The mature markets of Europe know their cards. With strong infrastructures in place, they have begun to expand their horizons, introducing tighter security controls, contactless payments and biometrics. At first glance, nothing can topple these strongholds, but is everything as it seems? Patrick Brusnahan reports
The United Kingdom, Italy, France, Germany and Spain are five of the most developed economies in Europe, if not the world. With that, comes developed financial markets, one of which being the card market.
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The UK is Europe’s largest and most highly competitive industry for payment cards. It accounted for 17.6% of Europe’s totals transaction value in 2014 and 20.3% of its transaction volume. The market is highly mature with a strong penetration of credit and debit cards. Post-financial crisis, banks and card issuers needed to introduce bespoke offerings to retain their market share.
Younger consumers in the UK are showing a preference for faster and more secure payment options, leading to mobile operators, retailers and other service providers introducing their own payment services. As a result, payment cards are expected to lose part of their market share in the next five years to these alternative payment instruments.
The global economic crisis, added with conservative consumer spending, is expected to help the growth of the cards market in Italy, particularly prepaid cards. However, credit and charge cards will see a decline in usage.
In terms of cards in circulation, there were 116 million cards in Italy by the end of 2013. The channel was valued at $481.6bn with debit cards the largest category in terms of both volume and transaction value.
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By GlobalDataFrance is the world’s most visited country and the third-largest in terms of income generated from tourism according to the Central Intelligence Agency (CIA). Approximately 80 million foreign tourists visit France each year.
With regards to cards in circulation, France recorded a CAGR of 3.2% between 2009 and 2013, driven by the prepaid and debit card categories, with CAGRs of 6.84% and 5.95% respectively. Credit and charge cards recorded a decline in market share, attributed to this result of the financial and European debt crises.
Despite the economic slowdown, the German card payments industry recorded growth between 2008 and 2012 with a CAGR of 3.56%. That totalled 247.6 million cards in circulation with a total transaction value of $668.2bn. Changing lifestyles and an increase in online purchases and disposable income helped with this growth.
Contactless technology
When one thinks of regions that have adopted contactless technology with aplomb, the United Kingdom immediately comes to mind.
Contactless cards were introduced in the market in 2003 and, by 2014; there were nearly 58 million of them in circulation, accounting for a 36.3% share of the market.
Most leading banks in the UK – including Barclays, Capital One, Clydesdale, American Express, MBNA, HSBC and Royal Bank of Scotland (RBS) – are offering payment cards with contactless features.
The ease of making quick payments using contactless cards has helped contactless’ rise in popularity among both consumers and retailers in the UK. This has led to an increase in the number of retail outlets accepting contactless payments.
This, in turn, enabled consumers to opt for card-based payments. To further encourage contactless payments, the UK Cards Association is increasing the spending limit from the existing £20 to £30 from September 2015 onwards. However, retailers can also decide to forego the spending limit if added authorisation is provided, such as a PIN code or biometrics.
The Deutsche Kreditwirtschaft’s launched an initiative to imbed debit and credit cards with contactless technology and major operatives, including the German Saving bank Association, MasterCard Paypass and Visa Europe have embraced this.
Germany’s retail sector has successfully migrated to EMV technology, which aids the adoption of contactless payment systems.
In 2011, the German rail transport company Deutsche Bahn launched its Touch & Travel mobile ticketing service. This allows users to check-in and check-out at rail stations which the use of NFC cards, or 2D barcodes on smartphone devices. In 2013, Shell entered into an agreement with Visa to introduce contactless Visa cards.
In France, a partnership between Banque Accord, BNP Paribas, Credit Agricole, and Natural Security (a user-authentication technology provider) launched a pilot project in October 2012, combining a smart payment card, biometrics, and mid-range contactless communication.
The pilot was completed in March 2013 with the participation of over 900 consumers. The response was overwhelmingly positive and over 90% of users were in favour of adopting the payment method.
Italian consumers have accepted contactless cards with open arms. As a result, Telecom Italia and Visa Europe extended their partnership in 2013 to increase acceptance.
With this programme, Italian customers will be provided with Telecom Italia Mobile (TIM)-branded Visa cards that will enable selected consumers to make contactless payments at compatible POS terminals with certain smartphones. The spending limit is 25 without entering a passcode.
In addition, BNL, a subsidiary of BNP Paribas and MNO, an Italian mobile network operator, implemented NFC-enabled technology.
