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V1 27/11/2013

The Merchant Acquiring Conference

Cross Border Acquiring – New Models Post 2015 Interchange Ruling

29th November 2013

PSE – Cards & PSD Regulations V1 27/11/2013 2

The European Commission’s Game Plan

The card regulation “Caps” have made the headlines but the detailed “Rule Changes” indicate a longer term

Commission plan to change radically the structure of card payments in Europe

Capping Interchange

Change Business

Rules

Zero Debit

Cards Market Not Working

Too Many Barriers

Lack of Consumer Choice

The Commission’s Targets The Commission’s Case for Cards

Encourage Non-Bank

Competition

Vertical Integration Concerns


Key

Hotter

Cooler

Key

Today

Direction

and extent of

travel by

2020

3 Source: PSE Consulting analysis

Heat Map of Regulatory Impacts on Key Players

Impact

2. IF CAP

Capping of Interchange and

Zero Debit Target impacts

Issuer revenues and domestic

schemes

3. Brand Choice

Multi-brands and Card

Holder Choice new

complexities at the POS

4. Exclusions

Three Parties

Commercial Cards,

iDEAL and ELV

exclusions generate

work-arounds

5. CBA

CBA at

acquirers home

rates 2015-

2017 impacts

domestic only

acquirers

6 Licences

One licence removes

country boundaries &

impacts all players

7. BIN Blocking

Honour All Cards

dropped & Merchant

Steering impacts

higher cost cards

8. Account Access Non-Bank

Account Access

delivers new

product features

1. Card Schemes

Scheme Brand & Processing

Separation Impacts Visa &

MasterCard business models

A

C

Q

U

I

R

E

R

S

I

S

S

U

E

R

S

All players will be impacted. The new CBA rules mean many acquirers and issuers could be hit first in 2015.


Visa Cross Border Acquiring Concessions

Visa pre-empted the Commission’s new CBA regulations by offering major concessions in June 2013. These

concessions are expected to apply even if the Commission’s legislation is delayed.

The Visa Concession

• Can use cross border IF of 0.2% to 0.3%

• Must be EMV/similar approved

• Must be Interchange Plus Plus framework

• Acquirer must have CBA licence

• Acquirer and merchant in two separate EEA markets

• Must have single merchant identifier

• Rules apply 1st January 2015

The Commission’s Variations

• Lacks the clarity of the Visa Concessions but

objectives similar

• Perceives limited to large merchants

• Applies two months from date of regulation

enactment

• Commission may not have fully understood

impact of change


Interchange Arbitrage - Major Implications of Cross

Border Acquiring Regulation - Impact

• Cross Border Acquirers establish outside country operations and cherry pick key

merchants in vulnerable countries with compelling 0.2% to 0.3% offers. High credit

card rate countries the target.

• Pressure on Issuers to reduce domestic IF rates to remain attractive to domestic

acquirers.

• Cross Border Acquirers to implement Interchange Plus Plus processing to benefit

from the lower rates.

• Domestic players become Cross Border Acquirers and relocate to protect revenue

streams.

• Based on sector, average transaction values, acceptance methods, etc. Dynamic

solutions could save large merchants significant interchange costs.

• The ICS rule variances between domestic and Intra EEA need to be addressed.

• For example, for Intra EEA CVV2 and UK CVV2 rates difference between the input

methods for eCommerce qualifications.

• Merchants potentially to lose one day’s settlement.

Acquirers

Target Domestic

Merchants

Domestic

Interchange Rates

Rule Variances

Dynamic Routing

Settlement


CBA Routing Illustrative Implications of New Rules If the current proposals are implemented then a retailer with locations in UK, Netherlands, France & Poland entering into a cross

border acquiring contract could make significant savings from the new regulations. France could also be impacted.

UK

Netherlands

Germany

Poland

Current Domestic

Credit ICS MIF* New Cross Border

Credit ICS MIF

Potential Merchant

Saving

Notes:

• Rate is based on current published ICS domestic Consumer EMV rate meeting qualification criteria (no sector specific)

• Netherlands rates for Maestro lowest in EU. Also default to the ICS’s intra EU rates and therefore current credit card rates will be aligned to the new agreed rates

• Data correct as 14th June 2013

• Assumption €100/£100 credit card transaction processed via ICS

• Merchant has outlets in each country and being acquired by a cross border acquirer

Interchange Rate 0.77% 0.3% 61%

Interchange Paid

(£100) £0.77 £0.30 £0.47


Interchange Paid

(€100) €0.50 €0.30 (see note) €0.20


Interchange Paid

(€100) €0.90 €0.30 €0.60


Interchange Paid

(€100) €1.30 €0.30 €1.00


Int Rate Current Fees Revised Rate Revised Fees

UK 5,000,000€ 0.77% 38,500€ 0.30% 15,000€ 23,500€

Netherlands 4,000,000€ 0.50% 20,000€ 0.30% 12,000€ 8,000€

Belgium 3,500,000€ 0.55% 19,250€ 0.30% 10,500€ 8,750€

Germany 2,500,000€ 1.58% 39,500€ 0.30% 7,500€ 32,000€

Total 15,000,000€ 117,250€ 45,000€ 72,250€

Current Fees New FeesCard VolumeRetail Merchants Savings

Cross Border Example – Potential Merchant Saving

For a relatively medium sized merchants operating across the four countries their interchange costs could be

reduced by over 60% based on the proposed changes.

