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� � � � � � � � � � � �
EU Retail Payments - Interoperability and Networks
Merchant Acquiring Conference
London27th November 2014
Prepared by: Peter Jones,Managing Director
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Topics for Today,
Objectives: To review the EC/ECBs vision of SEPA for Cards and Technical Interoperability
Regulation
SEPA for cards
TechnicalInteroperability
Key Interoperability Issues
Network Architecture
Scenarios/Solutions
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ECB’s Vision
“ The Eurosystem reiterates its
invitation to the industry to establish a SEPA card processing framework
and a technical interoperability
framework and strongly encourages all
interested stakeholders to product
tangible results. ”
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KeyHotter
Cooler
KeyToday
Directionand extent of
travel by 2020
4Source: PSE Consulting analysis
Six Key Retail Payments Interoperability Issues
ImpactInter Operability Requirements
• Consumers• Issuers• Merchants• Acquirers
NetworkProviders
• Brand/processing separation
• National Clearing and Settlement
• Best in Class Networks
Business Case
• Volumes• Architectures• Cost/Risk
Sovereign Debit Scheme
• Player Exits• New Entrants• Future Visions
National Market Governance
• Debit Schemes• Processors• Clearing/Settlement Barriers
• Pan EU Merchants• Pan EU Acquirers• Merchant Steering• Border Dematerialisation
NetworkProviders
ImpactImpactImpactImpactImpactImpact
1
2
4
Sovereign Debit
5
6
3
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Barriers to Entry1
• ICS Interoperability functions – but legacy and needs re-work!
• Domestic debit a long term barrier to acquirers
• EPC/EPASOrg standards – but when?
• Domestic acquirers advantages – On Us discounting
Conclusions: Full Technical Interoperability not being achieved
Where Interoperability is needed
Barriers • Pan-EU Merchants• Pan-EU Acquirers• Merchant Steering• Border Dematerialisation
Requirements• Consumers• Issuers• Merchants• Acquirers
• Pan
1
Requirements
2
National Market Governance• Debit Schemes• Processing• Clearing/Settlement
4
5
•
6EU Debit Schemes• Player Exit• New Entrants• Future Visions
Network Providers• Brand Processing Separation• National Clearing Settlement• Best in Class Networks
• Brand Processing Separation
3Network Business Case
• Volumes• Architecture• Cost/Risk
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2 Interoperability Requirements
• 95% transactions domestic issued, accepted and acquired
• Consumers want local, and occasional cross border
• Pan EU merchants want efficiency improvements
• Interchange++ merchants want lower costs of ICS processing
• Domestic debit impacted by brand selection/ merchant steering and no borders
• Some domestic debit issuers want cross border acceptance
The Needs of the Users
Demand for Interoperability amongst small group of multi country players
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Network Providers
• Few credible players – ICS + Trionis
• ICS Networks
- Monobrand offer- EU/worldwide reach- Multi currency ACS- Very significant investments- Wide range feature options
• Very strong competition - domestic debit hits
• Created tensions with regulators
Who can deliver ACS EU-wide
3
Conclusion: Competition between ICS has partly contributed to regulatory interventions
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Network Business Case
• Cross Border Debit/Credit volumes – only 4%-5%
• Revenue opportunity - €25m - €35m pa
• Current cross border contracted to ICS
• No business case for cross border only network – target domestic
• ACS have 10+ National Clearing and Settlement markets – 20bn+ transactions pa
Is there a Credible Business Case?
4
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Conclusion: Business Case for Cross Border Only Network weak – Additional Volumes needed
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“Sovereign” EU Debit Scheme
• Loss of several domestic debit schemes –more to follow?
• EC/ECB pressure to build “sovereign” Pan EU scheme
• Monnet last interaction – poor case!
• New EU schemes emerging
• Potential loss of low cost beneficial national cards
• New regulation threatens scheme’s future!
5
Is there a Case for the return of Europay?
Conclusion: Delay Pan EU debit – encourage cooperation – find new acceptance solutions
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Local Governance
• Several markets want local control of settlement
• Several fear loss of volume to any new Pan EU debit/ACH
• Finland/Malta implementing own ACH
• Reflects national market disillusionment with centralisation vision
6
The demise of Centralised solutions?
