Customer data key to card wars

The new rules on electronic payments in the European Union are nothing short of a bombshell dropped on one of the world's most profitable industries. True, the provisions were not unexpected and have been flagged for years, but the rules, which among other measures cap the interchange rate on credit and debit card transactions at 0.2% and 0.3%, respectively, will turn the world of traditional payment service providers - usually banks - upside down.

The payments value chain is somewhat more complex than it might be. The traditional four party model comprises the card issuing bank (issuer), customer, merchant, and merchant acquirer (the bank that owns the merchant relationship). In the middle of all that is the network, usually Visa or MasterCard.

Interchange is the fee paid by the issuer to the acquiring bank, which in turn levies a merchant service charge (MSC) on the merchant. Nearly all of this MSC comprises interchange and if one considers that MSC rates of up to 3% were not uncommon up until a few years ago, the impact of the new rules on the industry's revenue model are nothing short of devastating.

In many ways the card-based electronic payments industry has been a major success story from the point of view of building innovative, simple, and convenient payment mechanisms for the world's consumers. Visa and MasterCard are two of the world's most respected and trusted brands with a track record of innovation and imagination.

But the contention of the EU is that ultimately the networks' success has been built on cartellist practices and while both networks are now public companies, the interests of their bank customers are paramount, and at the expense of the European consumer.

According to Internal Market and Services Commissioner Michel Barnier, the payment market in the EU is fragmented and expensive with a cost of more than 1% of EU GDP or €130 billion a year.

"These are costs our economy cannot afford," said Barnier. "Our proposal will promote the digital single market by making internet payments cheaper and safer, both for retailers and consumers. And the proposed changes to interchange fees will remove an important barrier between national payment markets and finally put an end to the unjustified high level of these fees.”

According to the EU, the interchange fees paid by retailers end up on consumers’ bills - usually unknowingly. Meanwhile, the networks argue that reducing interchange fees will see no difference in the prices EU customers pay for their good but it will, however, mean that card issuers will be forced to charge annual fees to cardholders to make up the difference.

But the gap in interchange fees proposed by the EU is unbridgeable. For the networks and the banks, having gorged on massive payments revenues for decades, this presents an appalling vista and their strategic reaction can be summed up in one four-letter word: data.

Traditional payments operators have known for some time that their revenue sources faced regulatory threats of all kinds across the globe. While the arrival of the digital economy, and particularly the smartphone-enabled mobile wallet, is already transforming the payments experience.

The digitization of payments has also brought new entrants for the card operators to worry about but with digitization come a massive opportunity and this is in respect of payments data. Put simply, many in the payments industry believe that the value of the data around payments is now greater than the revenue deriving from the payment itself.

The new world of payments will eventually consign plastic to the dustbin. Instead, customers will be using their smartphones to pay for goods and services. Many of these goods and services will be offered directly to the consumer based on their past transaction history, or even real-time, based on their geographic location.

The battle is now on for bank issuers, networks, merchants and acquirers to mine customer data as intensely as possible in order to understand their spending DNA and target offers accordingly. A major new factor in the equation, however, is the role of mobile network operators (MNOs) on whose rails the smartphone-based payments experience runs. The MNOs, challenged by decreasing airtime and data rates, are desperately looking to supplement their revenue models and payments is part of the answer.

For Irish cardholders, the new world of digital payments and offers is somewhat behind the rest of the developed world. Battered by credit card write-offs and massive deleveraging by the Irish consumer since the crisis, Irish credit card issuers are looking to stabilize their businesses before innovating in the sphere of digital payments. Meanwhile, the Irish credit card market remains almost uniquely affected by the annual card tax of €30.

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