Merchant is

present in 4

EEA

countries

Existing

domestic

EMV Chip

Card rate

Revised

interchange

rate acquired

Total Card

Volume is

£15M split as

above

Annual

interchange

fees for all

countries

Revised

interchange

fees

Key Notes: • Visa Consumer credit EMV rates only correct 17th June 2013

• No Scheme Fees or acquirer margin included with either example

• Domestic Volume Only

• Cross border acquirer in this example would be based in the Netherlands where both domestic and intra EEA rates are the same


Example - Transaction Routing By Transaction Value

The current fixed fee per transaction for UK Debit transactions may also make it cost effective for CBA

acquirers to dynamically route transactions based on transaction value.

£0.08

£0.163

£0.08

Domestic

Acquirer

Domestic

Merchant

Transaction less than £45* e.g. £30

Transaction greater than £45* e.g. £100

£0.058

Merchant Transaction Amount Interchange Cost Optimised Solution

Cross Border

Acquirer

Key:

Rate Comments

0.15% + £0.013 Current Intra EEA Chip Debit Rate

£0.08 UK Debit EMV RateDomestic Published UK Debit

Interchange Category

New Cross Border Rate

* ATV in UK is £45


Scheme Brand – Processor Separation - Observations

Primarily targeted at ICS but will impact Denmark and potentially several ATM schemes.

For ICS potentially significant issues relating to:

Extra territorial and security issues/impacts (very important).

Creation of multi-brand network and potential common carrier positioning.

Rebalancing brand/processor revenue streams

Separation of scheme risk/related activities

Delivery of own brand product solutions

Mechanism for new product releases and take up

Generalisation of network standard and value added features

Potential changes to member contract commercial terms

Can all schemes be ready by 2017? What are the penalties for delay?

Separating scheme brand from processing will be a very complex operation and will be difficult to implement

before 2017. Vision and strategy will be key but potentially a significant opportunity to add to shareholder

value.


Multi-Brand Cards and Cardholder Choice - Impacts

Multi-Brand

Cards

• Convenience – one card, multiple

brands

• Convergence with eWallet features

• Growth in single brand cards

Cardholder

Choice

• Most familiar brand selection

• Increase in incentives

• Cardholder preferences enabled

Multi-brand and co-branded cards may have less utility when country licences disappear. Domestic schemes,

such as CB, will need to consider how their reach can be extended.

• Why multi-brand when fewer

borders?

• Potential for combined Debit/Credit

cards?

• CB/domestic debit EU wide

acceptance?

• Consumer unaware of brand

differences

• Enabling cardholder selection –

POS/eCommerce

Benefits

Issues 4B

CECA

http://www.barclaycardbusiness.co.uk/information_zone/logos/visa.html

http://www.barclaycardbusiness.co.uk/information_zone/logos/mastercard.html


Regulatory Exclusion - Impacts

Outcome

Opportunities

Impacts

Three Party

Schemes

eCommerce

Account to Account

ELV – ACH/SDD

• Sheltered from Caps

• Reduction in four party

franchises

• Market advantage for T&E

schemes

• MSC differentials highlighted

• Merchant pressure for lower

rates

• Modest decline in ICS credit

issuance/usage

• Growth of T&E acceptance

• Increase in bank T&E

co-branding

• Banks build in-house closed

loop card products linked to

acquiring.

• No impact on iDEAL –

very low bilateral IF

• MyBank believed no

interchange

• Issuer incomes remain the

same

• Growth in similar schemes

• Significantly higher

interchange for new

• GiroCard differential

reduced by Cap

• Guaranteed ELV less

attractive

• Increased usage of GiroCard

• Reductions in ELV pricing

• Increase in ACH/SDD

Alternative Payment

methods across the EU

Regulatory exclusions could be used by banks to build own brand three party card product, co-operate to

develop eCommerce Account to Account platforms and increase the use of ACH/SDD acceptance at the POS.

