Despite the perennial grumblings about margins, the card payment industry has pretty strong underlying growth potential and here’s where it’s going to come from.
- Kill cash. 50% of European transactions are still cash, for goodness sake.
- Widen acceptance networks. 75% of EU SME’s still don’t take international card schemes. Even in sophisticated Finland, 130K merchants could take cards but don’t.
- Make In App payments easy. Apple Pay does this really well.
- Penetrate new verticals – speakers enthused on rapid transit, parking and vending
- Launch value added services. Conference speakers were persistently vague about what these might be but included:
- Post-pay and installment credit (big in Turkey but also a key focus for PayPal),
- Taxi apps (Verifone bet big on this but admitted being blindsided by Uber)
- Coupons and offers that personalize the relationship between the merchant and shopper. I’ve seen no compelling case studies for this yet although if it’s a winner, it would be a strong argument for keeping issuers and acquirers under the same roof.
- Online VAT reporting – some countries are considering mandating this the service could be integrated into the payment terminal.
The alternative is to compete on price which everyone says they don’t want to do. A chap from Klarna suggested that payment processing would be free within ten years – it’s just bit and bytes moving around the Internet after all – and merchants would only be paying real added value services such as fraud protection and counter-party risk.
Another idea would be to created an exciting B2B brand that processed cards as well as doing lots of other useful things for its customers. But that wasn’t on the agenda, sadly.
Merchant view – Auchan spoke on day one. Carrefour presented on day two and said pretty much the same thing, as you might expect. The good news for the industry is that it has outsourced its payment service to Ingenico and runs the company’s new P2PE service across all European sites. The bad news for acquirers is that the new infrastructure now allows Carrefour to dynamically route transactions to the lowest cost processor.
John Delaney of EVO forensically dissected the economics of the card business. He calculates the processing costs for issuers range from 1 to 10 euro cents per transaction. Following the reduction in credit interchange to 0.3%, small issuers won’t be able to survive. Even the larger ones won’t be making enough money to satisfy their owners.
The result is likely to be consolidation (scale drives down processing costs) and increasing fees (both transparent and sneaky) for cardholders.
Why should acquirers be concerned? Well, of course without issuers there won’t be any acquirers. Less existentially, there has to be a strong chance that authorisation fees, currently paid to the schemes by issuers, get billed to the retailers instead via the acquirers. That will be an interesting discussion for the relationship management teams.
And there’s the ever present worry of issuers ditching Visa/Mastercard for the more lucrative and unregulated Discover or American Express. Barclaycard has done this in the UK and, according to my calculations, ripped £47m profit out of the UK acquiring market all on its own.
The acquiring squeeze won’t be helped by the rapid exit of banks from this business. Innovalue calculated that the proportion of banks that have an acquiring arm fell from 72% to 58% in the last five years. Of those that don’t, most have a referral agreement rather than partnership. Pretty soon, acquiring won’t be a core banking product. This is already the case in the UK where only Barclays and the tiny AIB remain as integrated issuing and accepting businesses.
If acquiring is all about scale, there are three possible strategies:
- Lead the growth in the nascent market for pan-European acquiring services directed at multi-national merchants like Carrefour and Auchan. This is about scale, reach and microscopic margins.
- Dominate a domestic market. I think this one is primarily about who has the best SME distribution. This is probably a case of picking up white label or referral deals from banks that don’t want to run their own acquiring operations although it would be nice to think that the winners might genuinely love SME’s for their own sake.
- Target a niche such as gambling. Customer understanding is key for this one.
EVO claim to have some cool technology from the US that will allow them to keep their costs down as their volumes ramp up, including fully automated onboarding, reporting and chargeback management. I’m told this was critical in its winning the Bank of Ireland contract away from Elavon in 2014.
Both EVO and SixPay are committed to a pan-European strategy but a number of speakers speculated whether WorldPay and Barclays (the two largest acquirers by transaction volume) would stay fixed in the UK or come out to play.
Edward Strycharczuk spoke for Raffeisen Bank (15 markets, 110K terminals). He reiterated his bank’s commitment to acquiring but that it needed to be bundled with other products and services to produce propositions relevant to particular segments. That’s certainly true and it would have been interesting to hear some details. He did mention that Raffeisen had tested m-POS in four markets but considered it, too, a scale game. Regular readers of this blog will know that m-POS is wasted in micro-merchants.
Here’s my deck. I’ll write a separate blog on the subject next week.
