We know where you spend

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We know where you spend
        Government benefit prepaid card
         programmes increasingly being
       used to track and control spending
          ● Strategy: HSBC Merchant Services goes transparent
             ● Conference report: Cards & Payments Europe
                       ● Analysis: mobile payments
                        ● Country survey: Norway
Cards International                                                                                                                                                                          comment

 contents                                                              from tHe editor
 02-03 news analysis
 04-05 Us delinqUencies falling
                                                                        Analysis, insight, intelligence
 	           	 s	delinquencies	continue	to	
             fall.	We report	on	the	latest	
             trend	in	collections                                       Thank you for downloading this sample
                                                                        issue of Cards International magazine. The
 06          strategy: HsBc mercHant
             services goes transparent                                  content is a compilation of articles that have
 	           	 ransparency	in	interchange	
             T                                                          appeared in the publication over the past six
             fees	is	a	delicate	topic.	HSBC	                            months.
             Merchant	Services,	a	division	
             of	Global	Payments,	has	begun	
                                                                           We have tried to give you an idea of the
             detailing	the	various	charges	on	                          breadth of topics we cover – from merchant
             the	bills	                                                 acquiring strategy through to mobile pay-
 07          german prepaid                                             ments consumer trends – and the depth in
 	           	 erman	regulators	resist	new	
             G                                                          which we cover them.
             payment	technologies	and	
             declare	war	on	e-money
                                                                        saving the best…
 08-09 regUlation: intercHange                                          I am confident you will find the material in
       in tHe Us                                                        this publication useful. But that said, please
             The	delay	in	the	Federal	                                  bear in mind we keep the best material for
             Reserve’s	debit	interchange	
             rules	may	indicate	it	is	feeling	                          our paying subscribers.                                                Our country surveys contain a unique level
             the	heat	from	its	opponents.	                                 They are truly at the heart of what we                           of insight into specific cards and payments
             Charles	Davies	investigates
                                                                        deliver. As journalists, we do not answer to                        markets, with the latest data informing seri-
 10-11 analysis: moBile payments                                        advertisers or sponsor, just our readers.                           ous analysis by our highly experienced edito-
 	           	 	new	report	seeks	to	identify	
             A                                                             We see our subscribers as investors –                            rial team.
             the	mobile	payments	adoption	                              stakeholders – and we pride ourselves on
             barriers	and	opportunities
                                                                        delivering excellent value, and a healthy                           find out more
 12-13 news analysis: emv in                                            return on that investment.                                          If you have a serious interest in subscribing
       tHe Us
                                                                           In a world where news and opinion are                            to Cards International, we would be very
             	 he	roll	out	of	EMV	chip	                                 free, and anyone with an email address can                          happy to talk you through our plans for the
             technology	in	the	US	has	been	
             a	long	time	coming,	but	Visa’s	                            call themselves a publisher, we have recog-                         coming months, so you can be confident you
             recent	announcement	finally	put	                           nised that value lies in analysis, insight, infor-                  will see a return on your investment in us.
             forward	a	timeline	for	migration                           mation and data gathering.                                             I look forward to speaking to you soon.
 14-15 cards & payments eUrope                                             We don’t simply print the news, we take it
       2011                                                             apart, analyse it, develop the stories and talk                                                           James Ratcliff
             	 e	look	back	at	the	highlights	                           to the people whose opinions really count.                                
             from	this	year’s	European	

 16-18 coUntry sUrvey: norway
             Total	card	spending	in	
             Norway	has	grown	at	
             a	compaund	rate	of	
             10.4%	over	the	past	
             five	years,	placing	it	
             among	the	fastest-
             growing	cards	markets

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news                                                                                                                        Cards International


Equifax, FICO in joint analytics development deal
Equifax	and	FICO	sign	agreement	for	the	UK	banking	market	to	enhance	consumers’	reliability	to	pay	back	debt

In the first step of the joint strategy, the    conditions.                                       in line with changes in marketing condi-
analytics tool will assess consumers’ ability     It will be an addition to Equifax’s RN4         tions”.
to handle credit, analyse individual circum-    suite of risk scores, and FICO, meanwhile,           The utilisation of credit cards is going back
stances and subsequent changes in a con-        will further develop its own suits (FICO          up, he said, and there is a credit gap – between
sumer’s risk profile under different macr-      Credit Capacity Index and FICO Economic           how much the individual consumer is demand-
oeconomic conditions.                           Impact Index).                                    ing and what the bank is willing to supply.
   According to FICO, the core goal of the        The deal is expected to spur what FICO             Consumers are unable to take out secure
alliance is to enable banks using the analyt-   described as “healthy lending growth”.            loans, so they end up leveraging their credit
ics software to understand the risks of cus-      FICO forecasted a “breakthrough for             card limits, he explained.
tomer acquisition, retention and customer       the UK, facilitating responsible lending             “Many of the banks have been working
relationship management strategies.             and helping lenders to sustain profitable         to reduce those limits appropriately, but the
   The new suite of analytics solutions will    growth”.                                          gap still appears. The demand is not neces-
assess consumers’ ability to handle credit        Mike Gordon, FICO vice-president and            sarily going down.”
and analyse individual circumstances and        managing director for EMEA, said that                Gordon says that the current volatile
subsequent changes in a consumer’s risk         recent data has found a slight increase in        economy has “put additional pressure” on
profile under different macroeconomic           credit card risk, which he said “might be         consumers to pay back their debt. <

n   partnersHips

Dynamic executes                    cardholders to send funds to                                                Mario Shiliashki, senior
volume agreements                   card members or charity organi-                                           vice-president and group head
                                    sations in real time anywhere                                             of US emerging payments at
Card processor Dynamics has         in the world by using Veritec’s                                           MasterCard Worldwide, said:
completed multiple volume           mobile banking technology.                                                “Subway’s decision to provide
agreements with card issuers in        Veritec said that the technol-                                         PayPass acceptance is a testament
the US for more than 1m units.      ogy also ensures security for                                             to the popularity of contactless
The agreements are in order to      card members by receiving noti-                                           payments and our shared goal of
unveil its next-generation mag-     fication when their card is used                                          providing consumers a faster and
netic stripe products within the    in real time and they will be able    president, said: “Aligning with     more convenient payment experi-
US. Volume production will begin    to turn a card on or off via phone    PULSE as a network partner          ence and a more enjoyable dining
in 2012.                            or internet.                          gives our members strong nation-    experience.”
   Dynamics has introduced a           Veritec processes debit, pre-      wide PIN POS acceptance, along
series of new products utilising    paid and gift card solutions to       with expanded ATM access.           Barclaycard, Asda
the first programmable magnetic     debit card issuers using its mobile     “Our arrangement also is          launch corporate card
strip including MultiAccount        banking software.                     important as it ensures our mem-
which allows users to select an                                           bers’ debit card programmes are     Barclaycard and Walmart’s UK-
account by pressing a button on     PULSE and Net signs                   in compliance with the Durbin       subsidiary Asda have launched a
the face of the card.               POS and ATM deal                      Amendment’s prohibition on          corporate trade card.
                                                                          network exclusivity arrange-           The Asda trade card links SMEs
Veritec signs deal with             Debit and ATM network PULSE           ments.”                             to a single account and offers up
Lifestyle Wireless                  has signed a long-term accept-                                            to 56 days of interest-free credit,
                                    ance agreement with NETs (Net-        MasterCard PayPass                  Barclaycard’s full online account
Veritec, a developer of mobile      Works).                               provides contactless                management systems to track
banking debit card solutions,          NetWorks, a electronic funds       payments for Subway                 spending in real-time, and gives
has signed an agreement with        transfer services, will be install-                                       access to VAT reporting for cer-
the mobile marketing agency         ing more than 1,400 of its ATMs       Sandwich chain Subway is to         tain merchants.
Lifestyle Wireless to market        in the Midwest to accept PULSE,       accept MasterCard PayPass pay-         Katie Walley from Asda Finan-
debit cards.                        Discover and Diners Club Inter-       ments across 7,000 US locations.    cial Services said SMEs make low
  Washington-based Lifestyle        national cards.                         By the end of the first quarter   value, high volume purchases, but
Wireless will market Veritec’s         NetWorks will also be able to      of 2012, consumers will be able     lack a method to track spending
on-off debit card to the banked     expand ATM acceptance through         to pay by tapping a MasterCard      and purchasing. She added that
and un-banked population.           PULSE’s 380,000 US ATMs.              PayPass-enabled card or device at   the card would make tracking
  The on-off debit card enables        Cathy Morrissey, NetWorks          the register.                       spending easier. <

2 y 2011                                                                                                 
Cards International                                                                                                                         news

n   top 5 most read articles tHis montH at

American banks face                    the German Banking Industry          provided to the merchant.            mobile service applications.
antitrust investigation                Committee (GBIC) to launch a           The app is being trialled with
                                       co-branded card.                     Recreational Equipment, an           Central Bank of
Bank of America and other                JCBI will launch the card in       outdoor equipment retailer. It is    Azerbaijan mulls safer
major banks face an antitrust          conjunction with girocard in         currently available to iOS users,    card infrastructure
investigation following the            2012 in Germany. The GBIC            but an Android compatible ver-
introduction of debit card usage       consists of five of Germany’s        sion will be launched in the near
fees to make up for revenue            banking associations includ-         future, said developer Venturo.      The Central Bank of Azerbaijan
losses due to the impact of the        ing the National Association of                                           (CBA) has held a workshop in
Durbin Amendment.                      German Cooperative Banks; the        GlobalPlatform: new                  association with MasterCard
  The investigation was called         Association of German Banks;         admin protocol for                   Worldwide on the topic of card
for by five US House Demo-             the Association of German            remote management                    fraud in the country.
crats who claim banks worked           Public Banks; the German Sav-                                                The CBA said that the Fraud
together improperly to charge          ings Banks Association; and the      GlobalPlatform has published a       in Payment Cards Market work-
their customers monthly fees for       Association of German Pfand-         single, standardised administra-     shop aimed to develop a stable
using their debit cards.               brief.                               tion protocol for mobile service     infrastructure within the indus-
  Peter Welch, US congressman                                               providers to develop and deploy      try and said risk management in
for Vermont, said in a letter to       US Bank launches                     remote management platforms.         e-commerce was the key topic.
Attorney General Eric Holder:          mobile credit app                       The protocol helps users man-        Prepaid cards in particular are
“The result is that banks, which                                            age apps via secure elements on      in high demand in Azerbaijan, as
normally compete, agree not to         US Bank has launched a mobile        mobile phones.                       well as in the Ukraine, Armenia,
do so when it comes to swipe fee       app that allows users to apply          Gil Bernabeu, technical direc-    Georgia and Kazakhstan due to
prices and instead accept fees         for and receive on-the-spot          tor of GlobalPlatform, said: “A      a high number of foreign work-
centrally determined by Visa           credit for in-store purchases.       standardised approach, which         ers in Russia who send funds to
and MasterCard.”                         The user can apply for a vir-      enables one administration           their families.
                                       tual credit card using the app       platform to remotely manage             Money transfer companies
JCBI and GBIC release                  and get an instantaneous deci-       applications across all kinds of     sent RUB9.9bn ($315m) to the
co-branded card                        sion. Once approved, the user        secure elements, will stimulate      above mentioned countries in
                                       receives a virtual credit card via   the mass deployment of secure        2010, thus driving demand for
Japan’s JCB International              their smartphone which contains      elements within mobile phones,       secure payment and remittance
(JCBI), has teamed up with             account information that can be      and subsequently more secure         services. <