Germany

Commercial Cards

• Commercial & Business

cards are subject to the IF

Cap

• Merchants may decide not

to accept card products

• Potential to be included in

the regulations along side

credit & debit cards

• Limited – expectation is

that Issuers may withdraw

services being offered

• Kick backs to corporates

will decline


Removal of Honour All Cards and Merchant Steering - Impacts

Honour All Cards

Outlawed

• Merchants decide card product

acceptance within a scheme

• Potential for BIN blocking

• Reduced merchant costs

• Non capped cards surcharged

Merchant Steering to

Lower Cost Payments

The removal of the Honour All Cards rule and enabling merchant steering to lower cost payments is expected

to damage all card products priced above the caps including commercial cards. In the period 2015 to 2017

dual branded cards could be routed via the ICS.

Benefits

Issues

• Provision of BIN tables by card

schemes

• Impact on issuer revenues

• Demise of credit IF prepaid cards

• How to communicate with

consumers

• Physical/online identification of card

type

• Potential for selective domestic debit

routing 2015 to 2017

• Already happens in eCommerce

• Increased competition and lower

acceptance costs

• Increased acceptance of

ACH/alternative payments

• Conflicts between consumer and

merchant choice

• Exclusion of premium and

commercial cards (even though

exempt)

• Impact on T&E acceptance

• Impact on issuer revenues

• Merchant conflicts versus

surcharging


CBA 2015-2017 Who Will Feel the Most Pain

The new CBA rules will impact high credit card usage countries that have high domestic interchange, followed

by high debit countries, which may include France.

Domestic bank

acquirers with no

CBA licences

and large

acquiring and

issuer portfolios

Maximum

Pain

Non-bank CBA

acquirers in

issuer JVs where

lower rates will

damage

partner’s

revenues

Quite

Some

Pain

CBA

licences as

part of

Group

membership

Some

Pain

Passported

CBA

licences and

existing CBA

deals

A

Little

Pain

Acquirers with

CBA licences

and domestic

licensed

operations in low

interchange

countries

(Netherlands,

Luxembourg,

Malta) and with

existing CBA

deals


New Cross Border Acquiring Rules - Initial Reaction

Across EU Markets

“Why do we have

to wait until

2015” major UK merchant

“Now the French

market is open

to everyone” French bank

“Too early to say

as many points

unclear” Portuguese acquirer

“Relocating to

Luxembourg is not

an option for us” UK acquirer

“Now is the time to

enter acquiring” EU PSP

“We are unable to

deliver Interchange

Plus Plus billing” Scandinavian acquirer

“No way we will

reduce

interchange to

0.3% from 2015

onwards” major UK issuer

“German acquirers

already planning to

relocate” German Subject Matter

Expert

“We are already

operating out of

Luxembourg” Swiss acquirer

“Do nothing is not

an option” UK acquirer

“Either accept competition

or reduce domestic rates to

match” European Commission


Domestic Acquirers’ Strategies and Actions

Domestic Acquirers’ Strategy. Domestic acquirers will have to compete/defend/attack under the new rules. A key

issue will be to build a new commercial model which balances a reactive strategy (i.e. CBA bids only when competitors

threaten), or a case by case proactive strategy (first mover) targeted at particularly vulnerable sectors and merchants

within the portfolio.

New CBA Entrants. New CBA entrant acquirers will re-examine markets and decide to enter using low credit card

rates to build new relationships.

Domestic Banks Relocate. Domestic banks that already CBA and have operations in low rate countries can now

attack non-CBA. Non-CBA banks will seek to relocate to build a defence.

Interchange Plus Plus. Interchange Plus Plus delivery capabilities must be available to construct a defence.

Knowledge and skills to support such offers and services will be required.

Merchant Education. The new regulations are complex to understand. Already large merchants recognise the

savings potential. Acquirers will need to proactively communicate to its merchant base to ensure a clear message.

Cardholder Scheme Selection and Merchant Card Product Steering. New features and functionality will be

required at the POS, eCommerce and mobile. Players who are first to market and compliant with the regulations may

win competitive advantage.

Platform Functionality. Acquirers platform must be able to support the standard features of CBA – language,

reporting, statements, payments, etc. along with the ability to price products separately on contracts, statements and

reporting.

Retain Acquirer Margins. Price will remain a key factor and even under Interchange Plus Plus, the acquirer margin

must be retained where possible. Retailers must value the service they are receiving.

Acquirers will need to carefully defend existing markets from attack from predatory Cross Border Acquirers

and new players entering the acquiring space as well as building strategies to attack their home and cross

border markets if they are already a CBA player.


New Regulations - Key Challenges and Possible Outcomes

Uncertainty – Plan A. At this stage the timing and implementation of the new regulation is uncertain. The EC

are targeting mid April 2014 but this is close to the European Parliamentary elections. Lithuania has the

Presidency and may not see interchange as a key issue, as will Greece who follow.

Commission’s Position. The Commission is pushing Lithuania to set up working groups. Barroso has

written to member states emphasising priority. UK asking for speedier implementation and impact of credit

card annual fees. If April is not achieved the legislative schedule may slip 6 to 12 months. Chances of Plan

A’s success about 40%.

