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This story appears in the November 2008 issue of Cards&Payments.
What do proposed European card schemes have in common with airline carriers? More than you might think, to hear some of their backers talk.
That is especially true of a plucky Belgian company, European Payment Solutions, which is promising to slash transaction fees for merchants. It is billing its planned Payfair brand as the "Ryanair of payment schemes," after the low-cost carrier that has helped to shake up the airline industry in Europe.
"They fly with the same planes as Air France, Lufthansa and British Airways, with the same certification, but with a good price," says CEO Dominique Buysschaert, a former executive in Belgium for retail giant Carrefour Group.
Two other groups also are trying to gear up or are in discussions to launch pan-European card schemes, including the Euro Alliance of Payment Schemes,or EAPS. Based in Belgium and centered in Germany, EAPS views itself at present as a "scheme of schemes," similar to the large Star Alliance of airlines, says Oliver Hommel, EAPS vice chairman. The national schemes are "part of a bigger community," he says.
But Payfair and EAPS, along with a small group of major German and French banks that are considering launching their own payment brand, called Monnet, are having trouble getting off the ground (
Mandates by European officials for a Single Euro Payments Area give these banks and other payments players an opportunity to take on titans Visa Europe and MasterCard Worldwide. But like in the airline industry, the current economics do not look good for launching a scheme.
Leaving aside the banking crisis, which is putting a crimp, if not the kibosh, on plans banks and other financial institutions might be entertaining to launch a card brand in Europe, other obstacles stand in the way.
European regulators are placing interchange, a major funding source for card issuers and acquirers, under increasing scrutiny. They view interchange as anticompetitive and lacking transparency in its present form.
And national regulators could follow with restrictions on interchange on domestic transactions, which account for the vast majority of card purchases in Europe, observers say.
But under the SEPA concept, Europe is to eventually become one big domestic market for electronic payments, so one day the EU view of interchange will likely hold sway.
And European Commission officials say they are not against interchange per se, as long as schemes can justify the charges. So interchange as a revenue source probably is an option for banks and other payments players considering launching pan-European card brands.
Interchange, paid by acquiring banks to card issuers, largely determines the transaction fees merchants pay to accept cards.
Compliance Needs
In addition, EU officials and the bank-led European Payments Council now say a new card scheme would comply with the Single Euro Payments Area mandates even if it does not cover all 31 European countries targeted for SEPA–the 27 member states plus Liechtenstein, Iceland, Norway and Switzerland. Only Visa and MasterCard have existing card networks that cover all those countries.
A new card scheme could cover the parts of Europe that make sense economically, as long as it complies with SEPA standards intended to open up Europe's payments market to competition and break down "fragmented and monopolistic national payments markets," as one European Commission official put it.
Despite making clear that interchange would be available at least temporarily in some form and that potential card schemes need not blanket Europe, EU officials have looked on with dismay at the prospect that two card networks, Visa and MasterCard–both with American roots–would dominate the SEPA card-payments landscape.
Regulators have only themselves to blame, some observers say.
"They've laid the groundwork for this wonderful duopoly," says Richard Willis, an attorney for U.S.-based McKenna, Long & Aldridge who represents payments-industry players in Europe from the firm's Brussels office. "They are concerned, justifiably so, of the impact on the merchants and consumers."
Though European officials consider both MasterCard and Visa Europe as American, Visa Europe executives insist the card organization fully split from the rest of the company that went public as Visa Inc. They say Visa Europe remains a card association owned by European banks, while holding an irrevocable license to use Visa's logo and intellectual property.
But in the SEPA-based card world envisioned for Europe after 2010, Visa and MasterCard would compete for domestic card business, which in Western Europe is now generally restricted to national schemes. EU officials worry interchange rates will rise, especially in such low-rate countries as Belgium, the Netherlands and in the Nordic region.
"The benefits of SEPA in the cards market will only be realized if there is sufficient competition," Gertrude Tumpel-Gugerell, a member of the executive board of the European Central Bank, said at a recent conference. It is "not a secret" then that the central bank supports a new European scheme, she said.
Both Visa and MasterCard reject the idea their pan-European networks would result in higher prices overall for merchants and consumers.
Peter Ayliffe, Visa Europe president and CEO, who asserts he does not report to anyone at Visa Inc., questions why European Union officials are so keen on having a third, fourth or fifth card scheme operating across Europe. That will not increase competition, but it will increase costs, he says.
"I don't know how many 'railroad' tracks you want to put across Europe," he says. "The competition isn't railroad tracks. The real competition is (among) the banks."
Tying Schemes Together
Among the three prospective schemes planning possible rollouts, at least one would certainly use existing "railroad tracks," or the card and terminal infrastructure already in place.
The Euro Alliance of Payment Schemes, founded a year ago, takes in schemes based in six countries, including major domestic payment networks in Germany and Italy, electronic cash and PagoBancomat, respectively, and ATM networks in those countries. EAPS also includes ATM schemes based in Belgium and the United Kingdom, and payment schemes in Spain and Portugal.
The consortium could bring together more than 200,000 ATMs and more than 150 million cards and 2 million point-of-sale terminals, says Hommel, the group's vice chairman and coordinator. By next year, at least 1.5 million of those POS terminals could be Euro Alliance-enabled, he says, noting the scheme could cover ATMs in the six countries and beyond and have 100 million cards in circulation.
These cards and terminals already are deployed, and they will not necessarily carry an EAPS brand, especially the cards.
