Despite having one of the highest payment card
penetration rates in Europe and an internet-savvy population,
Iceland’s payment players would appear to be in hibernation mode –
at least until the country’s economy recovers from the kicking it
received in October 2008, as Victoria Conroy

After all that has happened to Iceland’s economy over the past
year, is there any hope for card players in the country, or has the
payment industry been frozen in time? Although Iceland’s economy
makes for a gloomy backdrop, the lack of a domestic payment scheme
has given Visa and MasterCard a space in which to grow, and card
numbers continue to rise even as spending is being hammered.

Until Iceland’s economy gets back on its feet from the kicking it
received in October 2008, it is to be expected that there will be a
distinct inertia in the country’s payment industry until new bank
reorganisations and ownership structures settle into place. It is
also worth noting that Iceland has had its share of regulatory
intervention when it comes to the payment industry. Despite these
issues, a young and well-educated population and a booming interest
in e-commerce should stand card players in good stead for the
future, once funding and liquidity constraints are removed.

As of 2008, around 92 percent of the population aged 16 to 74 used
a computer and 91 percent used the internet, according to
Statistics Iceland, with 36 percent of internet users in that age
bracket ordering goods or services over the internet – the most
popular goods and services purchased relating to travel and

Debit Card Statistics

Payment card usage trends

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Considering it had a population of only 319,368 as of January 2009,
Iceland has achieved the impressive feat of having one of the
highest rates of payment card penetration in Western Europe at 2.8
cards per person. Despite a GDP growth rate of -3.8 percent in
2008, GDP per capita in US dollars is one of the highest in the
world, reaching $41,700 in 2007 and $39,900 in 2008, according to
The CIA World Factbook.

In tandem with the growing economy, all forms of electronic
payments grew significantly year-on-year during the past decade,
with growth rates accelerating during the period 2005 to 2007 in
particular. As of December 2008, the central bank of Iceland stated
that there were around 251,000 active debit cards in circulation
and 235,000 active credit cards.

Credit cards in Iceland are charge cards in all but name, with card
balances usually paid off in full at the beginning of every month –
however several charge/credit cards offer fixed repayment periods,
usually up to 36 months. Revolving credit cards made a late entry
into the Icelandic payment market and there are relatively few on
offer, given that APRs are currently around the 19 to 22 percent
range, and that consumers tend to use their current account
overdraft facilities as a back-up credit line when needed, due to
the lower interest rates charged.

Annual fees are common for all forms of Icelandic charge or
revolving credit cards and can range from ISK5,000 ($39) for a
standard or classic card to ISK23,0000 for platinum cards. Minimum
repayment fees are around 5 percent of the outstanding balance on
revolving cards. Cash withdrawal commission fees are typically
between 1.5 percent and 2.3 percent for domestic cash withdrawals,
and upwards of 2.5 percent for overseas cash withdrawals. There are
also separate withdrawal fees which usually range between ISK50 and
ISK150 for domestic withdrawals and IKS400 for overseas withdrawals
for some issuers.

Debit card annual fees range from ISK350 upwards and unauthorised
debit card transactions can incur penalty fees of ISK100 upwards,
with late payment fees (over 7 days late) rising to the ISK500 to
ISK600 range. There are no cash withdrawal transaction fees on
debit cards.

Debit cards are by far the most popular form of payment card in the
country, with debit card turnover, including domestic and overseas
turnover, rising from ISK418 billion in 2006 to ISK432 billion in
2007, a rise of 3.2 percent. Between 2007 and 2008, however, debit
card turnover fell by 5.4 percent to ISK410 billion, but the month
of October 2008 saw a ISK9.4 billion surge in debit card usage,
attributed to a consumer flight to cash withdrawals – not
surprising given the economic circumstances at the time. According
to the central bank of Iceland, average withdrawal value per
transaction rose sharply compared to average monthly withdrawal
values. But the central bank also noted that without this temporary
spike, the fall in overall debit card turnover would have been
around 8 percent. As of March 2009, debit card turnover was ISK28.4
billion, a fall of ISK2.6 billion or 8.5 percent compared to the
year-ago figure.