n   otHer news in Brief
earnings                               income by 32% over the year ago      prompted to enter a PIN before       60% of Canadian merchants stat-
AmEx Q3 net income                     period to $322m.                     completing a transaction.            ed they would adopt an m-pay-
up 13% Y-o-Y                             There was also a decline in pro-                                        ments solution within the first
                                       visions for loan losses within the   tecHnology                           three months of introduction.
American Express (AmEx) has            US Cards Services division, which    Moneris launches
reported a net income of $1.23bn       almost halved from a year ago to     payment app                          innovation
in the third quarter of fiscal 2011,   $143m.                                                                    ATM P2P payments to
13% higher than the year-ago                                                Canada-based credit and debit        be launched in US
quarter.                               contactless                          card processor Moneris has
   For the nine months to the          MasterCard, Etisalat                 launched an app for merchants        A joint venture between PayPal,
end of September, net income           launch NFC in UAE                    to accept credit card payments on    S1 Corporation and NCR is to
amounted to $3.74bn, a 25%                                                  their smartphones.                   offer real-time P2P payments via
increase from the corresponding        MasterCard Worldwide has                The e-Select plus Mobile App      ATMs.
period last fiscal year. Net income    signed a strategic deal with UAE-    allows merchants to obtain real-       The service will allow users
from US Card Services in the           based telecommunication provid-      time authorisation on transactions   to transfer money directly from
third quarter rose 23% over the        er Etisalat to launch contactless    as well as send email receipts and   their bank account via an NCR
year-ago period to $733m, while        mobile payments in the UAE.          generate reports on transaction      SelfServ ATM to the recipient’s
third quarter net income from its         Etisalat will provide NFC-sup-    history. The app is aided by the     PayPal account which will be
International Card Services divi-      porting smartphones, which will      Moneris card reader which can        identified by their email address
sion soared by 53% to $221m.           enable consumers to use them         be plugged into the smartphone’s     or mobile phone number. It will
   Global Commercial Services          as mobile wallets and link their     audio port.                          offer instantaneous payments to
reported a 31% year-on-year            MasterCard accounts to their            A survey by the Moneris Advi-     recipients in over 60 countries.
increase in net income to $197m        mobile phone.                        sory Board found 57% of small          NCR expects to launch the
and AmEx’s Global Network                 But unlike in most other          business owners described their      service in the first quarter of
and Merchant Services divi-            contactless payment cases, con-      mobile device as a vital asset in    2012. It will be initially available
sion increased third quarter net       sumers using this service will be    the running of their business and    to consumers in the US. <                                                                                                                2011 y 3
analysis: credit card delinqUencies                                                                                         Cards International

Credit cards: return to health?
The	latest	data	on	credit	cards	by	Equifax	shows	that	delinquencies	have	fallen,	subprime	card	accounts	
have	increased	and	banks	are	issuing	more	cards	over	all.	The	levels	are	nowhere	near	as	high	as	those	
before	the	recession	–	but	are	banks	returning	to	old	tricks	already?	duygu tavan reports

        quifax’s latest credit card data shows   factors. The contraction in credit limits and    n card nUmBers
        that delinquencies and credit utili-     loan values during the recession, combined       new credit cards acounts opened in the
        sation have fallen, more prime and       with a focus away from lower score, higher       year-to-august, 2006-2011
        subprime credit cards are issued and     risk prospects are paying dividends in terms
credit limits have increased in the last year.   of reduced delinquency and subsequent pro-
Is this something to worry about – or does       visions.
it prove that the industry is returning to          “There is a lead time for the effects to
health?                                          emerge and the positive impacts of these
                                                 have now emerged,” says Schratz.
delinquencies fall                                  Utilisation rates have remained relatively
Delinquency rates have not stopped declin-       flat, between 24-26%. There was a big jump
ing both on a month-on-month and year-           in utilisation in 2008 due to credit tighten-
on-year basis since August 2010. The rate        ing by the banks and, consequently, utilisa-
of decline slowed down and decreased since       tion rates soared.
May (see top chart, p5).                            After a peak in February 2010, when the
  This does not signal a negative trend,         utilisation rate surpassed 26%, credit usage
however, it may simply mean that tighter         began to fall again.
credit and risk controls by banks are becom-
ing more and more efficient, thus leading to     more prime and subprime cards
fewer delinquencies.                             The number of new credit card accounts
  The delinquency rate as of August was          opened by the end of 2010 was 2.8%
2.63% and Equifax senior vice-president          higher than at the end of the prior year and
Michael Koukounas says this is “near pre-        amounted to almost 33m.
recession levels”.                                  This signals the return in confidence         Source:	Equifax
  John Schratz, managing director of Eclipse     among banks, as in the 12 months to year-
Enterprise Consulting, agrees.                   end 2009, the number of credit cards issued      to August 2006, but, again, the return to
  “This is likely the result of a number of      had slumped by 42.3% to just 32m.                growth signals further positive metrics.
n credit limit comparison                           This figure was less than half of that at
                                                 year-end 2006. The year-end 2010 figure of       return to ‘old tricks’?
difference in credit limits between
                                                 33m credit cards is still less than half the      These statistics may suggest a ‘return to old
pre-recession/recession years and 2011
                                                 amount opened at year-end 2006 – but the         tricks’: in light of regulatory changes, have
                                                 year-on-year volume growth certainly initi-      banks begun to issue more credit cards to
                                                 ates an optimism among issuers.                  discourage the use of debit cards?
                                                    The year-to-August figures support this          Schratz doubts that.
                                                 optimism as the number of cards issued              “I don’t think the data specifically points
                                                 by August 2010 was 9.7% higher than the          to this,” he says.
                                                 corresponding period in 2009. The growth            “After austerity measures imposed during
                                                 trend then accelerated in the 12 months to       the recession and the subsequent reduction
                                                 August 2011 (see chart, top right).              in both delinquency levels and write-offs
                                                    Unsurprisingly, the volume of credit cards    achieved and card origination during that
                                                 issued to subprime borrowers had slumped         period, card issuers relaxed underwriting
                                                 by 60% to 7.5m accounts in 2009. By year-        criteria.
                                                 end 2010, this figure had risen by 12.4%            “This resulted in growth in new cards
                                                 to 8.5m.                                         issued.”
                                                    Banks have since tuned their focus on sub-       Consultant Paul Lucraft does not see a
                                                 prime borrowers again and new subprime           direct link between the dramatic increase
                                                 credit card accounts opened in the twelve        and banks’ anticipation of the effects of
                                                 months to August 2011 soared by 64% to           new legislation, simply because the increase
                                                 5.4m.                                            is coming from a very low base.
                                                    This figure is of course a far cry from the      Lucraft does not cancel out such a possi-
Source:	Equifax                                  12.6m new accounts opened in the year            bility, but emphasises that because the new

4 y 2011                                                                                                  
Cards International                                                                            analysis: credit card delinqUencies

legislation has not taken effect at the time       n 60+ day credit card delinqUency rates
Equifax compiled the data, any possible            year-on-year change in delinquency rates august 2010-august 2011
impact it may have on credit card issuing is
unlikely. Rather, he adds, it was the CARD
Act that curbed “irresponsible lending.”
  This viewpoint is supported by Koukou-
nas, who says “risk managers are extreme-
ly” conservative nowadays.
  “The ways used to drive growth in 2007-
2008 – those would not work anymore due
to the changes in regulatory and risk man-
agement,” he explains.
  “What we are seeing instead is a reaction
to the improved performance of consumers
paying off their debt.”

limit for new cards
As of June 2011, the limit for new credit
cards was almost a third higher than the
corresponding period a year ago.
   It remains to be seen whether the year-end      n card limits                                    n card limits
figure will return to positive metrics, too – it   credit card average limit, June 2006-June 2011   subprime card ave. limit, June 2006-June 2011
is not unrealistic to assume so.
   While the average credit limit for both
prime and subprime segments is still
nowhere near pre-recession levels, the year
to June 2011 figures confirm a steady return
to those levels is under way.
   The credit card limit for subprime bor-
rowers fell dramatically in the 12 months
to year-end 2008 and 2009, by 33.2% to
$27.8bn and 69.7% to a meagre $8.4bn
   Between fiscal 2009 and 2010, this
decline slowed down to 3.9% year-on-year
to $8.1bn (see chart, bottom right).
   Given the trends obvious in the year-to-
August metrics, however, it is highly likely
that credit limit for subprime borrowers will
increase by the end of 2011. Already, the
limit in the 12 months to August 2011 has
soared by 69% to $5.4bn.
   Another key metric to highlight is the          n new sUB prime credit card limit                 n new sUB prime credit card limit
percentage of the average subprime credit          year-to-June new credit limits, 2006-2011         year-end new credit limits, 2006-2010
card limit compared to the prime credit card
average credit limit.
   The average subprime credit limit in 2006
was 34.5% of the average credit card limit.
In 2007, this metric fell slightly, to 32.3%,
but grew to 34.8% in 2008 (see chart, mid-
dle right).
   This indicates that financial institutions,
at that point in the recession, had not curbed
credit limits to subprime borrowers yet.
   They did so in 2009, when subprime aver-
age credit limit was 27.6% of the average
credit card limit. This declined further to
24.8% in 2010.
   But here is the interesting metric – and
one to look out for in the months to come.
Average subprime credit limit as of June
2011 was 27% of the average credit card
limit. <                                           Source:	Equifax                                                                                                             2011 y 5
news                                                                                                                               Cards International


40% of e-tailers reluctant to use 3D Secure
Some	UK	retailers	fear	the	extra	step	will	lead	customers	to	cancel	purchases,	writes	dursaff ibrahim

The second e-business benchmark report by        eliminate fraud for businesses. The pass-      n fraUd prevention tools
Sage Pay surveyed over a 1000 businesses         word and PIN code for 3D Secure is not         which fraud prevention tools do you use?
that run e-business operations and found         written anywhere on the card. Therefore, it
that e-tailers were spending £430 ($688)         provides greater security than the CV2 Code
each on average in fraud prevention, with        because it is not printed on the card. Busi-
63% using 3D Secure as a fraud prevention        nesses are slowly but steadily realising the
tool.                                            effectiveness of 3D Secure.
   Other figures revealed that 88% of retail-       “If there are a lot of steps in the check
ers offering their services online are worried   out process it may stand in the way of com-
about internet security.                         pleting a transaction because there are more
   More than a third of e-tailers said they      opportunities for something to go wrong,”
had lost revenues in the past. With the con-     Black says.
tinuing rise of online sales volume, having a       “When 3D secure was introduced it was
simple but efficient payment mechanism is        an additional step that popped out in a new
therefore essential.                             window since then some companies have
   This is what 3D Secure, the online            managed to embed the stage into the same
authentication that is verified by Visa and      checkout.”
MasterCard providing fraud screening, aims
to achieve. 3D Secure, introduced in 2001,       simple, efficient check-out process
adds another stage to the payment process,       essential
leading merchants to resist implementation       Making online sales and purchases simpler      Source:	Sage	Pay,	e-business benchmark report
for fear of losing online sales.                 for customers and more secure for mer-
                                                 chants is essential- especially considering    done to make it much clearer to the con-
secure, yes, but merchants worry about           the value of online purchases has risen by     sumer what they need to do next,” Black
sales reduction                                  14% to £5.2bn in the 12 months to August,      argues.
The additional check-out step with 3D            according to research by Capgemini.              “Depending on what budget you have
Secure may lead to drop-outs because con-          Therefore, Black argues, the 37% of          got and what your payment provider can
sumers may get distracted and forget what        e-tailers that do not use 3D Secure are not    offer you, you can fully still integrate the
they were doing when making the purchase,        seizing opportunities to improve customer      web pages but still outsource your whole
resulting in an uncompleted or cancelled         experience – such as making sure the pay-      process.”
transaction.                                     ment type are presented clearly and ensuring     Fraud is a big issue for many online busi-
  According to Simon Black, managing             there is a flow from putting goods in your     nesses, which explains the emphasis that is
director at Sage Pay, this is the reason why     basket to entering your bank details to make   placed on security strategies by payment
37% of e-tailers still do not use 3D Secure.     the purchase.                                  gateways. With the introductions of the
In fact, 80% of e-tailers said they used CV2       “High-performing businesses do focus on      fraud prevention tools, it seems there is yet
as the main tool of preventing fraud.            customer experience including the payment      to be a single, successful method of provid-
  But he argues that 3D Secure can almost        pages and that there are things that can be    ing a complete protection against fraud. <