Visa Concession – Commission’s Plan B. The Visa concessions on CBA will probably proceed in any

event. However, will both card schemes make the same offer? The Commission will need scheme co-

operation if Plan B is to be successful.

Split Cards/PSDII – Commission’s Plan C. An option is that the more lengthy PSDII element might be

delayed to the next Parliament (will be resisted by DG Competition/DG Markets) and just the cards regulation

is passed.

Delayed Cost of Cash Study. The Commission exposed because of lack of empirical evidence for caps.

Long (four years) delay in Cost of Cash study an embarrassment. If study shows cash lower cost than debit,

the basis of the caps undermined and potential embarrassment. If higher, then Merchant Indifference model

substantiated. DG Competition may delay release if results unfavourable!

Potential Changes. Many parties will lobby the Commission and the European Parliament for changes during

the consultation and for PSDII - over 500 amendments were tabled. Lobbying could radically change the

legislation. The two rapporteurs are Jose Zalba (cards) and Diego Fele (PSDII).

Reaction of the ICS. Both schemes have yet to provide guidance on the management and implementation of

the new regulations and particularly cross border acquirers will be able to operate in the interim period.


Opinions – Possible Amendments?

The European Parliament Internal Market and Consumer Protection Committee (IMCO) has published its

opinion on the proposed regulation on interchange fees for card-based payment transactions. A number of

amendments have been proposed by Rapporteur Adam Bielang.

Focus Area Proposed Legislation Proposed Changes

Transitional Period Two year period after the new regulation comes

into force.

Reduced to a one year period following

introduction of the new regulations.

Net Compensation

Currently the assessment of “Net

compensation” is for an Issuing Payment

Services Provider only.

The removal of “Issuing” part which leaves just

the Payment Service Provider only and will

ensure that the “acquirer” or any other party is

also covered by the net compensation clause to

avoid collusion and price fixing.

Commercial Cards Commercial Cards are excluded from the

regulation.

Commercial Cards to be part of the proposal

with the relevant caps, etc.

Definition Clarification Current rules apply to “debit and credit card

transactions”.

Amend the rules to define card based payment

transactions to ensure that all payment

instruments are included even products that

store data – Mobile phone, Wallets, etc.

New Card Scheme N/A

It is proposed that the CAPS being introduced

would not apply to newly established payment

card schemes for a limited time period.


The New Regulations - Some Key Questions

What Impact will ICS brand/processor Separation have?

Will the Capped Rates cause more Domestic Schemes to exit?

How will marketing incentivisation rebates operate within the Cap?

How will the Cap limits be managed and can premium products exist

within the Cap?

For Card Schemes

For Card Issuers

For Acquirers

Can Domestic Acquirers defend against Cross Border/Cross Border

Acquiring attack 2015 to 2017 and the Removal of Country Licenses in

2018?

What is the impact of dropping Honour all Cards and Merchant Steering?

What changes are needed to support Interchange Plus Plus charging?

How to replace lost Interchange and should Issuers plan for Zero IF?

What will be the impact of Three Party Exclusions and Non-Bank Access

to the account? Do they create Opportunities?

How will Card Multi-Branding and Consumer Choice impact Offers and

Usage?

The proposed new cards business rules are complex and thus there are many questions remain

unanswered.


Source: PSE Consulting Analysis

Player Winner or Loser Degree of

Inhibitors

Degree of

Opportunities

Consumers Few, if any, immediate benefits, payments more complex and potential confusion.

Longer term lower cost of living.

Cards Generally Medium level of short term damage, longer term Zero IF for debit a great concern.

Domestic Card

Schemes Domestic schemes under pressure unless they take pro-active action.

International Card

Schemes Loose vertical integration benefits but gain from new processing opportunities.

Merchants Large merchants have won and major beneficiaries; SMEs small improvement.

Issuers Major losers in credit card countries and in some debit from 2015 onwards.

Domestic Acquirers Domestic acquirers defenceless – lose customers to international acquirers.

Cross Border

Acquirers Potential short term winners, enter new markets, win new relationships 2015 to 2017.

ACH Payments Potential winner in retail payments but not yet fit for purpose.

Alternative

Payments

Significant benefits from account access – can compete with banks without risks and

costs.

Key:

High impact/opportunity Moderate impact/opportunity Low impact/opportunity

Winners and Losers - Summary of Conclusions

Changing the Business Rules is simple but the Regulators must watch out for severe collateral damage.

PSE – Cards & PSD Regulations V1 27/11/2013 20 20

Luke Purser +44 (0) 20 8891 6244 [email protected]

Documents

The Merchant Acquiring Conference - PSE Consultingpseconsulting.com/wp-content/uploads/2013/01/mac13_… · · 2016-03-17The Merchant Acquiring Conference ... €0.90 €0.30 €0.60