Turmoil in Europe

  Europe has experienced a surge in cross-border debit card spending, prompted by the advent of the single European market and a rise in the use of debit cards for purchases on the continent. But Europe is struggling with a fragmented debit card infrastructure.
  Local electronic funds transfer networks, often owned by a nation's largest banks, switch most domestic debit transactions. These networks, though, have few common transaction policies, such as the setting of interchange rates.
  In the U.S., most debit card program interoperability issues have long since been resolved. But interchange rates and other issues still are unresolved among European banks for a variety of strategic, economic and local reasons.
  To solve this interoperability problem, the Brussels, Belgium-based European Union is pushing banks to unify their debit card systems on a pan-European, chip-based platform. But the EU also seems poised to bypass reluctant bank issuers.
  Although some European banks have for some time been issuing smart cards with debit functionality that complies with the Europay/MasterCard/Visa, or EMV, standard, the chips do not support international interoperability for debit payments and cannot be used for cross-border debit transactions, says Ivan Remsik, a London-based senior analyst at Forrester Research.
  "For domestic debit cards to be useable as chip cards in other countries, the cards and terminals would need to be re-issued and systems upgraded," he says. "The EU cannot force the banking community to pay for such a system."
  But the EU is pushing for the adoption of a uniform, pan-European debit card payment system. Known as the Single Euro Payment Area, or SEPA, the initiative is being promoted by the European Central Bank and the European Payment Council. The EU wants banks to introduce SEPA by 2008, and it is getting impatient with the delays the large debit issuers are seeking, Remsik says.
  However, Visa International and MasterCard International appear ready to step in if the banks do not. Both card associations already have widely used international systems for cross-border credit and debit card transactions, and they are pushing their own solutions.
  MasterCard, which dominates continental Europe in terms of cross-border debit volume, has its Maestro PIN-debit card brand, which is widely used in cobranding arrangements with domestic networks. Currently, MasterCard is getting around the problem of incompatible debit applications on the chips by using magnetic stripes for cross-border purposes.
  "What you have is one plastic with two cards," Remsik says. "One has an EMV chip interface for domestic use, and the other has a magnetic-stripe interface for international use."
  MasterCard hopes its Maestro debit network eventually will become the cross-border network standard for European banks seeking to meet the SEPA requirements. "Maestro already provides both domestic and international switching, clearing and settlement services in 12 countries out of the EU's 25 members," Alexander Labak, MasterCard Europe's president, stated during a presentation in March at a MasterCard conference. "There is no need to start a new SEPA merchant network from scratch."
  Countries adopting Maestro as a domestic debit scheme include Austria, Poland, Switzerland and the United Kingdom.
  MasterCard's solution in the United Kingdom was to acquire the national Switch debit network, which it then converted to the Maestro standard. "The migration of the Switch debit scheme to Maestro was MasterCard's first conversion and represented its learning curve," says Brian Moore, MasterCard Europe's head of acceptance merchants. MasterCard hopes that local networks in other European nations will adopt Maestro as well, he says.
  Visa's competing product for cross-border European debit payments is V pay, a chip-and-PIN-only debit card intended to co-exist with domestic debit schemes. Visa carried out the first domestic and cross-border tests of V Pay transactions in France and Greece in June.
  Visa officials declined to comment about V pay. But the problem with V pay is its chip-centric technology. Cardholders using V pay would not be able to use their cards in countries such as the U.S., where only mag-stripe readers are available, says Remsik.
  A snapshot of the growth of debit card use in Europe suggests MasterCard is making a bid for network dominance in cross-border transactions for years to come.
  European consumers spent $16.8 billion on cross-border trade in Europe using MasterCard credit cards and Maestro-branded debit cards in 2004, 12% more than in 2003, MasterCard stated in a report on Europe's cross-border economy. The two main drivers are in-store cross-border debit purchases and cross-border online, telephone and mail-order shopping.
  In volume terms, credit cards represented the largest component of MasterCard cross-border card usage in 2004. Total cross-border spending with MasterCard credit cards last year was $13.6 billion. The total cross-border spending with MasterCard debit cards was $3.1 billion. However, cross-border European POS debit transactions grew by 22% in 2004, which compares with 5% growth in cross-border credit card growth, according to MasterCard.
  Visa would not provide comparative figures.
  Until an international, chip-based interoperable network for debit emerges, Maestro's use of magnetic stripes, in addition to the future use of chip standards for cross-border debit payments, is a plus for MasterCard as Europe moves to a unified payments system, Labak said. "It could be 10 years before all terminals across Europe are upgraded to chip and PIN, and there will be major destination markets where chip-and-PIN terminals may never be fully available," he says.
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