Verizon: Most businesses                                                Green Dot joins PCI SSC
yet to comply with PCI DSS
                                                                        Green Dot, a prepaid financial          security officer of Green Dot,
Most businesses that accept cred-    that the lack of PCI compliance    services company, is the latest         said: “Green Dot has always
it or debit cards are still strug-   continues to be linked to data     member to join PCI Security             made security a priority.
gling to comply with PCI DSS, a      breaches.                          Standards Council (PCI SSC).              “We see our membership
report by Verizon has found for         Wade Baker, director of risk      PCI requires the involvement          in the PCI Security Standards
the second year in a row.            intelligence, Verizon said: “We    of merchants and service pro-           Council as a way to further
   The Verizon Payment Card          believe that compliance with       viders that process or transmit         demonstrate our leadership in
Industry Compliance Report           PCI standard will ultimately       payment card data to adhere to          the industry.
shows only 21% of organisa-          improve the security posture       information security controls             “We are a company fully
tions were fully compliant during    of all organisations and, in all   and processes that ensure data          committed to implementing
the audit.                           likelihood, lead to much fewer     protection.                             critical information security
   The findings also suggests        breaches.” <                         John Coffey, chief information        policies.” <

6 y 2011                                                                                                    
Cards International                                                                                            analysis: german prepaid

Legislative threat to prepaid in Germany
The	German	banking	and	payments	landscape	is	often	described	as	conservative.	While	its	neighbours	and	
the	emerging	markets	in	Europe	are	adopting	new	payment	technologies	fast	and	declaring	war	on	cash,	
the	German	regulators	resist	new	payment	technologies	and	declare	war	on	e-money.	duygu tavan	reports

            hen the second e-money directive       efforts to reduce bureaucracy, and that the         PrePay Solutions, agrees the KYC process
            (2EMD) was issued in April, the        required role for an AML commission will            at the till point makes it a too complex and
            German Finance Ministry inter-         only increase costs without actually effec-         costly business case.
            preted its requirements in its own     tively fighting money laundering.                      “AML regulation is being localised across
way and introduced AML legislation that               ZDH is, according to a spokesperson,             Europe, but there needs to be a common
destroys any opportunities in general pur-         against the legislation “in its current for-        spirit,” Coccoli says.
pose reloadable prepaid products in Europe’s       mat”. The spokesperson argues that, if for             “The solution would be no KYC at the till
biggest economy.                                   instance, an independently-run bakery wants         point and monitoring buying behaviour. If
  Germany’s AML laws make what is a                to issue prepaid cards, it will still need to       somebody buys 10 cards, that is not normal.
growing and viable business case a complex         apply KYC procedures – even when the card           If the merchant sells those 10 cards, they will
and costly one: Non-finance institutions,          is in a closed-loop system and obviously has        be held accountable to prove anti-money
such as estate agents, casinos, solicitors, pet-   no high-value stored on the card.                   laundering actions.
rol stations, bakeries and even supermarkets,         So if a drug dealer decides to pay back its         “We would have to report the merchant
are just as much affected by them as are non-      distributors with a prepaid bakery card, it         and they would be called upon by the finan-
bank e-money product and service provid-           technically is money laundering. But, what is       cial regulator and lose their licence.
ers.                                               the likelihood of such a scenario?                     “The chances of money laundering are
  The local legislation requires prepaid card         Michael Mueller, group CEO of paysafe-           limited. PrePay Solutions runs a system that
distributors to comply with KYC stand-    and member of the Prepaid Forum            monitors how many cards are bought at
ards and record and archive the consumer’s         Deutschland (PFD), argues that the legisla-         once – one would have to have a very clever
information for five years – regardless of the     tion “clearly violates” the 2EMD and criti-         scheme, such as buy one card a day and top
top-up value. The legislation also requires        cises its lack of differentiation between pre-      it up to its limit.
companies with more than nine employees            paid issuing and distribution.                         “But if KYC takes place at the till, it is
to appoint an AML commissioner.                       “The issue is that if an e-money institution     impossible to do business with prepaid.”
  Germany’s home-grown AML legislation             issues a gift card, for instance, it needs to          The issue of prepaid clearly goes beyond
restricts prepaid more than the regulations        comply with KYC standards,” he says.                security – it is an issue of banks versus non-
in other countries.                                   “If a bank issues gift cards, there is no such   banks.
  The issue is this: If the e-money provider is    obligation. Banks are not yet regulated in             “Not one bank is a PFD member. They are
not based in Germany, the regulator cannot         that way. So e-money institutions are treated       pretty happy with the law,” Mueller argues.
control them. But it can put very restrictive      differently.”                                       “The real reason behind the law is that a lot
legislation in place.                                 Mueller argues the Finance Ministry “actu-       of e-money distribution takes place via non-
  It seems to be more a case of political,         ally knows very little about prepaid. They do       banks. There will be exemption of the law
rather than security issues. One source says       not understand it and do not want to”.              for the German Geldkarte – so there is clear
the German Finance Ministry has even                  “The regulator based its arguments on the        evidence that the AML legislation has any-
approached its French and Benelux coun-            outcome of the FSCS report which found              thing to do with AML. It is political.”
terparts to convince them to adopt “a harsh        that Germany had to tighten its AML regu-              But the ZDH spokesperson believes the
regime” – to no effect. As the popularity of       lation,” he adds. “However, the report did          problem does not lie directly with the banks.
e-money rises, elsewhere Germany seems to          not specifically refer to money laundering via         “It lies with the opinion of the Federal
be shooting itself in the foot.                    e-money products.                                   Criminal Agency and the Law Enforcement
                                                      “They argue prepaid cards can be used for        Agencies who think that every little e-money
criminal intent                                    crime. But we oppose that. Statistics show          value can serve as money laundering” the
Industry stakeholders clashed on 19 Octo-          money laundering crime has gone up from             spokesperson say.
ber at a public hearing in the Bundestag. At       11,000 to 40,000 in the year to end-2010.              Coccoli highlights the relatively low thresh-
the hearing, a Federal Criminal Police rep-           “E-payments crime has risen from 64 to 90        old limit for prepaid cards and argues that
resentative described a horrific scenario in       and prepaid is a tiny fraction of this. So there    the risk of money laundering is relative low.
which prepaid cards appealed to criminals          is no evidence for prepaid crime. There might          He warns: “If this legislation kills prepaid,
and argued that so far, only a fraction of the     be a risk of money laundering, but there no         it could weaken the economy. Prepaid replac-
prepaid crime that is possible, has occurred.      clear evidence. If there is a risk of cash out      es cash securely and is an efficient tool for
  The counter argument came by the Ger-            and e-money transfers, then there should be         fund distribution.”
man Confederation of Skilled Crafts (ZDH),         verification when that money is redeemed or            But, the ZDH spokesperson highlights, the
which argued that the collection of KYC            transferred,” says Mueller.                         Finance Ministry is not interested in the eco-
data went against the German government’s             Gilles Coccoli, managing director of             nomic impacts of prepaid. <                                                                                                                  2011 y 7
regUlation: intercHange in tHe Us                                                                                                         Cards International

Life after interchange
The	delayed	release	of	the	Federal	Reserve	Board’s	final	debit	interchange	rules	indicate	it	might	be		
feeling	the	political	heat.	But	while	this	intrigue	is	far	from	over,	it	is	not	too	early	to	envision	what	the		
US	payments	landscape	might	start	to	look	like,	says	charles davis

         egislative efforts to introduce a two-        Since banks earn money from each card              n cHanges in visa and mastercard
         year delay in implementing the Fed’s        swipe, increasing card use has meant increas-        domestic credit card intercHange fee rates
         new regulations have opened a new           ing costs for merchants. But it is not just the      numbers and average rates – 1991 and 2009
         front in the interchange wars. On the       card use that has gone up. The cost to mer-
Fed’s radar is TCF Bank’s lawsuit seeking to         chants for each card swipe has grown, too.             changes in rates from           visa        mastercard
                                                                                                               1991 and 2009
block implementation of the Durbin amend-              Exactly how much it costs banks and the
ment as an unconstitutional infringement of          card companies to process a debit card pur-          Number	of	interchange	                   4             4
its right to recoup the costs of providing debit     chase varies based on whether a consumer             rate	categories	in	1991
services.                                            uses a PIN-based debit card or a signature-          Number	of	interchange	                   60         243
   Still, the consensus holds that the Fed is tak-   based debit card. Since 2000, many PIN debit         rate	categories	in	2009
ing its time to try to find a workable solution      cards have adopted a fee that is a percentage        Range	of	interchange	              1.25	to	      1.30	to	
– one sure to infuriate the larger debit issuers     of the value of the transaction.                     rates	in	1991                         1.91          2.08
in the US but one sturdy enough to withstand                                                              Range	of	interchange	              0.95	to	      0.90	to	
the inevitable wave of litigation to come.           are schemes to blame?                                rates	in	2009                         2.95          3.25
   Under the Fed’s proposal, announced in            Critics of interchange blame the competition         Percentage	of	rates	that	                43           45
December, interchange rates for debit cards          between MasterCard and Visa for driving up           increased
would be capped at 12 cents per transaction          fees, in part because their business interests
                                                                                                          Percentage	of	rates	that	                45           45
for issuers with more than $10 billion in assets     are more aligned with banks than with retail-        stayed	the	same
– a huge drop from the current average of 44         ers, yet banks and the card associations say
                                                                                                          Percentage	of	rates	that	                12           10
cents.                                               the increases reflect the true cost of mitigating    decreased
   Retailers welcome the Fed’s proposed              risk and switching transactions.
                                                                                                          Source:	US	Government	Accountability	Office
cap, saying debit fees have forced them to              The debit processing fee helps pay for the
raise prices. Consumer advocates say these           electronic network that authorises, clears
higher prices are being borne by all custom-         and settles each purchase. Banks claim it also      rules – an ambit widely seen as the best bet,
ers, whether they pay with plastic or not. And       helps defray the costs of fraud, fraud preven-      politically speaking.
banks say a cut in fees means they may have          tion, data security, customer assistance and
to make up the revenue by taking away free           disputes, and debit card production.                anti-competitive landscape
checking accounts and other services.                   The associations have spent most of the          TCF argues that the amendment’s exemption
   Banks, retailers and consumer advocates           past decade fighting off a never-ending legal       in the law for banks with less than $10 bil-
have all played outsized roles in the regula-        onslaught. The Justice Department and mega-         lion in capital creates an unlawful advantage
tory saga, but none play a role in setting the       merchants like Walmart won concessions on           for smaller banks, which will use their higher
actual processing fees. That is the province of      grounds that Visa and MasterCard’s behav-           interchange revenue to offer higher rewards
the card associations, whose interchange rules       iour has been anti-competitive.                     and poach customers from the big banks.
are the subject of yet another massive lawsuit          The associations agreed in an October 2010          That position seems to undercut the strong-
by dozens of the US’ largest retailers.              settlement with the government to stop pro-         est argument for a delay, namely that competi-
   Retailers and consumer groups are infuri-         hibiting merchants from offering discounts to       tion will drive debit interchange fees down to
ated by the fees that banks charge retailers         customers who use a card that carries lower         the nonexempt level. Let market forces work,
for debit transactions, which have risen to          interchange fees.                                   argue proponents of a delay, and fees will
that 44-cent average from an average of seven           The associations have consistently defended      drop to levels that will remove any need for
cents in the past decade, according to Federal       themselves by arguing that consumers have           price controls.
Reserve Bank statistics.                             a multitude of payment options from cash,              Overwhelmed by more than 11,000 public
   Interchange might very well be viewed as a        credit and cheques to a host of emerging alter-     comment letters and one of the most impres-
victim of the success of debit cards. According      native payment methods. The central legal           sive lobbying battles in the nation’s history, the
to the Fed, debit card purchases now repre-          fight – the lawsuit filed by a consortium of the    Fed missed its 21 April deadline to issue a final
sent about half of all consumer purchases in         nation’s largest retailers – has been mired in      rule on the interchange fee cap. But the Fed
the US, while paper cheques account for 30           pretrial motions since 2005, but has still cost     recently said it was committed to completing
percent. Shoppers used debit cards nearly 38         all parties dearly in time and money.               the rulemaking before 21 July. Because of the
billion times in 2009, up from about 15 bil-            As for the TCF lawsuit, observers said that      way the Dodd-Frank law was written, if the
lion times in 2003. With that volume of the          it faces long odds and appears to be working        Fed does not issue a final rule by that date, its
market, retailers say they have no choice but        against the best arguments in favour of those       proposal to cap the swipe fee at 12 cents will
to accept debit cards.                               seeking a delay in implementation of the Fed        become law.