Conclusion: Danger of displacing efficient national settlement processes and infrastructure
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Network Topographies and Architectures
Typical Star Central HubNetworks (one or multi hub)
Processor Peer to Peer Linking Networks
Bank1
Bank 3
Bank 4
Bank 2
Processor1
Processor3
Processor4
Processor2
Benefits and Issues: Peer to Peer Networks Benefits and Issues: Hub Network
• Conceptually simpler to implement• Original basis of Berlin Group standards• Basis of UK Switch network• Major problem is cost of new members,
support and enabling change
• More complex and costly to develop• Imposes common API/interface on all players• Much easier for new members to join/new
releases/change• Can be a “Star or Multi Hub combination”
11
Conclusion: Recommended Architecture is Central Hub and/or Multi Hub
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Scenario 1 - Improved Status Quo
Scenario 1: No Change for 3-4 years
• ICS Co brands continue in short/medium term
• Drop brand selection, steering and borderless regulations!
• Place technical inter-operability on hold
• Discuss/Defer sovereign debit card scheme
• Mandate EPASOrg and Card Settlement Standards
• ICS to focus on cross border only – no more National Clearing and Settlement
Advantages - Domestic debit national clearing and settlement protected
Disadvantages - Loss of cherished SEPAconcepts, lack of competition andno efficiency improvement.
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Scenario 2 - Network Competition
New Structure for ICS Networks ?
• ICS separate brand and processing
• Both migrate to multi brand (from mono brand)
• Both offer universal access via their API’s
• Unbundled basic ACS
• Cross border only focus
• National clearing and settlement option
• Enable national debit scheme reach across EU
• Interface with ACH’s
• Low cost utility service
Advantages - Lower processing costs, decline in national market erosion and benefits of multi brand network
Disadvantages - Potential for duoplay - too fewplayers
?
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Scenario 3 - Cross Border SEPA Payments Hub
• Gateway hub interfaces into national market
• Cross border only – card and ACH
• Multi scheme/currency – national debit
• Common API for acquirer access
• Potentially real time processing
Advantages - Enables national debit reach/acceptance- Domestic ACS continues- ACH generates more volume for
business case
Disadvantages - High costs/risk to develop- Low volumes/ ICS lower cost- Potentially inefficient- Not all markets fit model
Is there a Cross Border Only Hub Business Case?
Processor1
Hub
Processor2 Processor
3Processor
4
Processor5
Processor6
Acquirer1
Acquirer2
Acquirer3
Acquirer4
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Scenario 4 - Universal Central Payments Switch
• Single central solution for domestic and cross border
• Embraces all payments - national debit cards/ACH
• All Issuers/acquirers directly connected – Pan EU reach
• Local card/ACH processors displaced
• One common clearing and settlement process (eventually multi currency)
• Potential to support ICS and Alternative Payments
Advantages - Massive volumes and very low cost- Removes surplus capacity
Disadvantages - EU monopoly (but competition from ICS)- National market pushback- High risk and complex- ICS needed for worldwide interoperability?
With a Single Monolithic Retail Platform Weak?
EUPayments Hub
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Scenario 5 - Market Demand Driven
• EC/ECB to lead but not mandate
• Need for a common API
• Commercial/interbank innovation
• Gateway sector to provide card/ACH interfaces
• Payment schemes (iDeal/MyBank) to extend
• Overlay/account access new models
Advantages - Many components already in place- Strong competition- Stimulates Fintech
Disadvantages - No over arching vision of architecture- Costs may not decline- Has failed to deliver in the past
Can Markets be Made to Deliver?
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Analysis of Scenarios/Options
Scenario Credibility/ Feasibility
Low Risk/Cost
MeetsUser
RequirementsCompetition
ImprovementsEfficiency
Improvements
MakesBusiness
Case Total
Scenario 1Improved Status Quo 17
Scenario 2Network Competition 20
Scenario 3Cross Border Only SEPA Payments Hub
21
Scenario 4Universal CentralSwitch
15
Scenario 5Market Demand Driven 13
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Conclusions
• More competition and unbundling needed
• Potentially ICS can deliver significant benefits
• Political perception is local/domestic control
• Monolithic central solutions unlikely to be effective
• Key stakeholders need to “get real” and accept reality