatively closed domestic markets and no pan-European players have yet evolved with substantial scale in various key markets.

Innovation

Innovation is also having an impact on the marketplace. E-wallets and merchant service providers (MSPs), such as PayPal, Moneybookers and ClickandBuy are continually taking market share from cards. Online payment methods are becoming more popular, such as giropay (Germany), iDEAL (Netherlands), eps (Austria), etc. Mobile payments and near field communications (NFC) are also rapidly gaining in importance. These include mobile banking, mobile money transfers (person-to-person) and m-commerce (person-to-business) (see below figure).

Lastly, client demand is driving change. Merchants are demanding quality at a reasonable price. They want:

• Flexibility and quick time to market for innovation.
• Speed of POS settlement.
• High system availability.
• Low cost.
• High security standard.
• Secure and guaranteed settlement.

Although in some areas niche payment methods can be sensible and successful, consumers mainly prefer a multi-purpose payment method. They demand:

• Easy usage.
• Transparency.
• Data protection.
• Low (or even no) costs.
• The possibility of retrieving payments.

Clients are also looking for payment services harmonisation to focus on their core competencies, allowing them:

• Streamlined vendor relationships and to offer cross-border acquiring from one hub.
• Standardisation of reporting, billing, processes and infrastructure.
• Integrated fraud prevention.
• An integrated receivables management solution.
• Safeguarded investments (e.g. terminals).

Therefore, in future, gtnews predict that cards will see continued growth, especially in e-commerce. There will also be further commoditisation of acquiring, with respective margin compression. SEPA will open markets and foster a European debit scheme, but this will take time. The competitive landscape will change, with vertical and horizontal integration and new competitors etc. And new payment methods will change the landscape and compete with cards, while innovation and technology will bring opportunities and challenges such as mobile, NFC, etc.

Merchants will see a significantly lower cost of card acceptance. With fewer providers and optimisation of internal processes and cost, they will have the opportunity to consolidate their business. But merchants will need partners that help them to fully benefit from these opportunities and reduce complexity.

For acquirers, even though volumes will grow, the payments business will become tougher, with margins declining. They will also face increased complexity (and costs) through new payment methods and regulatory requirements. They need to focus on:

• Client demand and value added services.
• Cross-border acquiring.
• Fraud prevention.
• Reporting and process optimisation.