8 y 2011                                                                                                            
Cards International                                                                                  regUlation: intercHange in tHe Us

   In the meantime, bank lobbyists are racing        left will be to shift these costs to consumers or    n intercHange
to build bipartisan support for a Senate bill        cease providing debit cards, said ABA Presi-         estimated components
that would effectively kill the swipe fee cap by     dent Frank Keating.
delaying it for at least two years.                     That would send larger issuers into a fee-        Network	brand	3%                  Network	processing	4%
   The bill, introduced by Democrat Jon Tester       hunting frenzy, the broad contours of which
                                                                                                          Network	                                      Issuer	
of Montana, is supported by about 55 sena-           already can be seen in some of the moves             rewards	                                      rewards	
tors currently – not quite enough to reach           made recently by some of the nation’s largest        1%                                            44%
the 60 votes needed to overcome procedural           debit issuers.
objections and move to a floor vote, with
time running out on a Congress eyeing a July         first steps to change
recess.                                              ATM fees are a natural pivot point for large
   So, with a multitude of optional outcomes         issuers seeking to recoup lost interchange rev-      processing		
still possible, issuers and associations are hedg-   enue, a possibility illustrated by JPMorgan          9%
ing their bets on what life will look like after     Chase’s recently concluded test of $4 and $5
the Fed’s rules are announced, hoping for the        ATM fees for non-customers in some areas.
best – the Tester bill’s two-year delay – while      While the bank has decided not to apply these
preparing for the worst.                             fees nationally, and reverted back to its origi-                                                servicing	4%
                                                                                                                            Other	issuer	
   In a call with analysts and reporters to dis-     nal $3 fees, the trend is catching on.                                 transaction	costs	&	
cuss second-quarter earnings, MasterCard                HSBC Bank USA started charging all non-                             profit	margins	35%
president and CEO Ajay Banga said the                customers a $3 fee in March for using its            Source:	Diamond	Analysis
industry is unlikely to feel the full impact of      ATMs. Previously, about 40 percent of its
the Fed’s rules until at least 2012.                 ATMs charged either $1.75 or $2.50.                     Wells Fargo is no longer offering its debit
   Issuers “are looking at reducing the reward          TD Bank used to let customers use any             rewards programme for new customers.
levels on their debit card activity”, Banga said,    ATM free of charge, but the bank is now              JPMorgan Chase notified existing custom-
adding that many changes issuers are consider-       charging $2 for customers who use out-of-            ers that their debit rewards programmes will
ing would serve to limit consumers’ debit card       network ATMs – unless the customer has a             disappear come 19 July. The bank elimi-
use, which certainly would have a deleterious        “deeper relationship” with the bank, defined         nated debit rewards for new customers in
effect on the association’s bottom line.             as carrying a high-minimum balance and pay-          February.
   “They’re looking at fees on debit cards,”         ing a monthly fee of $25.                               SunTrust Banks also began notifying its cus-
Banga said. “They’re looking at restricting the         Late payments may soon automatically trig-        tomers that it will stop offering rewards on
manner in which debit cards get used, either         ger dramatic interest rate increases – a move        purchases with one of its debit cards starting
for large-ticket items because of concerns           permitted under the new credit card reforms.         15 April. Customers will have until the end of
around fraud losses or at the bottom end for         Bank of America customers who make late              the year to redeem earned points.
small-ticket items.”                                 payments on their credit cards may soon see             Even smaller debit issuers dislike the inter-
   The Fed’s rules are also likely to force rapid    their interest rates jump by 30 percent, in the      change cap. The 2011 Debit Issuer Study,
adoption of a dual interchange environment,          first instance of what may become a standard         commissioned by Pulse, concludes that small
with the smaller issuers exempted from the           tactic among US banks.                               debit card issuers, including community banks
rules enjoying higher rates while the larger            Beginning June 25, the nation’s largest cred-     and credit unions, on average expect a 73 per-
issuers struggle under the lower rates man-          it card issuer will charge a penalty interest rate   cent decrease in debit interchange revenue as a
dated by the Dodd-Frank law.                         of up to 29.99 percent on future balances for        result of pending interchange fee rules.
   Visa has already announced it will support        credit card customers who fail to make timely           While these issuers with less than $10 bil-
a two-tiered interchange system to accom-            payments. Other issuers, including Chase and         lion in assets are exempt from the regulations
modate higher interchange rates for smaller          Citi, are already charging penalty rates rang-       proposed by the Federal Reserve Board, they
financial institutions. MasterCard has not yet       ing as high as 29.99 percent.                        are critical of the interchange cap and skepti-
said whether it would support a two-tiered                                                                cal that the exemption will be effective.
rate structure.                                      lowering value                                          “The study results support broad industry
                                                     The new Fed rules could also spell the end of        consensus that the proposed interchange cap
re-examining incentives                              debit card purchases greater than $100, or           will likely affect even exempt issuers. How-
In a similar conference call discussing earn-        even as low as $50. The revenue banks get            ever, the impact small issuers say they are
ings, Visa executives said they are likely to        from interchange fees helps to offset money          expecting is greater than many anticipated,”
re-examine incentive agreements with issuing         lost from fraudulent transactions. So with the       said Steve Sievert, senior vice-president of
banks after the Fed announces the final inter-       Fed’s proposed cap in place, banks argue they        Pulse, which has commissioned the study for
change rules.                                        won’t have the money to protect themselves           the past six years.
   “We will naturally, at our impetus, want to       against fraud for larger transactions.                  Many issuers indicate they will encourage
revisit a number of those contracts to make            JPMorgan Chase has said it is considering          use of PIN debit instead of signature debit,
sure that the incentives are structured in a way     capping debit card transactions at either $50        contrary to what many have done in the past.
that makes sense, given the legal environment        or $100, and other larger issuers are sure to        After implementation of the proposed rules,
that we will be under post-Durbin,” Byron            consider such a move as well.                        with interchange rates for PIN and signature
Pollitt, Visa’s CFO, said in the call.                 The most obvious victims of life after an          debit transactions likely being the same for
   The American Bankers Association said in          unregulated interchange market are debit             regulated issuers, PIN transactions will have a
April that the Fed’s proposed 70 percent cut         rewards programmes – popular among larger            better bottom-line contribution for issuers.
in debit processing fees means banks will lose       debit issuers quickly going extinct even before         As all parties await the Fed’s final rules, one
money on every transaction. The only options         the Fed’s rules are finalised.                       thing is certain: change is inevitable. <                                                                                                                            2011 y 9
report: gloBal moBile payments sUrvey                                                                                                       Cards International

Retailers wary of mobile payments
KPMG’s	2011	Mobile Payments Global Survey	garnered	responses	from	almost	1,000	executives	in	
the	financial	services,	technology,	telecommunications	and	retail	industries	in	order	to	identify	the		
mobile	payments	adoption	barriers	and	opportunities.	louise naughton	reports