The prepaid cards market
Italy has one of the largest prepaid card markets in Europe with a startling 45.5 million prepaid cards in circulation in 2013, representing a CAGR of 23.68% over the previous five years.
The popularity of prepaid cards is due to Italian consumers being more inclined to controlling expenditure and education the public on the benefits of prepaid. Italian legislation is also playing its part and is pushing prepaid card adoption. E-payments were made mandatory for amount above 1000 at the end of 2011.
Prepaid cards are expected to record to highest growth prospects, both in terms of cards in the market and transaction value. In terms of volume, a CAGR of 17.42% was predicted between 2014 and 2019, while seeing a CAGR of 13.41% in transaction volume over the same period.
The open-loop segment is also expected to rise in volume and transaction value in that time with CAGRs of 16.91% and 12.47% respectively.
French banks are focusing on prepaid card to drive growth. They are doing this through innovative marketing strategies. These consist of reloading options, personalised gift cards and product bundles.
La Banque Postale offers a personalised non-rechargeable gift, aimed towards 12-year-olds and above and can be preloaded with an amount ranging anywhere between 40-799.
Prepaid cards in France recorded a CAGR of 6.84% between 2009 and 2013. This was mainly due to strong growth registered by closed-loop cards with saw its own CAGR of 10.78%. In terms of transaction value, prepaid cards increased at a CAGR of 5.71%.
In the United Kingdom, prepaid cards gained popularity following the financial crisis and banks offered a wide range. These include youth, transport, fuel, and shopping and remittance cards.
British companies are increasingly looking towards prepaid cards for their employees, either for reward and recognition schemes, to manage expenses or to pay members of staff that do not have a bank account.
In an attempt to increase prepaid’s reach to low-income groups, prepaid card company Pockit introduced in 2014 a card that can be loaded online free of charge. This prepaid MasterCard costs approximately $50 a year and includes cashback offers.
As low- and middle-income populations rise, prepaid cards are becoming an attractive solution to pay utility bills and taxes. In addition, students have grown to using prepaid cards to keep an eye on spending with no risk of running into debt.
With Spain’s levels of unemployment growing, consumers are expected to be more cautious with spending.
This has led to expectations that payment cards with high maintenance or annual fees will be cancelled or substituted by prepaid cards, due to their spending limits and benefits such as loyalty programmes.
The volume of prepaid cards is expected to rise at a CAGR of 12.65% between 2013 and 2017 while transaction value is predicted to have a CAGR of 13.35% over the same period.
Cards and commerce
The growing market for online trade in France is a crucial factor in the expansion of the country’s cards and payments industry. E-commerce sales are predicted to increase from 52.5bn in 2013 to 118.3bn in 2018. This is in part due to the low costs, convenience, promotional offers and discounts usually associated with online retail.
In 2013, Worldline, a subsidiary of Atos, signed an agreement with MasterCard for the integration and deployment of MasterPass, a solution to enhance e-payments and digital transactions.
Under this agreement, MasterPass will be adopted by a number of merchants across many countries including Germany, France, Spain, India, the UK and Benelux.
It sends transactions through a mobile device without giving card information at the time of purchase. This solution will work with new technology such as QR codes and NFC. This will help support the adoption of m-commerce in France.
E-commerce value in Spain rose from 6.6bn in 2008 to 12.8bn in 2012 at a CAGR of 18.06%. The encouraging signs in online retail are set to aid growth in prepaid and debit cards with banks expanding their portfolios to include cards with online functionality.
One example is CaixaBank with its Cybertarjeta Prepaid MasterCard made specifically for secure online payments.
Despite economic crises, Germany’s retail sector performed well and saw growth between 2008 and 2012 as retail sales turnover grew from 405.2bn to 432.2bn. This value is expected to rise even further by 2017, hitting 482.7bn.
M-commerce growth in Germany has been possible in Germany due to high levels of smartphone and tablet penetration, the development of mobile-friendly websites, shopping apps and the fast delivery of goods by e-retailers. Mobile commerce turnover reached 7.2bn in December 2012.
With advanced safety and security measures coming to the fore, such as secure PIN systems, virtual credit cards, virtual keypads, one-time passwords, and dynamic passwords, the use of financial cards for mobile commerce transactions in increasing.
Increasing internet penetration and improvements to telecommunication infrastructure has led to online commerce becoming very familiar to German consumers.
