Photo of the Costa Brava coast

 

The economies of Spain and Portugal represent a huge payments opportunity which has so far managed to continue to shine despite the significant economic restructuring that is taking place in both countries, writes William Cain.

 

Bar chart showing growth rates in number of Spanish card transactions, (2002-2009)Between them their payments industries are worth €14.4trn ($20trn) in total volume. By one measure, Portugal is the most advanced payments market in Europe with more than 65% of all transactions made using payment cards – the highest percentage in the eurozone. Spain’s long list of multinational companies continue to wield vast economic clout despite unemployment problems and anaemic economic growth at home.

These well-documented economic problems are influencing the way corporates in Spain and Portugal manage their payments businesses. At a cash management level, companies are trying to optimise their use of capital through cash concentration strategies which maximise their interest income. Changes to the regulatory environment, notably upcoming Single Euro Payments Area (SEPA) reform on direct debits, is also on the agenda of Spanish corporates who heavily rely on them as a payment instrument.

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Portugal’s corporates and consumers, despite elevated levels of card payments, are still more dependent on cheques than many of their European counterparts. Reducing cheque usage in Portugal to the same level as Spain would add around €237.7bn to the electronic payments system, according to Electronic Payments International research.

Companies including The Logic Group and Global Payments have both recently started operations in the region. Despite economic uncertainty, there are clearly some that believe electronic payments will remain a growth industry.

Graph showing the share of total number of transactions between main payment types in Spain (2002-2009)

 

Spain – an overview

Spain is one of the world’s most important corporate payment markets. Its €1trn economy, 2,064 multinationals and strong trade and cultural links with the burgeoning economies of Latin America emphasise its significance not just to the payments industry but the global economy in general.

Santander, its largest corporate, has the biggest retail banking network in the world. Despite a banking crisis in the country which shows no signs of abating, the bank continues to grow its international footprint. Telefonica, an internationally-focused telecommunications company; Repsol, an oil and gas company; BBVA, another bank; and Iberdrola, an electrical utility company – all with revenue in excess of €21bn – contribute to the €12.4trn of payments which were pumped through the country’s economy in 2009.

Spain has a further five multinationals which feature in Forbes’ list of the world’s 500 largest corporates, making Spanish companies the 12th largest constituent of the list.

As the SEPA initiative continues to gather momentum in Europe, with its goal of providing standardised payment instruments across Europe, differences in the payments instruments used by corporates across the eurozone are diminishing.

Bar chart and line graph showing the number and value of direct debit transactions in Spain (2000-2009)

 

Spain and SEPA direct debits

One of the main issues facing Spanish corporates in the coming year centres around this issue. Direct debits across the euro area are being overhauled as part of SEPA, a programme that will impact business in Spain more than any other country except Germany.

Spain’s use of direct debits is the second most intensive in Europe after Germany. The instruments make up around 44% of the total number of transactions in the economy.

SEPA changes to European direct debits are due to be enforced by November 2011, and are one of the primary issues facing corporate clients this year, according to Alberto Romero, manager of BBVA’s transactional products business in Europe.

Currently, guidelines for direct debits vary across Europe and the SEPA directive aims to standardise these operations across the euro area. The new rules allow for debtors to be reimbursed for a direct debit taken from their account up to eight weeks after the payment was due.

The corresponding period in Spain is far shorter – varying between four weeks or nine days depending on the value of the transaction. In addition, the rules for refund are considered ambiguous by Spanish corporates in comparison with existing domestic rules. SEPA direct debits allow payors to claim reimbursement when the executed payment transaction exceeds the amount which could have reasonably been expected.

"This makes refunds easier for debtors but generates uncertainties and makes treasury management more difficult for creditors," says Romero.

"In addition, collection instruments in Spain contain much more information than SEPA direct debits, which makes reconciliation easier for both creditors and debitors. The migration to SEPA direct debits will suppose further difficulties in treasury management."

This migration will require substantial investment for those Spanish corporates not already compliant. HSBC started offering the SEPA-compliant direct debits to its corporate clients in Spain from November 2010 and some Spanish corporates are already using the service.

"Generally, SEPA has brought a large element of uncertainty into corporate strategies for treasury departments in the coming year," adds Romero. "As a bank, at BBVA we provide as much advice as possible to help corporates prepare for all of the upcoming changes. It is difficult currently to make any concrete decisions because while there is a general direction of movement it is too early to be able to say in some cases what the exact changes are going to be."

Bar chart and line graph showing the number and value of credit transfers in Spain (2000-2009)

 

Managing cash flows

Cash management is another area where corporate payment practice in Spain differs from many of its European neighbours, according to Romero. It is common in Europe for companies to take 60 to 90 days to pay invoices to suppliers.

