The rapid migration of magnetic stripe payment cards to EMV-embedded chip-and-pin technology in Hungary is fuelling growing demand for debit cards. But rising unemployment and harsh austerity measures are curbing consumer spending for the electronic payments industry. Maryrose Fison reports.
Nestled in the heart of Central Europe, Hungary’s dominant form of payment steadily remains cash.The landlocked country sandwiched between Austria and Romania has retained a longstanding attachment for coin and note-based exchanges, forcing the cards market to occupy a peripheral position in the payment sector for the best part of two decades.
As some western European countries approach debit card saturation levels, the potential for growth in Hungary presents a promising picture, albeit one that has yet to be fully tapped. The scope for providers to issue more cards and see the volume of purchases conducted on card acceptance devices soar is vast. But there are large obstacles to clear first in the form of conservative household spending habits and a lifetime familiarity with cash transactions.
Hungary is at a crossroads both geographically and economically. Having entered its second recession in five years in June, the economy is stagnating and consumer appetite for spending is drying up. In October, the government announced fiscal austerity adjustments designed to shore up more than HUF700bn (USD3.2bn) in a bid to reduce its debt-to-GDP ratio.
In 2008, Hungary narrowly avoided bankruptcy after its over-dependence on exports was exposed. Struggling European economies stopped importing in the volumes they had enjoyed pre-crisis and the government was forced to secure a EUR20bn (USD26bn) loan from the International Monetary Fund, European Union and World Bank.
As consumers face rising uncertainty over job security and higher taxes, it could be months or even years before the card payment industry picks up the momentum it was beginning to exhibit in the years before the financial crisis.There are a total of 8,9m cards in circulation in Hungary today, only 3 % more than there were in 2007. The value of money spent on cards has risen by 15 % over the past two years from HUF3,4m to almost 4m in 2012 and the ratio of debit to credit cards has widened from four-to-one to six-to-one over the same period.
The number of cards per capita in Hungary is also considerably lower than in neighbouring countries and the Euro area generally. There were 0.89 cards per person in Hungary in 2008 compared to 1.47 in the Euro area and 1.46 in the EU. This compares to the cash market, which the Hungarian Central Bank estimates accounts for more than three-quarters of all transactions, worth a total of HUF51,454bn.
Distribution of Payment Card Acquirers and Issuers in Hungary
At the end of 2011, 73 % of payment cards were issued by the five largest banks in Hungary, according to Magyar Nemzeti Bank (MNB), the Hungarian Central Bank. MasterCard’s market share in June 2012 was 80%, Visa’s was 18% and American Express’ was 1.8%. Smaller card issuers accounted for the remaining 0.2% of the market.
The major issuers of debit cards in Hungary are OTP, with an estimated 50% market share, followed by Erste Bank with about 10%, K&H with 8 %, Budapest Bank, CIB and Raifeisein with 5%, Takarekbank and Unicredit with 4% each and MKB with 3 %.On the credit card side, Cetelem retains the biggest market share with an estimated 20 %, followed by OTP-Citibank with 18%, Budapest Bank with 14%, Erste with 10%, CIB, Raiffeisen and K&H with 5%.
Unlike in other European countries, 90% of acquiring in Hungary is done by banks. As of June 2012, ten acquirers provided card acceptance for around 64,000 merchants. Some 91% of Point of Sale (POS) terminals were deployed by the five largest acquirers. The major third party processors active in the market are SIA Central Europe, First Data and Euronet.
Differentiating FactorsReflective of Hungary’s under-developed card payments market, clear competitive advantages have not emerged between issuers with the exception of the main services on offer. MasterCard and Visa both offer debit and credit cards while American Express only provides credit and prepaid cards.
Zoltan Sipos, director of cards and electronic payment channels at Budapest-based Erste Bank, tells Cards International: "There are no major differentiating factors in the market. Citibank and Cetelem are more focussing on credit, while the rest are basically all-round providers of standard Visa, MasterCard debit and credit cards. OTP has an exclusive agreement to issue Amex cards in Hungary".
