Politics, Corporate Shifts Could Drive Change In 2008

  The worldwide payments industry in 2008 is facing a year of unprecedented growth opportunities and possible upheavals, as economic and political pressures converge with new technological and competitive developments in key markets.
  The competitive landscape for payment companies is undergoing a major shift. Visa soon will join MasterCard Worldwide, American Express Co. and Discover Financial Services LLC as an independent, public entity. Moreover, several key mandates for new payment standards and technologies kick in this year, promising to melt borders around the globe.
  Hot topics for the year are likely to include downward pressure on interchange fees, legal and regulatory pressures, and the spread of new payment technologies.
  Cards&Payments takes a look at some issues that likely will affect the global payments industry in 2008:
  Shifting Allegiances
  The biggest competitive development of 2008 likely will be Visa Inc.’s initial public offering, which Visa expects will occur during the first quarter. And card networks that already are public are expected to have a busy year as well.
  â€œI expect Visa to be more aggressive in cutting deals with new partners when it finishes its IPO because its agenda will shift from satisfying its member banks to pleasing its shareholders,” says Judson Murchie, an analyst with the Boston-based financial research firm Aite Group.
  Analysts also are bullish on MasterCard’s prospects this year, especially in Europe. “MasterCard is well-positioned for growth in 2008 because it derives more than half its revenues from outside the U.S., which will help shield it against a recession there. And it is well-situated to boost its share of transactions on its Maestro network in Europe, as [the Single Euro Payments Area] unfolds,” says Sanjay Sakhrani, an analyst with New York-based Keefe, Bruyette & Woods.
  Discover Financial Services LLC, after writing off steep losses last year from its Goldfish card operation, forecasts a turnaround in the United Kingdom-based unit. But its weak stock price and vulnerability in a recession could set it up for takeover, analysts say.
  AmEx may consider entering the debit market this year or next year, predicts Gwenn Bézard, an Aite Group analyst. “There is a huge generational shift by younger card users to debit, and I don’t see AmEx shying away from it forever,” he says. AmEx denies any plans to enter the debit market.
  Interchange
  The worldwide battle over interchange is expected to heat up throughout the year. Some countries’ governments are considering regulating rates. In some cases, they already have done so. In the U.S., merchants are lobbying the government get involved by capping or regulating rates, which continue to rise incrementally.
  The Merchant Payments Coalition, which represents several major U.S. retailer groups including the National Retail Federation, claims that U.S. card issuers are collecting as much as $36 billion per year in interchange fees, an amount merchants say is excessive. Banks and payment companies disagree with the estimate but say revenue from interchange, which equates to just less than 2% of each sale, is necessary to manage risk and to support the card-payment system and infrastructure.
  A resolution this year in the U.S. merchant class-action litigation that alleges Visa, MasterCard and some of their member banks colluded in setting interchange rates could go a long way toward deciding the future of interchange in the U.S., says K. Craig Wildfang, lead counsel for the plaintiffs and a partner with Minneapolis-based Robins, Kaplan, Miller & Ciresi LLP.
  The fact-discovery phase of the case should be completed in June, and lawyers close to the case speculate that the defendants may settle this year. If not, the case likely would go to trial next year in the U.S. District Court for the Eastern District of New York.
  In Europe, merchants gripe that the interchange rates Visa and MasterCard set (about 1% of the sale there) are superfluous, while the payment networks warn that fees are essential to maintaining the integrity of the payment networks. In November, top executives from 14 European retail groups sent a letter to the European Commission urging it to fix a “malfunctioning credit card system” by abolishing interchange rates “in their current form.”
  The commission ruled in late December that MasterCard’s European cross-border interchange rates violate antitrust rules. MasterCard must decrease its interchange rates for cross-border credit and Maestro debit transactions in the European Zone by June or face fines. MasterCard said it will comply while it appeals the ruling, acknowledging that the appeals process could take years.
  Although the commission’s ruling affects only 5% of MasterCard’s transaction volume in Europe, it sets an alarming precedent for government intervention in interchange, says Javier Perez, president of MasterCard Europe. During a conference call with analysts last month, Perez said he fears issuers’ loss of interchange revenue caused by the ruling could reduce incentives for financial institutions to invest in implementing SEPA, an initiative to unite up to 31 countries in a single euro payments area and standardize cross-border euro payments among nations in the European Union.