In Spain, payment terms tend to be even more extended. It is not uncommon for some businesses to wait up to 180 days for payment, particularly suppliers selling to large retailers. Local governments and other public institutions may take even longer.

This has led to the evolution of a number of different forms of vendor financing to ensure the stability of companies operating at different points within the payments chain.

One common practice is a process called ‘confirming’. The payor provides their bank with a payment file featuring future dated payments. A discounting offer is then made to the supplier which they are allowed to exercise at any time before the maturity date, when the agreed amount is paid in full. The supplier is able to take the discounted offer before full payment is due to help with their liquidity or working capital requirements.

This type of activity is undertaken as a partnership between the buyer and the supplier as a means of ensuring the buyer’s trading partners are able to operate on these extended payment terms with sufficient liquidity and with a reduced degree of risk.

The extended payment terms in Spain mean these types of reverse factoring operations are commonplace for larger corporates and suppliers.

The large number of multinationals in Spain – particularly across Europe and South America – means there is a need to manage multiple currencies and cross-border spending.

Two trends have developed as a result of this. First, banks have sought to provide cross-border corporates with cash concentration products which allow them to sweep all of their available funds at the end of a business day into a central account, enabling them to maximise interest earned.

Second, as employee usage of travel cards has developed, corporates are increasingly building data aggregation centres to manage and monitor their travel card spending in real time.

It can be used to delegate responsibility for travel and general procurement expenditure while maintaining accountability and preserving an audit trail of transactions.

Bar chart showing how Portugal has seen a steady rise in number of credit and debit cards in issue (2000-2009)

 

Main payment mechanisms

The other main payment instruments employed by corporates in Spain are fairly typical of those used by others across Europe. Credit transfers are the largest transaction type in total value. They made up around €10.6trn of the total €12.4trn of payments in the Spanish economy in 2009.

That represents around 86% of total payments in the economy, up from 56% in 2002 and 75% in 2005.

The number and value of transactions conducted on payment cards have increased consistently since 2002, with the biggest increases on deferred debit and credit card products. The total number of transactions has increased every year from 2002 in both payment card categories, increasing 3% on debit to reach 952m transactions and 2% on deferred debit and credit to reach 1.169bn.

The value of payments on debit fell by 1% in 2009 to €41.2bn, hurt by a contraction in consumer spending in a year when GDP declined by 3.6%. Deferred debit (charge cards) and credit card payments registered a 5% decline to €57bn.

To put these declines in perspective, in the five years to 2009, payment values have increased 21.5% on debit and 60.4% on delayed debit/credit transactions.

Debit cards remain the most popular payment card product with around 30.7m cards in issue at the end of 2009. That compares to about 4.4m delayed debit/credit card products.

The use of credit cards in Spain is increasing from a low level because of the market’s traditional preference for charge card products which are paid off in full at the end of each month. Bank and consumer knowledge of credit cards as a revolving credit product is improving and Spain is considered by experts in the country as a good option for expanding usage compared to markets like the US and UK credit card markets where revolving balances are declining.

The number of cheque transactions in Spain in 2009 was 113.3m, down from 136m in 2008. That represents a decline of 16.7% year-on-year and a 47.2% decline since 2004, when cheque usage reached its peak.

The decline of cheques has been a result of a substitution for other forms of electronic payment including credit transfers, direct debits, payment cards and internet banking. The rate of decline is accelerating with double digit drops of 11% and 17% in the past two years.

Bar chart showing how Portugal has seen a recent spurt of growth in POS terminals over the past few years

 

Portugal – an overview

Only one of Portugal’s companies, utility company EDP-Energias de Portugal, makes it into Forbes’ global 500, ranked by gross revenue. Nine feature among the world’s largest 2000, according to a separate Forbes list.

This relative paucity of big business and a smaller population (at 10.6m, it is a fifth of the size of Spain’s) and economy (GDP of €164.4bn is around a sixth the size of Spain’s) does not mean Portugal is any less significant a payment market than Spain.

It is Europe’s most advanced card payments market by one measure – it has the highest percentage of transactions conducted using payment cards in Europe, at 65.5% of the total number of transactions. That compares with just 38% in Spain.

Its primary interbank network, Sociedade Interbancaria de Servicios (SIBS), as well as developing Portugal’s domestic networks, plays a role on the international stage. SIBS manages the Polish ATM network, runs an acquiring processing solution for POS transactions in Romania and also co-operates with Emprensa Interbáncaria de Serviços (EMIS), an interbank service provider in Angola.