Describing Erste Bank’s electronic payments strategy for the coming 12 months, Sipos says: "The focus is on credit card sales and an additional, related priority is to increase usage and activation of cardholders. Our product propositions are giving us a good basis to be able to become ‘top-of-the-wallet’ cards. On the acquiring side, cost efficiency and network optimisation are key both to ATM and PoS networks."
"With regard to electronic payments, the goals are to improve netbank capabilities by enhancing customer experience. We are planning to introduce personal finance manager services and we are opening mobile channel capabilities," he adds.Erste Bank has approximately 110,000 credit cards and 830,000 debit cards in circulation in Hungary.POS Acceptance and Card Security Progress
The infrastructure for secure card payments in Hungary has dramatically improved over the past eight years reflecting the industry’s commitment to crack down on fraud. The proportion of cards and acceptance devices compatible with EMV chip-and-pin technology has risen many times over and fraud levels have plummeted as a result.
Between the final quarter of 2004 and the second quarter of this year, the proportion of debit cards fitted with EMV microprocessors rocketed from 6% to 79% . Over the same period, the proportion of EMV-enabled credit cards jumped from 2% of cards to 70%. Likewise, the infrastructure to recognise chip-and-pin has become widespread. The proportion of ATM machines able to read EMV cards has grown from zero to 100% of all machines in eight years. The number of POS terminals capable of reading chip cards has multiplied from 20% to 99 %.
POS Machine Costs
Compared to the merchant costs of processing cash payments, the costs incurred by using POS machines are considerably lower. A survey of costs published by the Hungarian Central Bank this summer calculates that the average time consumers spend on individual card payments at POS terminals is 35 seconds and the cost of time spent on all card payments is HUF0.73bn.
The biggest costs recorded with the use of POS terminals relate to the replacement of paper rolls in POS devices and the time cashiers spent on comparing transaction slips with cash register data. MNB estimates that it takes an average of 6 seconds per day for retailers to replace paper in POS devices costing merchants HUF 8.4m. The estimated total cost of paper consumed in POS terminals was HUF109.26m in 2009.
The number of shops accepting MasterCard and Visa cards increased at a rate of 19 % annually between June 2005 and June 2010. Following this pattern, the number of POS terminals increased by 14 % annually from 42,000 in the first half of 2005 to 72,000 in the first half of 2010.
However, the number of POS terminals and transactions per card is comparatively low when compared to other countries. In 2008, there were 6,055 POS terminals per million Hungarians, compared to 16,314 in the EU. The number of payment transactions per card was 18.3 compared to 37.9 in the EU.
NFC and mobile
Technological advances have extended towards contactless payment processes such as mobile and Near Field Communications applications.
More than one million payment transactions were processed using NFC chip-embedded wristbands piloted at three popular music festivals in Hungary this year. In August, Hungary’s State Printing House announced that it had formed a partnership with mobile phone operator Telenor Hungary to pilot NFC-enabled payments next year.
In October, Citibank began offering contactless stickers to holders of its Citi Life, Shell, Citibank and Magyar Telekom Citibank cards. The MasterCard-branded stickers could be used at outlets equipped to handle PayPass transactions.
Ibolya Balint, director of accounts and bankcards product management at K&H Bank, told Cards International that remote payment methods had many applications for Hungarian lives but had yet to gain widespread traction to stick.
"The mobile wallet for remote payments was developed by MasterCard [The MasterCard Mobile] enabling more bankcards to be registered and customers to pay for different services such as mobile top-up, utility bill payments with QR codes but so far, the number of contracted merchants remains limited."
With the number of online retailers growing, Hungarians are turning to the internet to purchase anything from their weekly shopping to home appliances and clothing.
A survey about Hungary’s online spending habits published by T-Mobile and GKIeNET this May revealed that 2.4% of Hungary’s total retail volume, worth HUF 155bn, was spent online in 2011. Some 1.4 million Hungarians made online purchases last year – representing 15 % of the total population.