In 2007, credit card turnover rose by ISK43 billion or 17.9 percent
from 2006 to ISK282 billion, with ISK36 billion of the ISK43
billion figure being domestic transactions and around ISK7 billion
in transactions abroad. The rate of growth from 2007 to 2008 fell
to 10 percent, totalling nearly ISK311 billion. Figures for March
2009 show a steeper decline of 16.3 percent compared to March

Payment card volumes have risen as cheque usage in Iceland has
dropped dramatically, with cheque transaction volume falling by
nearly 23 percent from 2006 to 2007 to ISK162 billion from the
year-ago period. Cash volumes have also dropped, with the amount of
cash in circulation relative to GDP recorded at just one percent as
of 2007, compared to around 5 percent in 1961. However, 2007
actually saw a rise in cash usage, increasing by ISK1.2 billion to
ISK15.7 billion.

Not all cards issued in the country are chip and PIN, with the
country’s leading banks preferring to issue magnetic-stripe cards
on some offerings, most notably their debit cards. As Iceland is
not part of the European Union (and by extension SEPA), banks in
the country have made only halting efforts to migrate to EMV,
although newer card launches are increasingly incorporating the

Payment networks


The lack of a national debit scheme in Iceland meant that the
international schemes of Visa and MasterCard quickly secured
strongholds in the country. Visa Iceland, part of Visa Europe, was
established in 1983 for the issuing and acquiring of Visa debit and
credit transactions. Visa does not issue its own credit cards but
processes the issuing of Visa cards in Iceland on behalf of
Icelandic banks and savings banks. During the period 2003 to 2007,
Visa Iceland grew significantly in the e-commerce area thanks to
the implementation of multi-currency processing, and in 2007, the
decision was made to change the company name to Valitor.

MasterCard has been present in Iceland since 1980 and claims to
have issued 18 different types of Eurocard or MasterCard cards to
over 60,000 cardholders, both private and institutional. MasterCard
stated that every minute, about 26 transactions are made by credit
cards issued with the MasterCard brand in Iceland. MasterCard also
claims to have a market share of 29 percent in the Icelandic credit
card market.

Previously, each scheme’s transaction acquiring was carried out by
a dedicated acquiring entity jointly owned by Iceland’s major
retail and savings banks – Visa Iceland (now known as Valitor) for
Visa and Kreditkort for MasterCard. The year 2006 saw further
changes in the acquiring market due to ownership changes.

In 2006 Glitnir (now known as Islandsbanki) acquired a majority
stake in Kreditkort, the MasterCard acquirer. In 2007 Kreditkort
was divided into two separate entities, Kreditkort and Borgun.
Borgun provides domestic merchants with acquiring services for
MasterCard, Maestro, JCB and American Express brands, and also
provides Icelandic issuers of MasterCard and Maestro cards with
processing services. In 2007, Borgun began offering acquiring
services to international e-commerce merchants.

In 2007, Borgun’s merchant base grew by 3.34 percent, with total
transaction volume acquired through merchant accounts rising 13.8
percent to IKR147 billion. The number of transactions processed
through the company’s processing systems was 32.3 million, which
represents an increase of 8.4 percent from the preceding

Kreditkort holds a Principal Member MasterCard licence in Iceland
and also issues its own credit cards. Commercial banks and savings
banks, who also issue MasterCard and Maestro in Iceland, do this
based on an Affiliate Member licence with MasterCard International.
Kreditkort is also an agent and local acquirer for Diners Club,
American Express and JCB in Iceland.

Kreditkort started its operation as a separate accounting unit on 1
July 2007 and offers private customers, corporations and
governmental agencies various credit card services as well as
payment and collection services. Its total number of issued credit
cards increased by 27.45 percent to reach 71,507 cards in 2007.
Total cardholder turnover, however, remained at a similar level as
in the preceding year, at IKR36.3 billion.

The closely intertwined nature of the Icelandic payment card market
has drawn the attention of the country’s competition authorities,
which view the market as being especially hard to enter by foreign
banks, evidenced by the fact that up until late 2008, there were no
foreign banks present in Iceland.