Helped in part by the gradual decline of cheques, payment card usage in Portugal has continued to grow steadily across all of the main card types aided by consumer and corporate usage. Debit cards are the most popular type of payment card, with an estimated 16.7m cards in issue.

There are continuing signs of increasing usage and improving acceptance infrastructure. Debit card transaction growth has fallen below 5% just once in the past 10 years and has increased 28.9% since 2005. Debit card spending increased 44.7% to €35bn as individuals started to use their debit cards for higher value purchases.

 

Portuguese POS innovation

The number of point of sale terminals grew to 271,444 in 2009, up from 226,118 the year before – an increase of 20%. Growth in the number of point of sale terminals has increased in double digits for each of the past four years and has grown a total 65% in the past five years. The technology available on terminals in Portugal is considered to be among the best in Europe, according to Miguel Angel Lozano, director of technology at The Logic Group.

There is increasing use of value-added features at the point of sale which allow consumers to perform functions like cashback and redemption of loyalty rewards. Contactless is also in the process of being introduced to the market.

A new feature aimed at tourists allows retailers to discount Portuguese tax at the point of sale. International consumers can complete their purchase with tax deducted and receive a voucher which can be used for customs declarations.

Credit card usage is another bright spot in the Portuguese market. The number of credit cards in issue increased 44% in the five years ending in 2009. There are around 7.6m credit cards in the country, though some of these are joint debit and credit cards.

There are also a small but growing number of retailers issuing cards through banks, which make up just under one million of the total cards in issue. Prepaid cards have largely been limited to usage within universities or within businesses to pay for petty cash expenses like canteen meals.

They are also used for telephone cards and the country’s viaCard road toll system. Loyalty programmes are also becoming more popular in both Spain and Portugal as a result of difficult economic conditions. Retailers are using the programmes to better target offers to consumers and increase their share of wallet spending among existing customers.

Total cards in issuance in 2009, including debit, credit and charge cards, added up to 20.1m, down slightly from 20.3m the year before, mainly because of a slight drop in the number of debit cards in issue. Despite the economic downturn, total card spending has continued to increase, with total card spending rising 5.9% in 2009.

Cheque usage remains high at €336bn, or 17% of total transactions, representing a sizeable chunk of payments which can be shifted onto cards.

 

E-procurement and travel

Shifting cheque spending onto cards is being made easier because of e-procurement campaigns in the country, according to David Harrison, vice-president for corporate payments at Visa. Corporates are able to use physical or virtual cards to make everyday business purchases and also to maintain greater oversight of their overall procurement operations through centralised reporting systems.

"If you consider the multi-billions going through cheques, there is still a significant payment piece within that [both in corporate and retail] and it’s one of the easier flips to a card than anything else," says Harrison.

He would not go as far as to say Portugal represented the more attractive market than Spain as a result, claiming both markets are equally important to Visa and being driven by similar forces seen across Europe.

"In terms of e-payments, we are now starting to see people are much more receptive to that more generally," he adds.

"In all markets, they are not so reluctant to change because in their personal lives they are seeing it all around them. That’s what’s helping us with individuals in a business environment as well. The impediments to change are now lower than they have ever been because of the sheer pace of change generally.

E-procurement is also being driven by local government trials of the system, which he says tended to lead to a "ripple effect" in the private sector. He also claims e-procurement initiatives also tend to have a knock on effect into areas like corporate payroll cards and electronic benefit disbursal programmes.

"In government, particularly when local government does something, you start to see the private sector get quite interested," adds Harrison.

"We do see a connection between the procurement cards, travel cards and into prepaid benefit disbursal very much because the decision makers are often quite similar."

Reducing cheque usage in Portugal to the same level as Spain would add around €237.7bn to the electronic payments system, according to Electronic Payments International research.

Direct debit payments are typically used in Portgual’s larger urban centres for the payment of public utility services, though usage is still far from widespread. Their usage is in terms of total value as a percentage of total payments is 2%, 5 percentage points lower than in Spain, at around 7%. Usage has remained fairly static throughout the past 10 years, hovering between 1.5% and 2.2% of total transaction volumes. Total direct debit transaction value was €38.8bn in 2009, up 4.2%.

Credit transfers are the most significant payment mechanism in Portugal by total value. There are two primary types – conventional standing orders and variable standing orders – the most common way for corporates and suppliers to pay their bills and employees. The system is now largely electronic, with the most recent statistics showing around 10% of this system is now paper based.

There were 176m credit transfer transactions in Portugal in 2009, up from 165m the year before. The total value of these transactions declined from €1.55trn in 2008 to €1.54trn in 2009. The share of credit transfers as a percentage of total transaction value is 78%, lower than Spain’s figure of 86%, most likely because of the more intensive cheque usage in the country.