May 29, 2007

Will SEPA unleash the genie of spiraling interchange fees?

EU regulators are encouraging the emergence of multiple regional debit schemes, to the detriment of the national debit monopolies that exist across Europe. Banks will finally be able to choose between multiple debit brands. Not just Maestro and V Pay, but other new regional schemes that are quickly emerging to compete head to head with Visa and MasterCard.

At last week’s Cards and Payments conference in Berlin, a bank executive who was speaking on a panel about SEPA (the EU’s “Single European Payments Area” directives responsible for this increase in competition) mentioned very happily that he would now be able to choose the debit card brand that provides the most profit. He was clearly thrilled with this new competitive environment. Someone in the audience asked if that meant that he would choose the scheme that provides the highest interchange. The bank executive smiled, “As I said, we will choose the scheme that gives us the most profit.”

This new and fundamentally different competitive landscape will be a reality January 1st 2008, the date at which SEPA goes into effect. MasterCard and Visa are ready today with their Maestro and V Pay debit brands. The regulators want more competition, more players, and more schemes. At the conference in Berlin, the European Association of Payment Systems, a consortium of national debit monopolies, announced that they were grouping together to create a regional scheme with its own payment acceptance brand, EAPS. Interestingly, France’s Cartes Bancaires, the biggest of the old guard debit monopolies, showed no interest in joining the consortium and instead seemed to indicate that they wanted their brand to go regional and to compete head to head with Maestro, V Pay and EAPS.

I doubt EU regulators expected SEPA to cause interchange fees to rise, and I got the sense that the national debit monopolies like Cartes Bancaires and the members of EAPS are just now beginning to understand this aspect of payment brand competition. But the potential of rising interchange fees is high. A card will only carry one Euro-wide brand. It has to be Maestro, V Pay or one of the emerging regional brands. And now that banks finally have a choice, it will be irresistible for them to choose the brand that offers the highest interchange. The old European national debit brands have never had to deal with this before. EAPS and Cartes Bancaires will need to learn fast in order to compete with Visa and MasterCard who already have lots of experience using interchange as a major competitive weapon.

I was struck with how people talked about interchange. People from the EAPS consortium, all of them processors, kept referring to low interchange as a major advantage that their scheme would have over Maestro and V Pay. I couldn’t get my head around this until I realized that they were thinking like processors, for whom interchange is a cost of doing business which they need to bundle into their merchant fees. The lower the interchange, the better. They were certainly not thinking like bankers, for whom interchange is a profitable revenue stream that goes straight to the bottom line. A major wake-up call and mind shift is waiting to happen.

Something similar happened a few months ago in Singapore, with the country’s NETS debit card brand owned by the major local banks. NETS has always been the cheapest card payment method for merchants, with a fixed transaction fee much lower than the interchange fees on Visa and MasterCard debit products. But the banks that own NETS have grown tired of not getting interchange revenues out of their debit cards, and apparently pretty much told the organization that either it finds a way to generate interchange for the banks, or the banks will issue scheme debit cards instead. The result? Merchants received a letter from NETS saying that they would now be charged interchange fees on NETS transactions, a unilateral decision which has not gone down well with merchants.

What about European merchants? Won’t they resist spiralling interchange fees? Tensions are already high, with merchant associations fighting across the region for lower interchange or simply the right to surcharge and pass the fees on to customers. Since the only reasonable way to deliver higher fees is to give more value to merchants, there is growing pressure on payment brands to innovate for the benefit of merchants. The payment scheme that offers the most value to merchants will be able to deliver the highest interchange fees and attract the most issuers. Payment schemes that are positioned as low interchange products, offering little more than today’s basic commoditized payment service, are much less attractive to banks and could end up on far less cards than other brands.

My conference speech in Berlin was on the second day of the event. I was already going to talk about protecting interchange, but the first day’s discussions on SEPA made things so much clearer that I took advantage of East to West jetlag and spent the predawn hours completely redoing my presentation. Here it is.

I will be back in Europe in a few weeks, speaking at the Contactless Cards conference in London, on June 26th. Contactless is a whole other story, but interchange is still at the heart of it (as we saw recently with Visa’s decision to reduce interchange fees on contactless payments in the UK in response to merchants’ lack of interest, and a similar lack of interest slowing contactless growth in the US). I will be talking about ways to make MasterCard Pay Pass and Visa Pay Wave much more attractive to merchants so that deployment can happen more smoothly and more profitably than what is currently being experienced.

Very exciting times in the payments industry!

Related posts and how Welcome Real-time helps protect interchange:

Prior posts on interchange

Prior posts on data mining

How Welcome helps payment schemes justify higher interchange and compete for bank market share


Bruce Cundiff said...

Wonderful post (as always) Aneace. Do you think that the national debit networks in Europe will cease to exist or will they learn from the examples you cite (and one you didn't -- the EFT networks in the US and the ongoing consolidation/ownership issues that they are going through)?

Aneace Haddad said...

The comparison with the EFT networks in the US is interesting. I need to put more thought into that, but it does seem similar. Things seem to be consolidating even faster here in Europe, probably because of government intervention that US EFT networks don't have to deal with. Thanks for that new angle.

Anonymous said...

I've found the free podcast series at to be valuable in this regard. I actually came across it when listening to (it is made by the same media firm).

Also the Financial Services Club in London has a series of meetings/talks on payments scheduled in London and Dublin over the next few weeks I attended one yesterday where MasterCard and PayPal both spoke. The meeting was well attended and the question and answer sessions dynamic. You can register at their website and see the upcoming schedule.