  â€œWe are disappointed that the commission has failed to appreciate that, without a mechanism to share costs among all participants in a payment system that functions across Europe and around the world, consumers will likely be hurt," he said.
  All eyes also are watching to see how the struggle over interchange plays out Down Under, where the Reserve Bank of Australia in 2003 ordered interchange rates to be cut nearly in half, from 0.95% of the sale to 0.55%.
  In April, the Reserve Bank expects to release a highly anticipated review of its payment-system reforms, which will include input from issuers and merchants.
  â€œIndications so far suggest that the government’s move to slash interchange rates in Australia did not result in disaster, as some had predicted,” says Alan Frankel, senior vice president with Lexecon, a Chicago-based consultancy, who spoke on the topic at a recent conference in Australia. “Visa and MasterCard had used extreme rhetoric to warn of a ‘death spiral’ in Australia’s payments infrastructure if interchange fees were cut. But that didn’t happen, and the marketplace is working just fine.”
  MasterCard and Visa declined to comment on interchange issues. But Bruce Harting, an analyst for New York-based Lehman Brothers, noted in a report late in 2007 that interchange rates are flat or are declining in every major country in the world except the U.S.
  Because acquirers pay issuers interchange, slashing interchange rates would affect issuers more than card networks, which generate much of their revenue from switch fees. “Interchange may represent more than 10% of an issuer’s card-related fee income,” Harting wrote. “Regulating interchange may also have an indirect impact on networks’ revenues depending on the impact on issuers and cardholders.”
  Political, Legal Pressures
  In the U.S., a presidential election year like this one means candidates will latch onto hot-button topics such as credit card-industry practices, which were the subject of several congressional investigations and hearings in 2007.
  On the campaign trail, Democratic candidate Sen. Barack Obama is advocating passage of a Credit Card Bill of Rights, which would crack down on a host of issuer practices, including making rate changes to existing agreements and charging interest on transaction fees.
  Former Sen. John Edwards, another Democratic candidate for president, is touting a proposed Borrower’s Security Act, which would ban various issuer practices including universal default. Edwards also wants to create a Family Savings and Credit Commission to ensure financial-services providers treat consumers fairly.
  Legal issues simmering for U.S. issuers this year include Visa Inc.’s $2.25 billion settlement late last year with American Express Co. in an antitrust lawsuit dating from 2004 that could trigger additional settlements this year in related disputes.
  AmEx filed its antitrust suit against Visa and MasterCard after the U.S. Department of Justice won its antitrust case that found that the card brands illegally banned their members from issuing AmEx and Discover cards. Discover filed its own, similar suit, which is pending. Now that a benchmark for damages has been established, MasterCard soon may settle with AmEx, and both Visa and MasterCard also may settle with Discover, legal experts say.
  New Technology
  A plethora of new technologies is changing the physical processes of payments, and that trend could gain momentum this year around the globe.
  Coinciding with the adoption of SEPA, many European countries will adopt the chip-and-PIN EMV standard for payment cards. By 2010 nearly all consumers’ MasterCard and Visa cards in Europe and Canada are expected to comply with the standard, according to a report by Montreal-based KPMG LLP.
  Contactless-payment technology also has become increasingly widespread and is gradually gaining acceptance with consumers. In a recent survey conducted by KRC Research on behalf of MasterCard, 49% of the world’s consumers said they likely would use a contactless card if their financial institution provides it.
  Mobile banking also is on the rise, as more consumers are using their cell phones to check their bank accounts. A small, but growing, number of consumers in Asia, Europe and the U.S. use mobile phones to initiate and receive payments. But widespread adoption of mobile payments is still four or five years away, says Red Gillen, an analyst with Boston-based Celent.
  From a base of about 1 million mobile-banking customers at the end of 2007, Gillen expects the U.S. mobile-banking market to expand to double-digit millions this year on its path to reaching 17 million U.S. households by 2010.
  â€œEurope and Asia are far ahead of the U.S. in testing mobile payments, but as mobile banking spreads in every market, development of mobile payments will follow. And I expect within four or five years it will be widespread globally,” Gillen says.
  Regardless of the way the economic and political winds shift, this year will bring significant change and opportunity for many payment companies.
  (c) 2008 Cards&Payments and SourceMedia, Inc. All Rights Reserved.
  http://www.cardforum.com http://www.sourcemedia.com