Food and food-related products had the highest share of online sales volume, while computer products claimed second place. Entertainment products, electronic goods and home appliances were positioned in third place, books, magazines and newspapers took fourth place and clothing took fifth place.
The survey forecasted that HUF175-to180bn could be spent on online retail purchases in 2012, representing 2.9%-3% of all retail sales.
But while web shopping is gaining popularity, consumers are still reverting to the traditional modes of payment: to purchase their goods.
A spokesperson at MNB’s press office told Cards International that "a large part of online purchases are still paid for in cash when the goods are delivered to the buyer. In our opinion, this behaviour can be explained by the lack of confidence in merchants and not in payment service providers. Card payments and credit transfers are also used in some cases for online payments.""In recent years, an increasing number of payment service providers both on the issuer and on the acquirer side started to introduce two-factor authentication and 3D Secure services. These solutions however are not yet used in all online transactions," the spokesperson added.
Balint of K&H echoes this sentiment. He says that people purchase goods online using a variety of payment channels including "cash against delivery, bankcard, transfer and PayPal".
To ensure security, he says it is normal for "banks to issue bankcards for internet usage which are separated from the current account or a sub-account of the current account."
"The 3D method has also started to be applied these days. Citibank offers it to its credit cards, some other banks are working on it and on the acquiring side, nearly all merchants are 3D capable," he added.
Payment Card Fraud in Hungary
The importance of fraud prevention has been underscored during the recession. While rapid migration to EMV chip cards has succeeded in preventing many criminals from withdrawing cash and buying goods with stolen cards, the sluggish growth in card payments means that the industry has to hold onto every Forint it can get.
While card-present fraud has fallen significantly, fraud remains the thorn in the side of the electronic payments industry, swallowing up HUF 502,2m of possible turnover in 2011.
The majority of losses were absorbed on the issuer side, totalling HUF 295.5m, followed by losses on the acquirer side, totalling 127,605,000 HUF, followed by losses on the cardholder side, totalling HUF 79m.
In 2011, there were 11,595 separate instances of fraudulent activity recorded in Hungary. The biggest losses were caused by the misuse of counterfeit cards. Losses for this came to HUF 212.7m with around 80% of losses absorbed on the issuer side. (The value of losses on the issuer side came to HUF 177.2m compared to HUF 32.9 on the acquirer side and HUF 2.7m on the cardholder side.)
The second biggest cause of fraudulent activity was from card-not-present transactions. Some 4,306 instances of this resulted in HUF137.2m of losses. Around 40% of losses were absorbed on the acquirer side, 40% on the issuer side and 10 % on the cardholder side. (The corresponding resulting losses in monetary terms were HUF 67.2m; HUF 62,4m and HUF 7.5m respectively).The network which incurred the greatest losses from fraud was MasterCard. Payment card fraud on MasterCard cards resulted in HUF 321.2m of losses for the network while payment card fraud on VISA cards resulted in HUF 152.8m of losses. Payment card fraud on Amex cards resulted in HUF 28.2m of losses.
The location of fraud was skewed towards cross-border transactions, followed by domestic and interbank transactions. Respectively, these generated 76%, 15% and 10% of fraud.
Cash: the currency of choice
In 2009, an estimated 2,83m cash transactions took place in Hungary, according to MNB. The value of cash transactions amounted to HUF 51,454.18bn (USD237.5bn), representing 12.2 % of the total value of transactions conducted that year and 76 % of the total volume of transactions.
Behavioural factors have been described as a key reason for the prevalence of cash transactions as payment through coins and notes has become established as a familiar and routine part of consumer lives. In addition to the familiarity factor, the cost of making individual cash transactions is actually lower than making a debit or credit card payment by virtue of the large economies of scale possible with high volumes of cash transactions.
An in-depth report by MNB analysing the social and private costs associated with each of Hungary’s dominant payment channels revealed that the cost of paying by cash is HUF 73.66 (USD0.334), a fraction of the HUF 201.13 incurred using a debit card and HUF796.18 for a credit card payment.