         ompanies across a diverse range          n Kpmg 2011 moBile payments gloBal sUrvey
         of industries and regions are care-      what are the prospects for this mobile payment method in your country/region?
         fully watching the mobile payments
         opportunity. While many are already                                                                              contactless    specialist
                                                                                                         m-banking                                    carrier billing
heavily invested in mobile payments strate-                                              m-wallet (%)
                                                                                                                         card systems      online
                                                                                                                             (%)        systems (%)
gies, there is still a nagging uncertainty as
to when it will hit the mainstream, and pre-      Already	mainstream	                                            15                 8            39
cisely what form it will take.                    Will	get	major	traction	                          24           41                32            28               29
   KPMG’s 2011 Mobile Payments Global             Early	days,	not	sure	                             61           40                51            26               51
Survey has gathered research from almost
                                                  Unlikely	to	do	well	                              15               3             10             7               20
1,000 executives in the financial services,
                                                  Source:	KPMG	2011	Mobile Payments Global Survey
technology, telecommunications and retail
industries in order to identify the adoption
barriers and opportunities that lie in mobile    best practices and processes for both retail-                  While nine% of those companies surveyed
payments.                                        ers and consumers.                                          told KPMG they see no impact from mobile
   The majority of companies surveyed by           “If retailers do not lead the development                 payments in the foreseeable future, more
KPMG have a mobile payments strategy in          of mobile payments, the initial implemen-                   than 70% believe mobile payments to be
place – 58% – and outnumber those who            tations of the technology will have a rocky                 very important today or will be important
do not by two-to-one. What is more, half of      road to consumer adoption,” Mader says.                     in the future.
these already have a mobile payments offer-                                                                     Companies are in agreement the technol-
ing in the market today.                         retailer support required                                   ogy is in its infancy and three-quarters claim
   The report has found telecom providers        It is not simply about a retailer’s willingness             solutions will hit the mainstream within two
to be the most likely to have a strategy in      to break into the mobile space that delays                  to four years. Less than 10% of respondents
place, followed closely by financial services    the tipping point of the technology.                        say mobile payments are currently main-
companies.                                          Mader says it became evident three years                 stream – a belief held regardless of country
   KPMG believes retailers are being too         ago that some mobile payment providers                      or region.
slow off the mark and urges them to move         were not aware of the high security require-
more aggressively to incorporate mobile          ment and complexity of integrating payment                  Banking industry predictions
payments into their customers’ complete          processing to retailer POS applications.                    Financial services companies have come
commerce experience in order to catch up,           To order to ease this integration, ARTS                  out as being more conservative in their time
and capitalise on the rich opportunity they      has been working on projects to define the                  estimates of the mobile payments explosion
are being presented with.                        data interfaces between payment processes                   when compared to telecom, retail and tech-
   Richard Mader, executive director of the      and the devices around it, allowing them to                 nology companies.
association for retail technology standards      communicate in a standard method.                              Laura Chambers, senior director of PayPal
(ARTS) for the National Retail Federation           It is argued an ARTS XML standard – the                  Mobile, told KPMG m-payments are main-
(NRF), agrees with KPMG and says the             first truly global standard covering integra-               stream today.
involvement of retailers in the evolvement       tion of payment systems into the retail IT                     “We have seen tremendous growth over
of mobile payments is critical to the technol-   landscape – will provide significant benefits               the past few years,” Chambers says.
ogy’s success.                                   to retailers.                                                  “Three years ago we did about $25m of
   “Retailers need to get involved in this          The ARTS XML Payments Charter,                           payment volume via mobile. Two years ago
emerging process to guide the development,”      issued in October 2009 says: “By isolating                  that was $141m and last year it was $750m.
Mader says.                                      payments business logic and technologies                    This year we expect to do over $3bn.
   “I believe alternative mobile payments        into separate and more focused subsystems,                     “That growth is coming from broader
provide retailers with the opportunity to        retailers can minimise the ‘system envelope’                adoption in the consumer base and it’s mov-
introduce new conveniences for their cus-        that requires extremely high levels of secu-                ing very quickly into a mainstream consumer
tomers while creating competition with tra-      rity and therefore minimise the impact of                   audience doing mobile payments.
ditional debit and credit providers that can     supporting regulations like PCI-DSS.                           “Increasing smartphone penetration is one
lower service/interchange charges.”                 “At the same time, retailers gain flexibility            driver but people trying the service out and
   Further to that, new payment processors       to adapt to the constantly evolving payments                becoming familiar and comfortable with the
like BilltoMobile, FaceCash, Isis and PayPal     technologies and regulations, while adapting                process is key.”
need guidance from retailers to create the       POS business logic independently.”                             Convenience and ease of use are touted

10 y 2011                                                                                                               
Cards International                                                                                       report: gloBal moBile payments sUrvey

as the most compelling attributes of a suc-                   mobile wallet will magnify both the risks and          “less easy” than swiping a payment card as
cessful mobile payments strategy, and                         opportunities in mobile payments thanks to             it requires consumers learning a new pay-
unsurprisingly they came top once again                       the technology allowing the payment brand-             ment behaviour.
in KPMG’s survey with an 81% and 73%                          ing point to become an interactive process.               “NFC is interesting, but in payments the
respective share of the responses.                            As such, Crone claims mobile wallets will              winning solution will need to address the
                                                              play a pivotal role in financial services.             end-to-end consumer experience and the
consumer concerns                                                However, he warns that, as mobile wal-              value across that experience in order to
Consumer concerns surrounding mobile                          lets can open up more than a singular funded           incentivise consumers to change their behav-
payments are very evident from KPMG’s                         account for payment, financial institutions            iour,” says Chambers.
report. Security and privacy are consistently                 need to aggressively work to define both                  According to the KPMG report, alter-
said to be of utmost concern for consumers                    their ‘protect’ and ‘extend’ strategies for            native mobile payments solutions such as
and the payments industry when developing                     mobile wallets and mobile payments in par-             PayPal represent a highly disruptive threat
and launching new payment technologies.                       ticular.                                               to the incumbent financial services players.
   There was no doubt among KPMG                                                                                        “If consumers embrace PayPal transac-
respondents as to what the ultimate barrier                   contactless concerns                                   tions at the point-of-sale via a mobile wallet,
for widespread adoption of mobile pay-                        Contactless stood out as the least favourable          funded directly through a bank account and
ments with 71% agreeing with their peers.                     mobile payments form factor among retail-              transferred via ACH, the result would be
   Only 26% of respondents cited the com-                     ers.                                                   disastrous not only for credit card networks
plexity of the m-payments game to be a con-                      In comparison to the full set of respond-           like MasterCard, but also issuers and mer-
cern. KPMG claims this low%age indicates                      ents, retailers were just as likely to deem            chant acquiring banks,” said the report.
overconfidence in the benefits mobile pay-                    contactless systems as mainstream today                   “Not only in lost revenue from existing
ments will bring.                                             but were more than 10% less likely to say              transactions, but also the revenue these com-
   It is KPMG’s view that mobile wallets pro-                 contactless card solutions will gain traction          panies hope to gain in displacing cash.”
vide the most exciting and promising pay-                     in their respective markets.
ment opportunities within the mobile pay-                        KPMG puts this down to the cost involved            creating a niche
ments arena.                                                  with upgrading point-of-sale terminals to              Crone says the big issue for financial institu-
   “M-wallets provide the momentum to                         include the technology. This view may be a             tions is that new intermediaries are trying to
move beyond payments to participate in                        simplification of what is a very thorny and            “wedge themselves” between them and their
the entire chain of mobile commerce – from                    complex issue for retailers. As contactless            customers.
brand awareness to consideration, followed                    and NFC technologies are in their infancy                 As such, he believes, “mobile wallets con-
by after sales, loyalty and care,” said the                   and haven’t caught on with the mass market             trolled by non-bank, third party intermediar-
report.                                                       as yet, consumer demand is unknown and                 ies threaten to supersede the service relation-
   However, the majority of survey respond-                   there is a lot of confusion surrounding the            ship with the payment relationship”.
ents (61%) claimed it was still too early to                  fees for such transactions.                               Financial institutions have a choice when
predict the success of mobile wallets and                        Card schemes and banks have to educate              evaluating their strategic options for mobile
instead chose to throw their weight behind                    and communicate further with retailers if              wallets: to aggregate or be aggregated.
mobile banking and specialist online sys-                     they are to change their contactless percep-           Crone fears some banks may be too slow
tems as the forms in which mobile payments                    tions.                                                 to mobilise and in doing so be at the risk
would thrive and gain traction in their                          While PayPal’s Chambers believes there              of being aggregated by third party interme-
respective markets.                                           are some “great, seamless payment experi-              diaries.
   As payment is the most ubiquitous and                      ences” that NFC can drive, she claims it is               “There is a strategic tipping point affect-
powerful way to reinforce a financial institu-                fundamentally “just a technology”.                     ing banks’ mobile platform decision centred
tion’s brand, Richard Crone, founder of con-                     She argues ‘tapping’ a card or mobile               on addressing the ‘control’, ‘time-to-market’,
sultancy firm Crone Consulting, believes the                  against a contactless reader is seen as being          and ‘future-proof’ trifecta of their cross-
                                                                                                                     channel self-service plans,” says Crone.
                                                                                                                        “This is not to say that third-party inter-
 n Kpmg 2011 moBile payments gloBal sUrvey                                                                           mediaries won’t also play a role, but the
 when will mobile payments become mainstream in your industry/region?                                                savvy banks we have worked with have come
                                                                                                                     to understand that they will need to control
                                                        financial                 asia-                              their own mobile payment offering if they are
                                 retail       telecom               technology                            americas
                   all (%)                              services                 pacific       emea (%)
                                  (%)           (%)                    (%)                                  (%)      to preserve and grow their hard-won custom-
                                                           (%)                    (%)
                                                                                                                     er relationships.”
 Mainstream	               9              9         7          10            6             5          6          5
 today                                                                                                                  The complexity of the mobile payments
                                                                                                                     space means alliances and co-operation
 Within		                37            40          41          36           41         39            37         37
 1–2	years
                                                                                                                     between financial service companies, opera-
                                                                                                                     tors, technology companies and retailers
 Within		                37            34          39          27          39          39            39         40
                                                                                                                     is a key path to succeed in such a dynamic
 3-4	years	
 Within		                13            14          10          13          12          14            15         15      KPMG’s report notes that partnerships
 5-10	years	
                                                                                                                     such as the one Google has struck with
 More	than		               4              3         2           3            2             2          2          4   Sprint, Citi, MasterCard and First Data are
 10	years                                                                                                            emblematic of what it will take to succeed
 Source:	KPMG	2011	Mobile Payments Global Survey                                                                     and establish dominance. <                                                                                                                              2011 y 11
news analysis: emv in tHe Us                                                                                                                                                                           Cards International

Time for a change
The	roll	out	of	EMV	chip	technology	in	the	US	has	been	a	long	time	coming,	but	Visa’s	recent	announcement	
finally	put	forward	a	timeline	for	migration.	louise naughton	looks	at	the	detail	of	the	announcement,	and	
considers	the	implications	for	the	US	industry

