Europe: a potential threat emerging for international payment schemes

As the migration to Single Euro Payments Area (SEPA)-compliant payment schemes progresses, Deutsche Bank chief operating officer Hermann-Josef Lamberti has stated that a group will probably be created in October 2009 in order to press ahead with plans to establish a European debit card payment scheme. As reported by Bloomberg, Deutsche Bank is joined by Société Générale and BNP Paribas among the banks that are working on the project, called Monnet, with the aim being to have 31 European countries join the system.

Ouliana Vlasova, cards and payments analyst at Datamonitor explains: “The introduction of SEPA has been threatening the viability of domestic payment schemes for many years, and since January 2008 banks across the region have begun implementing SEPA migration plans as set out in the SEPA Cards Framework (SCF).”

The SCF states that issuers may choose from multiple schemes to pursue different options, including evolving domestic systems to be SCF-compliant, which means that co-branding domestic cards with international schemes is sufficient. In addition, the European Payment Council encourages issuers to consider new schemes and initiatives to compete with existing systems, although this is not mandatory.

Despite difficulties, two operations announced

Vlasova observes: “Despite the fact that there are many complications and much investment involved in introducing a new scheme, there have already been at least two such operations announced over the last year or so, namely PayFair and the Euro Alliance of Payment Schemes (EAPS).

”While the former is not yet operable, the latter is and accounts for Europe's large players such as SIBS Portugal, Link UK and Consorzio Bancomat Italy. EAPS builds on existing technical infrastructures, leveraging national economies of scale. The question arises, therefore, of what happens to cards used outside of Europe: whether EAPS will have to form relationships with acquirers outside of the continent, or cards will still have to be dual-badged for non-European transactions”.

Visa and MasterCard may appear unthreatened about the prospect of a new European scheme, as the majority of domestic cards are co-branded with their networks. The aim of SEPA is to harmonize and maximize the efficiency of electronic payments across Europe. Surely, then, the duopoly is— technically —more efficient, as the infrastructure exists already.

It is becoming evident, however, that the European banks are looking at the long term and questioning this duopoly of international schemes in Europe. This is partly due to the issue of interchange, since there are typically low or no interchange fees on domestic schemes. This will certainly be welcomed by the retailers for which there will be less cost, but could be detrimental to consumers. There may be more confusion when using cards abroad and, potentially, the introduction of card fees to replace lost revenue from interchange.

MasterCard Europe appeals

Furthermore, the European Commission believes that interchange may stand in the way of creating SEPA. Indeed, MasterCard Europe is currently appealing the European Commission's ruling of December 2007, which mandated that it withdraw its cross-border interchange fees.

As SEPA continues to progress and the competition develops while standards begin to converge, the industry will probably see the harmonization of interchange rates. Still, with the possibility of a new European scheme being developed, there is uncertainty about what will happen to interchange fees.

Vlasova concludes: “A number of banks almost went out of business late last year, so it is difficult to see where the necessary investment will come from. What is certain is that European banks must continue to try to influence developments in their favour.”

Article courtesy of www.Datamonitor.com.