Payment methods unique to Hungary
In addition to the commonplace use of cash for everyday transactions, Hungary’s payment system relies heavily on antiquated payment channels that are both resource-intensive and costly. These are "postal inpayment orders" and "postal outpayments for pensions"
Some 271.48 million postal inpayment orders were submitted in 2009 to the total value of HUF 2,990.43bn, according to MNB. The most commonly used type of postal payment was the standard scheme where money orders were typically processed within two business days.
Households accounted for the majority of postal inpayments – representing 264.64m, with HUF 2,885.26bn while companies represented 6.84m postal inpayments worth HUF 105.16bn.
The cost of processing postal inpayment money orders was estimated at 5.3 % of the costs of cash transactions and represents HUF 0.42bn. However additional costs are incurred in the postal inpayment chain through so-called cash-in-transit companies. The costs of cash-in-transit companies related to postal inpayment money orders in 2009 was estimated at HUF 0.93bn and the single biggest private cost came from the collection and transportation of orders which cost HUF 0.46bn.
The Central Bank estimates that the total cost of Hungarian households relating to postal inpayment money orders was HUF 8.58bn in 2009.
Postal outpayment money orders for pensions
Pensioners in Hungary receive their state benefits via postal outpayment money orders. This complicated payment chain is comprised of multiple intermediaries resulting in unnecessary additional costs. In 2009, the process accounted for the payment of almost 22m postal outpayment money orders for pensions to the tune of HUF 1,541.93bn. The Central Bank estimates that the social cost of postal outpayment money orders for pensions was HUF 6.65bn, 0.03 % of GDP and the social cost of one voucher was HUF 302.39.
Payment Card Circulation Overview Over the past five years, the total number of cards in circulation has increased by little over 3% from 8,6m in 2007 to 8,9m in the first half of 2012. Year-on-year, the number of cards in issue has fallen by 0.48 % from a high of 8,9m in 2011 to the current level, reflecting the slump in consumption driven by frozen public sector wages, increasing taxes and a rash of redundancies.
Although Hungarian consumers have historically exhibited a preference for debit cards over credit cards, the ratio between the two has widened over the past half decade. In 2007, there were approximately four debit cards for every one credit card. Today, there are six debit cards for every credit card.
Another significant shift seen during this period surrounds the market shares of key networks. MasterCard’s market share of cards in issue has grown by a fifth (20.7 %) while the proportion of Visa’s cards in Hungary has contracted by almost a half (42 %).
As a result, MasterCard has seen its market share rise from 66.27 % of the total card market in Hungary in 2007 to 80 % today while Visa has seen a reversal, contracting from holding 31% of the cards market in 2007 to just 18 % in 2012.
In line with the sluggish growth in overall card circulation numbers has been the marginal increase in overall card spend. The value of money spent on cards has risen by 15 % from HUF 3,4m Forint in 2010 to 3,976,543m today.
The relatively slow pace of growth in numbers of Hungarian debit cards reflects muted domestic consumption driven by a weak economic outlook.
Over the past four years, Hungary’s unemployment rate has spiked, taxes have been raised and consumers have had to endure four rounds of austerity measures in the same number of years. Because much of Hungary’s growth prospects rely on the export sector, recovery from its present slump is heavily dependent on the speed of GDP output growth in European countries such as Germany – Hungary’s number one exporter.
Yet in spite of the fiscal challenges faced by the government, the number of debit cards in circulation rose 12 % over the past five years, reflecting the payment channel’s resilience. The number of debit cards in issue as of June 2012 was 7,6m and the biggest share was held by MasterCard, with 6,1m cards. Visa, by contrast, controlled 1,4m cards.
While NFC technology has yet to take off in Hungary, contactless payments are available via four of MasterCard’s seven debit card types available in Hungary. Some 14,038 MasterCard Standard, 14,038 MasterCard Arany, 60,928 MasterCard Electronic and 14,802 Cirrus/Maestro enable customers to make contactless payments (This represents 5% of all of MasterCard’s debit cards).