         isa Inc has announced its intention to      n How tHings stand
         speed up migration to EMV in the US,
                                                     worldwide emv deployment and adoption*
         saying it is essential to pave the way
         for mobile payments.                                           region                                   emv cards                      adoption rate                     emv terminals                     adoption rate
   The lack of a business case, a fragmented         Canada,	LatAm,	&	Caribbean                                     207,715,356                                 31.2%                      3.900,000                                76.5%
market and the existence of adequate fraud
                                                     Asia-Pacific                                                   336,602,681                                 27.9%                      3,480,000                                   43%
prevention measures have all been cited as rea-
sons why the US market has not introduced            MEA                                                              23,003,747                                17.6%                          345,000                             60.7%
EMV technology to its cards and terminals –          Europe		Zone	1                                                 645,472,323                                 73.9%                    10,500,000                                    89%
as reported in CI 457-458, EMV implementa-           Europe	Zone	2                                                     27,516,286                               12.7%                          513,600                             65.4%
tion: The US case.
                                                     total                                                     1,240,310,393                                   40.1%                    18,738,600                                 71.1%
   For some time, the US risked becoming left
                                                     *	Figures	reported	in	Q1	2011	and	represent	the	latest	statistics	from	American	Express,	JCB,	MasterCard	and	Visa,	as	reported	by	
behind in terms of payments standards and            their	member	financial	institutions	globally.																																																																																																																												Source:	EMVCo
becoming a hub for payment fraud.
   The worrying thought of what the US pay-
ments industry stands to lose by not moving            TIP rids merchants of the time consuming                                                       This shift is hoped to encourage chip
to EMV rather that what it costs to move, has       task of annually validating their PCI Data                                                      adoption as chip-on-chip transactions pro-
spurred on development.                             Security Standard compliance once 75%                                                           vide the dynamic authentication data that
   The majority of the global payments indus-       of a merchant’s transactions originate from                                                     helps to better protect all parties.
try considers the implementation of EMV in          chip terminals.                                                                                   “Dynamic authentication is the key to
the US as an essential move.                           For merchants to qualify, their termi-                                                       securing payments into the future,” said
   However, Seth Eisen, a spokesperson for          nals must be able to support both contact                                                       Ellen Richey, chief enterprise risk officer for
MasterCard, said that to date, consumer             and contactless chip acceptance, including                                                      Visa Inc.
demand and market economics have not jus-           mobile contactless payments based on NFC                                                          “Adding dynamic elements to transac-
tified a migration [to EMV] in the US.              technology.                                                                                     tions makes account data less attractive
   Visa clearly disagrees and, fed up with the         In another push, Visa will also require US                                                   to steal and takes more merchant systems
delays in implementation stateside, has made        acquirer processors and sub-processor serv-                                                     out of harm’s way, shrinking the battlefield
a public declaration of its intention to push the   ice providers to be able to support merchant                                                    against criminals.
technology forward. The company says that           acceptance of chip transactions by 1 April                                                        “The migration to chip technology will
migration to EMV contact and contactless            2013.                                                                                           be an important security layer and a criti-
chip technology is essential to prepare the US         The card scheme plans to provide addi-                                                       cal step in a comprehensive strategy to use
payment infrastructure for the development of       tional guidance as part of its bi-annual Busi-                                                  dynamic authentication across all markets
NFC-based mobile payments.                          ness Enhancements Release for acquirer                                                          and all channels.”
   “By encouraging investments in EMV con-          processors to certify that their systems can
tact and contactless chip technology, we will       support EMV contact and contactless chip                                                        tried and tested
speed up the adoption of mobile payments as         transactions.                                                                                   The US holds a key advantage over other
well as improve international interoperability         According to Visa, the US is the only                                                        markets that have seen the technology rolled
and security,” said Jim McCarthy, global head       country in the world that has not committed                                                     out in that EMV has already been tried and
of product for Visa Inc.                            to either a domestic or cross-border liability                                                  tested in many other countries around the
   “As NFC mobile payments and other chip-          shift associated with chip payments. This is                                                    globe and has had tremendous success in
based emerging technologies are poised to           all set to change as the network will force                                                     reducing counterfeit card fraud.
take off in the coming years, we are taking         the shift on 1 October 2015.                                                                       George Peabody, director of consultancy
steps today to create a commercial framework           At the moment, the cost of POS counter-                                                      firm Mercator Advisory Group’s Emerg-
that will support growth opportunities and          feit fraud is largely currently absorbed by                                                     ing Technologies Advisory Service, notes
create value for all participants in the pay-       card issuers.                                                                                   the potential for counterfeit EMV cards to
ment chain.”                                           In Visa’s proposed liability shift, in those                                                 exist.
                                                    instances where a consumer presents a con-                                                         However, he claims it is currently eco-
implementation plan                                 tact chip card to a merchant that has not                                                       nomically impractical, which is enough to
Beginning 1 October 2012, Visa plans to             adopted contact chip terminals – at a mini-                                                     keep criminals from ‘bothering’ when there
expand its Technology Innovation Pro-               mum – the liability for counterfeit fraud                                                       are other ‘easier’ ways to profit.
gramme (TIP) to the US.                             may shift to the merchant’s acquirer.                                                              Visa’s carrot and stick method to acceler-

12 y 2011                                                                                                                                                                  
Cards International                                                                                      news analysis: emv in tHe Us

n gloBal snapsHot
global emv adoption rates by region, september 2010

                                                                                   65.4%	of	cards
                                                                                 84.7%	of	terminals

                                                                                                                                       11.5%	of	cards
                                                                                                                                     61.2%	of	terminals

                                                        26.4%	of	cards
                                                      55.6%	of	terminals

                                                                                   13.7%	of	cards                 26.6%	of	cards
                                                                                 62.5%	of	terminals             41.5%	of	terminals

Source:	EMVCo

ate EMV adoption in the US shows that the       and advisory firm Javelin Strategy and                   While Van Dyke stops short of explic-
network thinks the US is ready to make the      Research, James Van Dyke, is equally                  itly linking the phrase with Visa’s EMV
switch.                                         impressed by Visa’s “pragmatic, compre-               announcement, dangling such a phrase and
   Steve Brunswick, strategy manager for        hensive and strategic announcement”.                  in the next breath showering Visa with com-
transaction security at software provider                                                             pliments over its incentive-led path could be
Thales, sees the US EMV shift to be a posi-     resistance to change                                  seen as potentially confusing and provoca-
tive move for payments security not only for    At a time where a new innovative payments             tive.
the US but for the rest of the world too.       start-up seems to emerge every five minutes,             One industry expert said: “It is mind-
   He claims Visa’s plans will reduce the       the odds are stacked against any one new              boggling that the US has been allowed to
instances of criminals stealing payment card    payments initiative gaining critical mass –           evaded its responsibilities in protecting both
data in one country and creating cloned         especially in as developed and saturated a            merchants and consumers for so long.
mag-stripe cards which can be used in the       market as the US.                                        “Visa is not trying to reinvent the wheel
US.                                               Visa is no different.                               with this announcement; it is simply trying
   Visa’s plans will also serve to focus mer-     It faces the same challenge of the resist-          to bring the US in line with many other mar-
chants in the US, not only on card fraud        ance to change as any other, but Van Dyke             kets.”
issues, but also on the currently unlocked      credits the scheme for acknowledging it will             MasterCard’s EMV strategy in the US is
potential of electronic payment.                require specific incentives with major indus-         to watch market responses to Visa’s EMV
   “While some US merchants like Walmart        try constituent groups to potentially change          push and reconsider its migration plans
have already taken the bold move to go          the industry and setting reasonable targets           accordingly. MasterCard’s Eisen refused
it alone and invest in EMV terminals and        for such change.                                      to comment on whether its lack of support
infrastructure, the rest have had no clear        In his comment on Visa’s announcement,              will scupper Visa’s EMV plans, but it seems
vision from the card schemes on whether         Van Dyke mentions the phrase “boiling the             very unlikely that MasterCard will resist the
to invest in EMV to improve security,” said     ocean”, referring to the practice of under-           move.
Brunswick.                                      taking an impossible task or project or                  The question is: how enthusiastically will
   “Well, now they have.”                       to make a task or project unnecessarily               they join the push, and whether they will
   President and founder of market research     difficult.                                            follow Visa’s timelines? <                                                                                                              2011 y 13
review: cards & payments eUrope 2011                                                                                               Cards International

Making debit work
Debit	card	strategy	dominated	the	agenda	of	this	year’s	Cards	&	Payments	Europe	Conference.		
James ratcliff	looks	back	at	the	days	discussions	and	finds	that	there	are	clear	ways	forward	for		
banks	looking	to	increase	revenues	from	current	accounts

        rankfurt – the centre of European       have not sufficiently communicated.”                 n 'casH addicts’ payment BeHavioUr
        finance and the spiritual home of          And it is communication that’s key here,          High atm, low pos usage
        the Euro – played host to this year’s   particularly in Europe, where EMV implemen-
        Cards & Payments Europe confer-         tation has seen card fraud levels plummet.
ence. And the town that has been the back-         “But if you look at consumer attitudes,
drop for some the banking world’s boldest       and read the mainstream media, that is not
moves saw the European payments industry        clear,” he said.
gather to discuss the significant changes the      The other issue very high on the consum-
industry is undergoing.                         er’s agenda, when it comes to payments is, of
  On the agenda this year were mobile pay-      course, the convenience aspect.
ments, e-commerce, and social media listen-        Naturally, debit cards create an easy way                                            Average	deposits
ing. In addition, speakers looked at how to     of accessing bank accounts but a step-change
drive profits from debit as more consumers      still needs to be made when it comes to mak-
turn away from credit.                          ing debit “the new cash”, said Olbrich:
  On this subject Luke Olbrich, head of            “People want the ubiquity of cash – they
debit for MasterCard Europe, encouraged         want to know cards are accepted every-
banks to revisit the way they look at their     where. But many merchants still do not offer
portfolios.                                     card payments, when they could.”                                                                   Time
  “We need to look beyond the device, and          There are a number of possible reasons
beyond the account,” he said.                   for this.                                            n 'deBit lovers’ payment BeHavioUr
  “Credit, debit, prepaid, deferred debit,         “It could be a problem of location: transit       low atm, high pos
decoupled debit – the channel to access the     systems, for instance, or it could be problems
account needs to be flexible.                   around speed of through-put. There is also
  “We need to offer a more adaptable set of     the problem of how to process low-value
platforms that will allow bank customers to     payments efficiently.”
choose exactly what it is they want to use.”       While those are all problems that mobile
  The economic crisis changed the needs of      payments and NFC professes to solve for
                                                                                                                                        Average	deposits
both banks and consumers.                       retailers, it is not an easy sell. Retailers still
  According to Olbrich, MasterCard              remain to be convinced that investment at
responded to this change by commissioning       the point of sale will see solid returns. So
a number of consumer surveys that continue      what would drive retailers to invest?
                                                                                                               purchases	propel	
to inform their product development work.          One answer is customer information –
                                                                                                               higher	deposits
  “When we undertook these consumer             marketing and loyalty – the other is con-
insight studies we focused on speaking to       sumer demand.
consumers and understanding how their              “We do not always have to be led by the
needs have changed – what their attitudes       consumer, said Olbrich.
are towards mobile and towards the differ-         “We are in a push industry to a great
ent channels,” he said.                         extent. If someone had asked me 20 years             Source:	Bluerock	Consulting
  The results of those studies, he explained,   ago if I would be interested in buying good
highlight four areas in which consumers         through a television, I would have said ‘no’.        encouraging banks to build on their debit
expressed concern.                                 “Now the technology is in place, we are           offer. But where are the profits?
                                                able to present the consumer with a mobile              Francesco Scanera, director of interna-
consumer concerns                               payments capability. And the consumer will           tional business at Bluerock Consulting, spent
Unsurprisingly, security and fraud was at the   start to look at their phones differently.”          some time looking at the specific area of
top of the list of consumer concerns.                                                                driving profit from debit. While the profit is
  “We are not in a remarkably glamorous         improving profitability                              not a clear as it is on credit portfolios, there
industry unfortunately,” Olbrich said.          Debit card portfolios is a particular area           is still a clear revenue stream.
   “When people think about payments – if       banks are being encouraged to look at very              “You cannot consider income streams
they think about payments at all – they want    differently.                                         simply as revenue from product fees and
their money to be safe.                           Return on investment in debit is hard to           interchange alone,” he said.
  “This is one area that we as an industry      gauge but banks’ credit-wary customers are              “When you are looking at profits from