Michael Saunders from Barclays was understandably bullish. To their credit, Barclays have been very deliberately using payment innovation as a brand building tool and, as the acquirer for TFL, have notched up 100m contactless journeys so far. Barclays have also pioneered the integration of contactless into wearables with the bPay wrist band. And have recently inked a deal with Southampton Football Club to offer fans a pre-pay wallet linked to a branded wrist band combined with related promotions and offers.
Lessons learned for wearable payments from the bPay experience are:
- Wearables need to be stylish and comfortable
- Payment features are not enough. People need other services such as access control.
- Speed and convenience are vital
What’s next for bPay:
- Better design and more comfort
- Partnerships with the fashion industry (for both design and distribution)
- Broad customer launch
- New form factors
- Wider range of styles and colours (not just blue)
Poland – Until TFL cranked up the volume, the Poles were the undisupted European kings of contactless. Piotor Warskcki explained that 75% of terminals are already contactless enabled and that 100% of new cards are too. 100 Polish cities have enabled their rapid transit. This explains why 30% of transaction volume is contactless today although the limits are lower than elsewhere. It’s tap and go < c.€12, tap and PIN > c.€12.
Pitor was rightly skeptical about NFC based mobile phone solutions (at least those that involve SIMs) but cited one interesting example of Polish payment innovation. Zencard is a card-linked loyalty scheme that can enroll shoppers on the payment terminal itself during a transaction. It’s coming the UK and has been accepted on Level49. Watch this space.
TIM Wallet – Ironically, Pitor was followed by a presentation about a SIM-based telco wallet, this one from Telecom Italia. The snappily titled TIM Wallet works with 11 payment cards and on any NFC terminal.
The commercial is lovely (see below) but a number of telcos around the world have launched these services and they have all struggled with the same issues. Firstly, customers have to go into a shop to have their SIM card switched out. Secondly, to actually make a payment, you have to open the app and select a card and press “pay.” If the transaction is >€50 you will have to input a PIN too. This is a worse (not better) customer experience than using a plastic card. In any case, Apple Pay blows this concept away as the US telcos have discovered.
Biometric credit cards – Sussanna Hamested from Zwipe, a Norwegian start-up, talked out its prototype that uses a fingerprint reader embedded in a Mastercard to authenticate high value transactions. The biometric data is held on the card itself and survey evidence indicates shoppers would welcome the innovation. If you look at the video, you’ll get the idea but I would certainly add a confirmation process for high value transactions.
Next step is a pilot on a standard dimension plastic card (the prototype which isn’t shown in the video is quite chunky) but I do wonder whether Europe is the right market. American banks, who recently decided their customers are too stupid to memorise credit card PIN’s might be more interested.
Car Parking – this has always been a problematic issue for the payment industry since the terminals are unattended. Jens Zier from Q-Park and Yves Lalieu from Schwartzyla Consulting have a cunning plan that involves changing the contactless rules regarding online PIN lookups. If you’re into car parks, I recommend you get in touch with Yves.
Millipay, a simple service that allows publishers to charge small amounts for access to individual pieces of content. Target customers are newspapers or possibly TV companies that want to charge viewers to skip the commercials.
Tiller Systems, a French iPad EPOS vendor focused on restaurants. This is quite a crowded sector at the moment as many people fancy taking lumps out of Micros. These guys seem pretty savvy, though. The CEO comes from the industry and is building the right ecosystem around the core product. This includes payment providers and 3rd party integrations to the likes of Just Eat and Guest Online.
Mea Wallet – a white label mobile wallet/access control/ID solution for banks to offer to their customers. The CEO was particularly excited that he’d found a way of including petrol cards. The presentation would have attracted more interest in the hall if he’d just played their corporate video. It’s a cracker.
Apple Pay – this innovation was well covered by Joel van Arsdale from First Annapolis. Although it has widely regarded as a success in the US, he cautioned that Apple Pay enters a crowded and complex European market in which local debit schemes predominate. However, all wallets are expected to benefit from its “hailo” effect. Key in the US has been the enthusiasm of the card issuers. The first card added to Apple Pay is the default which explains why there’s a bit of a scramble going on. Acquirers and PSP’s are helping by not charging extra for Apple Pay transactions although I would be struggling to see an economic rationale for them doing so in any case. Nevertheless, Joel didn’t think Apple Pay would get to much more than 5% of total card volume by 2020.
Big data – this got a couple of mentions but no concrete examples of services merchants might find helpful. Godwin Schembri from RS2 presented on merchant portals. He did suggest mixing a merchant’s aggregate data with market trends but didn’t show any screenshots or give any product information. That was a missed opportunity.