Contactless payments have some way to go before they are being carried out by significant portions of Hungarian society, but the increasing number of debit cards, POS terminals and added safety of EMV-enabled technology are expected to catalyse a gradual mass-shift away from cash to debit card transactions.
This is not to say debit cards don’t incur their own costs. The Central bank estimates that costs relating to debit card payments were HUF 16.64bn on the issuer side in 2009 with major contributing costs coming from the processes of acquiring new customers, gaining licenses for Visa/Mastercard and Amex cards, undertaking transaction (non payment) processing and the management and monitoring of activities.
On the acquirer side, the costs relating to debit card payments in the payment service provider sector were HUF 7.94bn in 2009. The biggest single cost in this process was the private cost of POS management, which represented HUF 2.26bn, or 28 % of costs. The cost of Visa, MasterCard and Amex licenses and fees was estimated at HUF 1.l3bn, 0.18% of costs.
The number of credit cards in circulation in Hungary has fallen by almost a quarter over the past five years from 1,6m to 1,3m. The cost relating to credit card payments on the payment service provider sector on the issuer side was HUF 17.85bn, according to the Central Bank. Customer acquisition and auxiliary services provided to customers accounted for a significant share of total costs, over 30% combined. The cost on the issuer side equals HUF 706.15 per transaction.
The significantly higher unit costs of credit card transactions on the issuer side compared to the corresponding cost for debit card transactions reflect much higher costs for individual underlying activities and the economies of scale afforded to debit cards (ostensibly 7 million debit cards compared to 1 million credit cards).For example, the unit cost of acquiring new customers for credit cards was calculated at HUF 155.94 compared to just HUF 11.98 for debit cards.
This was attributed to the costs of educating potential credit card holders in know-how relating to credit card products. The cost of credit risk analysis is also understood to be more than 40 times as expensive, costing HUF 41 for credit cards compared to HUF 0.74 for debit cards. Further, issuer banks spend more on the advertisement of credit cards than debit cards because the issue of credit cards is more profitable than debit cards.
Based on unit costs, cash is still perceived as the cheapest payment instrument in Hungary although, in the long-term, this trend may change, as the enhanced security and convenience factor of using plastic cards begins to increase the volumes of debit card transactions, thus creating the economies of scale to lower the overall unit prices.
The relatively cheap per transaction costs of using cash in Hungary are easily explained by the economies of scale such large volumes of cash transactions make possible. Some 2.8bn card transactions take place in Hungary each year while only 175m card transactions take place. Thus, the low unit cost of cash is not attributed to its low total cost of efficiency but rather its high transaction number.
Compared to other European countries, the share of card payments – 7-to-8%- compared to the share of cash transactions, 90 % – is very low. For example, in Norway, 76 % of POS type transactions are conducted on payment cards and 24 % are conducted using cash.
Hungary’s Central bank estimates that if the country were to reach half the level of card payments used at POS terminals currently measured in Scandinavian countries and the number of annual card payment processes were to rise from 150 million to 1 billion that the annual cost of conducting payments could be reduced by HUF11.35bn on a social level. The massive reduction would be realisable because of the higher proportion of fixed costs intrinsic to cash purchases.
By shifting paper-based payment transactions to electronic payment instruments and substituting the delivery of pensions in cash with electronic credit transfers, the bank calculates that further efficiency savings (social costs) could be made to the tune of HUF103bn.
While the savings potential is especially pertinent in the light of Hungary’s present stagnating economy and government deficit, the current time frame before such savings could be realised is 15 years. This is primarily due to the current number of debit card transactions being so low to start with.
Thus the key challenge for card issuers and acquirers alike over the coming months is to raise awareness of the cost benefits of a more card-oriented economy. With more card-friendly policies in place, the vast potential of Hungary’s electronic card payments system stands a chance of being fully realised.