14 y 2011                                                                                                        
Cards International                                                                      review: cards & payments eUrope 2011

    from above:
 Michael, man-
 aging director,
Digital MR; Dr
 Niklas Bartelt,
managing direc-
  tor, DZ Bank,
   John Schratz,
  and Gianluigi
 Rocca, head of
 product devel-
 opment, finan-
     cial institutions division, SIA; Gianluigi Rocca; Luke Olbrich, head of debit, MasterCard Europe; Siobhan Moore, senior associate, Salans

debit, you need to consider the fact that it      loyalty counts                                    of customer relationship management and
encourages higher customer deposits.              Encouraging increased use of debit cards at       marketing, and eventually retailers began to
   “It has been shown that account balances       the point of sale, as opposed to ATM usage        agree to funding the cash back scheme.
are generally larger where the account hold-      is something that all the morning speakers          “We have now developed a network of
er is using debit cards over cash. The other      agreed was important to portfolio revenues.       20,000 retailers, all of which were prepared
thing to consider when looking at debit in        But achieving this is not easy.                   to fund the cost of the loyalty programme
comparison to credit is that a debit offering        Having already heard that margins on           as a way of building their relationship with
targets a bank’s entire base of account hold-     debit are small and tricky to define, finding     customers.”
ers, unlike credit.”                              space to add value for customer (thereby            The main thing that convinced such a
   In addition, even when carefully distributed   increasing use) is itself difficult to justify.   large number of retailers to join the scheme,
credit has obvious risk and insolvency issues        Loyalty programmes are certainly not easy      Leoni said, was Banco Posta’s very large cus-
that debit does not. And those factors, while     to implement on debit portfolios, but Banco       tomer base.
harder to quantify, do add up to real value.      Posta, the banking division of the Italian          “It was not easy to convince retailers that
   Olbrich concurred and added: “We try           post office (Poste Italiane), is one organisa-    they would see a return on their investment,”
and get banks to invest in debit and we           tion that has looked at this area very crea-      he said. “But the key was the fact that we
have a business model for banks that clear-       tively.                                           brought 13.5m card-holders to the table.
ly shows the average balance on a current            Luca Leoni, head of market intelligence          “Every loyalty scheme needs a large
account increasing where ATM transactions         for Poste Italiane used his afternoon session     amount of regular spend to succeed, and
are replaced by POS transactions.                 to outline the innovative approach to loyalty     around 60% of card activity comes from
   “The fact is that debit card users’ money      that his organisation is implementing across      everyday spending.”
stays in the bank longer – and that’s right to    both debit and prepaid portfolios.                  And this brings us back to debit. High
the banks’ bottom lines in terms of interest         “We decided that a traditional points-         volumes of everyday spend has, Banco Posta
income.”                                          based reward scheme was not showing good          has proven, a significant value to retailers.
   So the value of debit needs to be judged by    results,” he said.                                Admittedly, there are few banking markets
the bank account’s profitability, not that of        “So we chose to offer cash back. Our           quite like Italy, but there are clearly oppor-
the cards themselves. And when multiplied         problem, however, was funding the cost of         tunities for banks with large debit portfolios
across many current accounts, that income         that cashback.”                                   to approach retailers to drive profit from
is very significant.                                 The Italian bank then entered into lengthy     card usage, and see the increased interest
   “It’s not just about the six euro cents the    negotiations with retailers. They empha-          income that comes from larger volumes of
bank earns per transaction,” said Olbrich         sised the importance of loyalty in terms          POS transactions. <                                                                                                            2011 y 15
coUntry sUrvey: norway                                                                                                                   Cards International

Norway’s double-digit growth story
Total	card	spending	at	the	PoS	in	Norway	has	grown	at	a	compound	rate	of	10.4%	over	the	past		
five	years,	placing	it	among	the	fastest	growing	cards	markets	in	the	developed	world.	How	far	does	the	
growth	story	have	to	run	in	Norway’s	mature	payments	market?	will cain	reports

         orway’s cards and payments mar-          GDP per capita in Norway is among the          n deBit card penetration*
         ket is an easy one to overlook.        highest in the world, at $79,089 in 2009         norway compared to selected markets (2009)
         SEPA is creating new opportunities     and $84,880 in 2010. This comparatively
         across Europe, and growth rates in     high wealth level and the development of
emerging BRIC nations continue to attract       BankAxept, a no-interchange domestic debit
much of the attention. What does Norway,        scheme, has established card usage as one of
a developed, mature payments market with        the most dominant forms of payment in the
a population of just 4.7m really have to        country.
offer?                                            Card spending accounts for around half
   The answer is plenty – Norway’s payments     of all household expenditure in Norway,
industry punches well above its weight and is   according to Norges Bank, Norway’s central
one of the leading lights in a Nordic region    bank, and it has the highest number of card
which as a whole offers rich potential.         transactions per capita of any country other
   In dollar terms, at current exchange         than Iceland.
rates, Norway’s 4.7m inhabitants spent a          Many of the Nordic states lead the way
total of NOK465.8bn ($85bn) in 2009 and         in this respect, with Finland, Denmark and
NOK500.1bn in 2010 on card products.            Sweden all averaging more than 175 card
Those figures place the size of its payments    transactions per person per year.
market close to European economies with far
bigger populations including Spain ($139bn      debit cards
card spend, 46m population) and Italy           Domestic debit scheme BankAxept is one of
                                                                                                 *Number	of	cards	per	1,000	working	age	individuals	
($169.9bn, 59.7m) population.                   the primary reasons for high usage of cards in   																		Source:	BIS,	Cards International,	PaySys,	Norges	Bank
   With compound growth in total card           Norway. The scheme, owned by Norwegian
spending in the five years to 2009 of 11.9%,    banks, has established acceptance coverage       in payment terminals had a significant effect
Norway is faster growing than the UK            that covers the vast majority of the country.    on the shift from cash to card payments.
(11.5%), Australia (10.3%), Japan (10.3%)         BankAxept’s acceptance network – the           That sentiment is echoed by Mats Taralds-
and the US (9.7%).                              number of point of sale (EFTPOS) termi-          son, deputy general manager for the Nordic
   The strength of Norway’s cards and pay-      nals in the country – increased from 2,487       and Baltic region at MasterCard.
ments market is the result of a strong econ-    per million inhabitants in 1990 to 25,410 in       “All of the Nordic countries were very
omy, an efficient and well developed domes-     2010.                                            early starting out with card payments,” he
tic debit scheme and an increasing appetite       A study in the International Journal of        says.
among consumers for credit cards.               Central Banking (IJCB) showed this increase        “They started in the domestic debit

16 y 2011                                                                                                       
Cards International                                                                                                                                                     coUntry sUrvey: norway

schemes with local branding without interna-                            n indicators
tional logos. I think that triggered the usage                          norway – key economic and payments market indicators
we are seeing now. People’s use of the domes-
tic schemes have contributed I think. Follow-                                                                                                  2009                   2010
                                                                                                                                                                                        year-on-year           5-year growth
ing on from that, because they were early                                                                                                                                                  growth                 (cagr)

adopters it means there is now a very good                              GDP	(NOKbn)                                                                 	2,381	                	2,505	                  5.2%                   5.2%
infrastructure for card payments. We see that                           GDP	per	capita	($)                                                        	78,436	               	84,880	                   8.2%                   5.4%
infrastructure as very solid and robust in the
                                                                        Inflation	(%)                                                                  	2.2	                  	2.4	                   n/a                    n/a
region and I think that helps.”
   The other reason Norway’s electronic                                 Population	(m)                                                                 	4.9	                  	4.9	                 1.2%                   1.3%
payments system has grown so quickly is a                               Working	age	population	(aged	15-64,	m)                                         	3.2	                  	3.2	                 1.2%                   1.3%
pricing policy which encouraged consumers                               Card	penetration	per	working	age	individual
to use more efficient and cheaper payment                               				Cards	with	a	debit	function                                                	1.9	                  	2.0	                 6.2%                   4.5%
products.                                                               				Cards	with	a	credit	function                                               	1.7	                  	1.7	                -1.0%                 12.3%
   It was promoted by Norges Bank, which
enforced transparent pricing of payment                                 Total	value	of	transactions	(NOKm)
instruments by banks in the country and                                 		Debit	transactions	(1)                                                    	535.8	                	561.4	                  4.8%                   5.5%
called for them to pass those charges on to                             		Credit	card	transactions	(1)                                               	66.4	                  	71.9	                 8.3%                  17.6%
consumers.                                                              		Total	card	spending	(2)
                                                                                                                                                    	465.8	                	500.1	                  7.4%                 10.4%
   This type of explicit pricing of payments
products is unusual – because if one bank                               (1)	Includes	ATM	withdrawals	and	cashback	from	POS	terminals	(2)	point	of	sale	spending	only.		
implements charges by itself, it risks losing                           																																																																																											Sources: Cards International,	BIS,	IMF,	World	Bank,	Norges	Bank
market share as customers shift to lower cost
providers.                                                         1990 to 78 in 2004. Cheque usage is now                                             pared to NOK0.40 for an ATM withdrawal.
   Norwegian banks were encouraged to shift                        negligible in Norway, with just NOK10.3bn                                           Despite the price differentials pre- and post-
to a transparent pricing model on debit card                       worth of transactions in 2010, down from                                            1997, debit transactions grew strongly for
transactions, ATM withdrawals, electronic                          NOK102.4bn in 2000.                                                                 the duration of the study.
giros and paper giros from 1986 by the cen-                          The pricing effect was less apparent in card                                         The domestic debit scheme BankAxept is
tral bank.                                                         payments because prior to 1997, prices for                                          based on a no-interchange model and has an
   The IJCB study compares Norway to the                           debit transactions were set higher than for                                         exclusive co-badging relationship with Visa.
Netherlands, which had no specific pricing                         ATM withdrawals – encouraging greater                                               Domestic debit transactions run through the
model on transactions, and shows that the                          cash usage. Despite higher prices, debit card                                       BankAxept scheme while overseas spending
pricing model helped drive Norway to elec-                         usage grew in Norway.                                                               on the cards is done via the Visa brand.
tronic payments more quickly.                                        The study says this is because BankAxept’s                                           Spending on debit cards has increased at
   The process was most apparent in the                            acceptance network created a convenience                                            a five-year compound rate of around 5.5%,
elimination of paper-based cheque usage in                         and security factor which encouraged con-                                           although this figure also includes ATM with-
Norway. The differential in pricing began                          sumers to use cards, despite the higher costs                                       drawals and cashback issued at point of sale
at NOK0.35 ($0.06) for each paper cheque                           charged by banks.                                                                   terminals.
transaction and NOK0.10 for an electronic                            From 1997, the cost of making a debit                                                The growth rate for debit spending was
giro in 1990. It had changed to NOK2.76                            card transaction fell below the price of ATM                                        4.8% between 2009 and 2010, representing
and NOK0.09 respectively by 2004. Dur-                             withdrawals in Norway and at the end of the                                         a slowing from the five-year rate. It is an indi-
ing this time, electronic giro transactions                        study period, in 2004, the average debit card                                       cation the market may be getting closer to a
increased from 15 per person per year in                           transaction cost a consumer NOK0.26 com-                                            saturation point. There are just under two
                                                                                                                                                       cards with a debit function for every working
n card Usage                                                                                                                                           age individual in Norway, placing it among
selected countries – number of card transactions per inhabitant per year (2009)                                                                        the world’s most heavily carded markets in
                                                                                                                                                       the debit space.
                                                                                                                                                          BankAxept is likely to come under greater
                                                                                                                                                       competition in the coming years from both of
                                                                                                                                                       the main international schemes.
                                                                                                                                                          Visa, although it has its co-badging rela-
                                                                                                                                                       tionship with BankAxept, has been working
                                                                                                                                                       hard on building its own acceptance network
                                                                                                                                                       in Norway and is “in discussions” with banks
                                                                                                                                                       to offer a Visa-only debit card product.
                                                                                                                                                          “No one offers Visa-only debit at the
                                                                                                                                                       moment – they are all co-badged but we
                                                                                                                                                       might expect to see some Visa-only debit
                                                                                                                                                       cards going forward,” says Visa Europe’s
                                                                                                                                                       Cristina Lind, country manager for Sweden
                                                                                                                                                       and a former country head for Visa Europe
                                                                                                                                                       in Norway.
Sources:	Norges	Bank,	ECB,	BIS/CPSS	Red	Book,	Central	Bank	of	Iceland                                                                                     “There’s been nothing announced yet but4                                                                                                                                                                                       2011 y 17
   coUntry sUrvey: norway                                                                                                                                                                                Cards International