EAPS, now in operation for some cross-border transactions, currently ties existing schemes together, essentially as a confederation. Each of the six schemes in the alliance has bilateral agreements with the others.
For example, an Italian cardholder doing a debit card transaction in Italy would continue to use the PagoBancomat network. But if he goes to Germany and encounters a POS terminal in the electronic cash network, it would be an EAPS transaction.
"If it's an Italian PagoBancomat card, it will be an EAPS card," Hommel says. "It's the same conditions (as) for a domestic transaction. It doesn't make any difference if [the merchant] accepts a domestic debit card or an EAPS card."
The consortium later plans to try to keep merchant fees low by making use of low-cost clearinghouse networks like those banks now use for credit transfers and direct debits for processing. Also, the group will not charge brand or "scheme fees" like Visa and MasterCard do, Hommel says. Those fees pay for advertising and sponsorship activities for the Visa and MasterCard brands and pad the bottom lines of the card companies, he says.
By next year, EAPS hopes hopes to bring in more schemes and individual banks and to become more like a true scheme, instead of a collection of national schemes with bilateral agreements.
But since announcing its intention to form a new scheme in September 2006, EAPS has added no new national schemes or banks to its consortium, although one executive connected with the organization says EAPS is still writing rules under which individual banks could join.
It has been difficult to get other schemes to join because all member banks of those schemes have to agree, he says.
In any case, Hommel has not quit his day job as head of debit and smart cards for Germany's cooperative banking group.
Even for national schemes that have joined the consortium, it is unclear whether all member banks within those schemes would participate, says consultant Malte Krueger of Germany-based PaySys Consultancy GmbH.
And the group's structure as a collection of national schemes could create problems. In SEPA, the schemes cannot prevent issuers and merchants from shopping around for a better price, Krueger says.
"For merchants, in particular, there would be an incentive to move to the scheme with the lowest price," he says. "For instance, an Italian merchant could dump the Italian scheme and start accepting the cheaper German scheme." He could still accept all Italian cards, but according to EAPS' rules, he would only pay the German merchant charge."
Yet, unlike other proposed card schemes, EAPS could be rolled out widely soon, Hommel notes. By contrast, it could take six or seven years for major German and French banks to establish their proposed Monnet scheme, he contends.
Short On Details
Details remain sketchy for Monnet, named after Jean Monnet, one of the founding fathers of the European Union. Major commercial banks Deutsche Bank and Commerzbank in Germany, and BNP Paribas and Société Générale of France, reportedly were involved in talks with European officials last spring.
At a German banking conference in September, Hermann-Josef Lamberti, chief operating officer for Deutsche Bank Group, reportedly laid out a business case for Monnet that assumes revenue from interchange and from such "value-added" services as contactless cards and e-commerce, along with lower costs compared with existing card networks the banks use.
The Monnet cards apparently would be cobranded with either MasterCard or Visa for transactions outside the home markets of Germany and France.
But German and French merchants could just ignore Monnet and accept MasterCard or Visa in those countries, too, if fees are lower, says PaySys' Malte.
Also unclear is how long the European Commission would allow the banks to charge interchange. It might only be for a start-up period to cover the initial investment in infrastructure. Regulators said in September they temporarily would allow "balancing" fees, similar to cross-border interchange, to help banks get moving on launching a pan-European direct-debit scheme under the SEPA mandates, due by next November.
"It seems [Monnet banks] are thinking about the business cases, and [with the] few numbers they put forward, the arguments seem to be optimistic," says Krueger. "We have doubts they are realistic."
Relying On Retailers
A bit more specific are the plans of European Payment Solutions and its proposed Payfair scheme, which is counting on broad acceptance by merchants to get rolling.
The scheme has been attracting significant interest from retailers, claims CEO Buysschaert, although declines to name them. A source tells Cards&Payments Carrefour is one of merchants interested in the scheme.
Payfair would focus on food retailers and petrol stations both for acceptance and card issuance, Buysschaert says.
"Once a week, you fill the fridge and your petrol tank," he says. "If you can convince these operators to adopt and accept your scheme, there is a place for a business model."
Payfair interchange and merchant fees would be set much lower than those applied to Visa and MasterCard transactions, Buysschaert says, declining to say how much lower. He also would not say how they would compare with the already low fees on domestic debit card transactions in Payfair's home region of Belgium and the Netherlands. Buysschaert would only say the fees "will be Ryanair-like."
"What do merchants want?" he asked at a recent conference. "Very simple–three things: Cost reduction, cost reduction, cost reduction."
The scheme would be open to both banks and retailers as issuers. And while European Payment Solutions is trying to get the scheme off the ground by capitalizing on merchant dissatisfaction with existing pan-European card networks, retailers would neither own nor manage the brand, Buysschaert says.
The company instead will be drawing most of its start-up capital from a Dutch private equity fund, which Buysschaert declined to name.
Still, the company faces an uphill battle trying to encourage merchants and banks to roll out payment cards and terminals supporting the new scheme across Europe.
Undeterred, Buysschaert predicted the scheme would launch during the first quarter of 2009 in France, Germany, Belgium and the Netherlands, following a trial this year by Belgian retailer Colruyt Group.
But plans likely are up in the air for all three of the proposed new schemes, given the state of the global financial system. Launching any new scheme may be well down the list of priorities for Europe's banks, says McKenna Long's Willis.
"You've got other issues–survival, for one," he says. CP