The use of video and social media for enhanced product presentation and e-commerce services is also fuelling growth. Online retail sales grew by 24.8% in 2012. Card purchases account for the highest CAGR (22.8%), increasing from 2.6bn in 2008 to 5.8bn in 2012.
Italy’s internet penetration increased from 48.8 million people in 2009 to 54.9 million people in 2013, creating a great opportunity for e-commerce.
Despite Italy having one of the lowest internet penetration rates in Europe, its young population is pushing higher levels of use.
This is being aided by the Fibre for Italy project, created through an investment partnership between Fastweb, Vodafone and Wind.
The project aims to provide internet coverage to over 20 million people by 2015. Telecom Italia is also expecting to increase its connection to 138 cities by 2018.
Retail sales, which grew from 315.3bn in 2009 to 324.3bn in 2013, is set to be an important driver for the cards market. It is predicted to have an even larger impact as its value reaches 353.2bn in 2018.
At the top of the pile for e-commerce is the United Kingdom. It posted a CAGR of 16.02% between 2010 and 2014, going from $90.4bn to $163.7bn.
While the UK is a smaller consumer market than the US, Germany, China or Japan, its shoppers tend to spend more online per person.
According to digital marketing research company eMarketer, B2C online sales in the UK averaged $3,585 per individual in 2012. It goes on to say that UK shoppers make 13.5% of their purchases online.
That is higher than their counterparts in Germany, the US or South Korea, some of the world’s most digitally active regions.
By 2016, online retail is expected to make up 23% of the UK’s total retail sales, up from 13.5% in 2010, according to the Boston Consulting Group. This would be the highest proportion of any of the G20 economies. The rise has been attributed to rising online and mobile penetration, high consumer confidence in online transactions and the increasing presence of online gateways.
Customer retention tactics used by retailers have played their part in this rapid growth.
Customised emails to consumers based on their spending patterns, display ads on products and services, social networking and on-site personalisation features have enhanced the shopping experience and held onto consumers.
Younger members of the population have a strong inclination for mobile devices and online-media use, providing ample opportunity for e-commerce companies.
Security and regulation: From interchange to biometrics
In July 2014, the European Commission (EC) published proposals to regulate card payments across Europe by creating a new inflexible interchange rate.
Under the EC’s proposals, interchange fees for debit and credit card transactions in the EEA are capped at 0.2% and 0.3% of the transaction value respectively.
All cross-border transactions in EEA member states will have to comply with the caps.
The caps will also apply to centrally acquired transactions, for example, when a merchant contracts with an acquirer established in another EEA member state, the central acquirer will pay a 0.2/0.3% interchange fee.
In the second phase, after 22 months, all domestic transactions are capped at the same level.
Commercial card interchange fees are not subject to the cap, but are subject to the other provisions.
Europe Economics stated that the UK card issuers could lose revenue of up to $3.8bn and cardholder fees would be by up to $17.3 for debit cards and $39.3 for credit cards. Large retailers would save up to $3.5bn and there was no evidence that these savings would be passed onto the consumer.
Spanish banks have taken steps to offer enhanced security on cards and enable their consumers to take part in a greater number of online transactions.
Many already offer cards with chip-and-Pin technology for in-store payments, while for e-commerce; banks have implemented the MasterCard SecureCode and Verified by Visa programmes.
With these new security features, debit and credit card usage is expected to rise over the next five years.
French supermarket chains, such as Leroy Merlin and the Auchan Group, have begun to utilise biometric payment systems for security. Customers can make payments through the system by scanning their fingerprints instead of a card.
An exchange of data takes place between the card account and the fingerprint reader as soon as the customer places their hand on the scanner, resulting in very high levels of privacy.
In an attempt to reduce cash-based transactions and tax evasion, the government banned all cash-based transactions over 1,000 in 2011.
The effort came as a move to plug the approximate 100bn tax loss Italy suffered every year as well as an additional 10bn lost every year processing cash-based payments.
This cap is expected to increase the scope for card payments and encourage businesses to switch to card-based payments.
As a member of the EU, Italy adopted EMV standards to ensure card security. According to figures from EMVCo, Italy falls into the Europe Zone 1 category, with an EMV card adoption rate of 80.7% and an EMV terminal adoption rate of 94.5% in 2012.
The Bundesbank in Germany decided to outsource more of its cash recycling facilities to private companies.
This is likely to make cash transactions more expensive in the near future.
Cash would become less attractive for retailers, as cash handling services were previously free or subsidised, and cards will most likely become more used.