4 discussions are ongoing and we expect to see                                              n credit cards
   maybe debit cards that are not co-badged                                                 norway – credit card spending
   going forward.”
      MasterCard is also looking at introduc-
   ing a debit option into the market, which
   it does not currently have. It is consider-
   ing the launch of a “combo card” product,
   which would feature a single card offer-
   ing both debit and credit card function-
   ality through the card’s EMV chip. This
   approach has already achieved some success
   for MasterCard in the Danish and Finnish
   markets, and would increase the pressure on
   BankAxept further.

   credit cards
   After years of debit card growth, it is the
   credit card market which has proven the                                                  Source:	Norges	Bank
   most lucrative avenue for the international
   schemes to pursue in recent years. Credit                                               started to change. There’s been a lot of edu-                                      of a surprise to some of the industry’s prac-
   card spending is growing much more quick-                                               cation about how credit can be managed as                                          titioners.
   ly – at a 17.6% on a five-year compound                                                 a tool. It doesn’t have to mean that you don’t                                        Each year, Roger Augdal Olsen, head of
   rate – albeit from a much lower base. Credit                                            have good or stable personal finances.”                                            cards at Norway’s largest bank DnB NOR,
   card transactions were worth NOK71.9bn in                                                  Education initiatives are long, drawn out                                       said commentators predict the rate of credit
   2010, representing around 14% of total card                                             processes that can take many years. The                                            card growth will slacken. He says there has
   expenditure.                                                                            approach has included marketing and adver-                                         been little evidence of this yet at his bank.
      The growth in credit card usage is in con-                                           tising, which is an important part of Visa and                                        “We have thought for some years now that
   trast to many countries across the world                                                MasterCard’s strategy in all of their markets.                                     the market must be maturing and we’ll see a
   where debit card usage is growing more                                                  In addition, Visa launched an online educa-                                        flattening curve,” says Olsen.
   quickly. The situation in Norway reflects                                               tion tool in Norway which aims to show                                                “But we still see double digit growth on
   the relative maturity of the debit market,                                              consumers how to use credit and in what                                            credit card turnover every year, so it’s still
   according to Lind, and education initiatives                                            circumstances it can be useful.                                                    growing quite rapidly.”
   carried out by Visa and issuing banks in the                                               “It’s very neutral – of course it is Visa                                          The most recent statistics from Norges
   country.                                                                                branded, but you can use it, read and learn                                        Bank show that there may now be signs cred-
      “Norway is a very mature market in terms                                             how to manage your finances,” she says.                                            it card growth is starting to fall off. Industry-
   of cards,” she says.                                                                       “Visitors to the site can do budget calcula-                                    wide credit card spending growth declined
      “There are 4.7m inhabitants and around                                               tions, answer questions about what kind of                                         between the years of 2009 and 2010 to
   5m Visa cards as well as other cards in addi-                                           personality you have when it comes to spend-                                       8.3%, below the five-year compound rate of
   tion to that. Consumers have been very deb-                                             ing. It’s a bit of fun that also has a good mes-                                   17.6%. Equally, it may simply be a reflection
   it-oriented because the domestic scheme has                                             sage.”                                                                             of the worse economic conditions of 2009
   been so strong.                                                                            The rate of growth in credit card penetra-                                      and a slow recovery in consumer spending
      They are used to using cards but in Norway                                           tion and spending – there are now 1.7 credit                                       – the size of Norway’s economy in 2010 had
   and Sweden, credit has typically been con-                                              card products in issue for every working age                                       still not recovered to the levels seen prior to
   sidered a bad thing in people’s minds. That’s                                           individual in Norway – has been something                                          the financial crisis.

   n deBit cards                                                                                                                                                              prepaid, contactless and mobile
   norway – debit card spending*                                                                                                                                              For such an advanced payments market, it is
                                                                                                                                                                              perhaps surprising Norway has been so slow
                                                                                                                                                                              to start gearing its payments industry towards
                                                                                                                                                                              more innovative forms of payment, including
                                                                                                                                                                              contactless, mobile and prepaid cards.
                                                                                                                                                                                 The country recently launched its first near-
                                                                                                                                                                              field communication mobile payments trial,
                                                                                                                                                                              a collaboration between DnB NOR, mobile
                                                                                                                                                                              operator Telenor and MasterCard. These tri-
                                                                                                                                                                              als were first conducted in other European
                                                                                                                                                                              countries as far back as 2007 and a few –
                                                                                                                                                                              including the UK – already have products
                                                                                                                                                                              available for general use.
                                                                                                                                                                                 The lack of innovation in Norway, accord-
                                                                                                                                                                              ing to payments experts interviewed for this
                                                                                                                                                                              article, is the result of a number of different
   *Includes	ATM	withdrawals	and	cashback	at	the	point	of	sale																																																																																										Source:	Norges	Bank   factors. Most agreed that the strength of

   18 y 2011                                                                                                                                                                         
Cards International                                                                                                                             coUntry sUrvey: norway

BankAxept and consumers’ familiarity with                                 head of retail banking, said the bank’s main        n marKet sHare
it made it harder for new products to catch                               focus was building its share of wallet among        norway – market share of bank lending to
on.                                                                       existing customers.                                 the retail market (2011)
   “Norway has a very well functioning                                      Around 40% of DnB’s customers use other
national debit scheme and it’s really a very                              banks for products and services. The bank is                                                                                           %
fast service” says Olsen at DnB NOR. “If                                  planning to simplify its loyalty offers in an       DnB	NOR	Bank                                                                       31.6
contactless is going to succeed it’s not going                            attempt to encourage these customers to use
                                                                                                                              SpareBank	1-alliansen	(1)                                                          19.3
to be on the fact of being fast but rather on                             more DnB products and services.
                                                                                                                              Subsidiaries	of	foreign	banks	in	Norway                           	(2)
the convenience it provides for the private                                 The bank has a cross-sell ratio of three
customers.                                                                products per customer compared to an aver-          Branches	of	foreign	banks	in	Norway	(3)                                            11.0
   “We have had and still have discussions                                age of 2.27 across a survey of 35 European          Terra-Gruppen           	(4)
on whether the NFC payments should go                                     banks.                                              Other	savings	banks                                                                13.3
directly to mobile or if we should go the way                               DnB is growing its lending to households
                                                                                                                              Other	commercial	banks                                                               3.0
of contactless cards first. We still haven’t con-                         at a pace of 7.3% across its retail banking
cluded those discussions.”                                                customer base and 8.6% in Norway’s four             (1)	An	alliance	of	savings	banks	(2)	Nordea	Bank	Norge,	
                                                                                                                              Santander	Consumer	Bank,	SEB	Privatbanken	and	Nordea	
   Another reason for the lack of interest in                             major cities, Oslo, Bergen, Trondheim and           Eiendomskreditt	(3)	Fokus	Bank	(branch	of	Danske	
new products so far has been the shift to and                             Stavanger. These growth rates compare to            Bank),	Handelsbanken,	SEB,	Swedbank,	Handelsbanken	
                                                                                                                              Eiendomskreditt	(4)	A	collection	of	savings	banks		
investment in EMV cards in Norway. The                                    industry-wide lending growth of 5.7m.               																																																																							Source:	Norges	Bank
migration started in 2006 and now 81% of
all cards in the market are equipped with the                             Nordea Bank Norge/Eiendomskreditt                  a range of different offerings for mainstream
EMV chip.                                                                 Swedish bank Nordea runs a subsidiary in           adult customers.
   Prepaid cards have also had a slow start                               Norway called Nordea Bank Norge, one of               Its standard range is a package called
in Norway. No figures are available on the                                the largest banks in Norway and the largest        Fokus 24/7, launched in March this year,
number of the products in issue. Banks                                    of the foreign subsidiaries operating in the       and voted the best value retail package in
started out offering gift card-type products,                             country. It has a branch network of 140 and        Norway by personal finance website Finans-
but many were withdrawn from the market                                   offers a number of payment card options to         portalen.
because of a lack of interest from the public.                            consumers.                                            The Gold Programme, aimed at high-end
Interest has picked up again recently, with                                  It offers a product called Bankcard Visa,       retail customers, comes with three card prod-
several banks offering products aimed at the                              a Visa-branded debit card product aimed at         ucts, a Visa/BankAxept combo debit card and
youth and gaming segments with some suc-                                  customers who need to make international           two MasterCard credit cards – a platinum
cess.                                                                     purchases, and offers free transactions for        credit card and a product called 365Privat
                                                                          Premium customers and those using a Nor-           which offers discounts on furniture, petrol
Key players                                                               dea Bank loyalty programme.                        and clothing.
DnB NOR                                                                      Nordea also offers a basic bank card aimed         Finally, it offers an affluent/private bank-
DnB NOR, which will be re-branded simply                                  at customers aged between 13 and 18 years          ing package of products called Platinum
to DnB in the autumn, has a large share of the                            old. The cards carry the Visa Electron brand       which provides a personal adviser and range
country’s retail banking market, with 31.6%                               and can be used for point of sale spending         of investment options as well as the card
of the retail lending market in Norway and                                and ATM withdrawals but have limited               products offered in the Gold package.
2.1m customers. At the bank’s capital mar-                                international acceptance. Electron products
kets day in June, Karin Bing Orgland, its                                 at Nordea can also be linked to a service          SpareBank 1 Gruppe
n credit card penetration*                                                called micro-save, which rounds up transac-        SpareBank 1 Gruppe is the jointly-owned
                                                                          tions to the nearest krone and then deposits       holding company of a number of regional
norway compared to selected markets (2009)
                                                                          the difference into a savings account.             Norwegian savings banks, insurance com-
                                                                             It can also be linked to a charitable organi-   panies, leasing finance companies and debt
                                                                          sation, allowing funds to be deposited direct-     collection companies. Most of the group’s
                                                                          ly into a chosen charity’s account each time a     composite banks are relatively small – Spare-
                                                                          transaction is made.                               Bank 1 SMN, based in Trondheim, has 56
                                                                             Nordea also offers one MasterCard prod-         branches in 43 of Norway’s municipalities,
                                                                          uct, a credit card with a credit line of up to     serving retail banking and corporate clients.
                                                                          NOK50,000 and 45 days of interest-free             It has 182,000 customers, 138,000 of which
                                                                          credit. It is linked to a frequent flyer pro-      have debit cards and 74,000 of whom have
                                                                          gramme, comes with travel insurance and            credit cards.
                                                                          offers protection against fraudulent internet         SpareBank 1 SMN is also the first bank
                                                                          transactions made on the card.                     to offer contactless cards in the Norwegian
                                                                                                                             economy, which it will offer via a Visa-
                                                                          Fokus Bank                                         branded prepaid card. There are currently no
                                                                          Danske Bank-owned Fokus Bank has 41                scheme-only debit cards in issue in Norway,
                                                                          branches in Norway and is headquartered in         and offering a contactless product on a co-
                                                                          Trondheim. It offers a range of loyalty pro-       badged BankAxept product would prove too
                                                                          grammes, or product packages, offering a           complex, according to a Visa spokesperson.
                                                                          mix of Visa and MasterCard cards.                  As a result, it was decided to test the market
*Number	of	cards	per	1000	working	age	individuals	                          The programmes are segmented into a              with contactless by using a prepaid product
																		Source:	BIS,	Cards International,	PaySys,	Norges	Bank
                                                                          student offering, a youth product and then         instead. <                                                                                                                                                                        2011 y 19
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