However, 2002 saw the entry of the first cross-border acquirer into
the market, PBS of Denmark which, in conjunction with independent
sales organisation Korta, offered Icelandic merchants payment
settlement two working days after the card transaction has been
acquired, with what it claimed was a better rate than seen before
in Iceland – standard settlement period for credit card
transactions in Iceland has been between 15 and 45 days.

The entry of PBS and its link to Korta proved to be troublesome.
The duopoly in acquiring was immediately threatened – although Visa
Iceland and Kreditkort were not in competition with each other,
both of them were threatened by PBS, which acquires both Visa and
MasterCard transactions.

Visa Iceland rejected Korta’s involvement in the processing of
Electron debit cards and established several national rules
providing various conditions for cross-border acquiring of Visa
payment cards in Iceland, mainly involving special arrangements in
Iceland consisting of facilitated payments, in full or instalment,
on debt from credit card transactions. Kreditkort also established
rules in a similar manner for the issuing and acquiring of
MasterCard transactions, but these conditions were not as stringent
as those of Visa Iceland.

Following an investigation by the Iceland Competition Authority, in
early 2008 it was announced that Visa Iceland and Kreditkort had
admitted to non-compliance with the Competition Act and would pay
combined administrative fines of ISK735 million following a
settlement agreed between all parties. However, Visa Iceland was
singled out for criticism, having admitted to abusing its dominant
position in the market to target a new competitor.

Credit Card Statistics


Iceland’s economy

Much of Iceland’s economic growth in recent years came as the
result of a boom in domestic demand following the rapid expansion
of the country’s financial sector during the period 2004 to 2007,
enabled by cheap funding available on the global credit markets. As
a result, the Icelandic banking sector boosted its assets from 100
percent to nearly 900 percent of the country’s GDP between 2004 and
2007, with the three biggest commercial banks – Kaupthing, Glitnir
and Landsbanki – representing around 85 percent of total banking
assets in the country.

However, the events of the past year have shown all bubbles
eventually burst. It was this snowballing level of debt that would
prove to be the undoing of Iceland’s economy, as its financial
system swelled to such a size relative to the country’s GDP that it
became particularly vulnerable to impacts related to foreign
exchange-linked debt and bond sales, given that Icelandic banks had
financed their expansion with loans from the wholesale global
credit markets. According to the central bank of Iceland, the
country’s banks needed to refinance €35 billion in foreign bonds by
2012, including €17 billion in 2009 and 2010.

It is estimated that as of 2008, the Icelandic household debt ratio
to disposable income was equivalent to 230 percent, which was
tracked by rising interest and inflation rates which only
exacerbated the problem. As if this situation was not precarious
enough, domestic banks had offered consumers and businesses
extensive foreign currency loans, in the form of mortgages, car
loans and so on. The emergence of the credit crunch in mid-2007
resulted in the Icelandic kroner depreciating rapidly against other
currencies. All of these factors combined to bring Iceland’s
financial house of cards tumbling down as banks found themselves
unable to refinance their debts. As the year 2008 progressed, the
government and the central bank could not guarantee repayment of
the banks’ debts, which led to the government taking control of and
nationalising Iceland’s leading banks in October 2008, a seminal
moment for the country’s economy as can be seen from the immediate
spike in funding costs, interest rates and inflation as investors
pulled out of Iceland in their droves.

Ripples have spread out from the collapse of the financial industry
to all facets of Icelandic life. Over 2008 and since October of
that year in particular, unemployment has shot up and is expected
to continue to surpass 10 percent during the course of 2009,
although it appears that conditions in the international wholesale
credit funding markets are easing slightly. Current economic
forecasts predict that Iceland will face two years of contraction
before economic growth picks up in 2011.



Islandsbanki (formerly Glitnir but rebranded in February 2009)
offers a range of internationally-branded debit and credit cards in
various formats such as silver, gold and platinum. In 2007, Glitnir
launched a copycat version of Bank of America’s highly successful
‘Keep the Change’ debit programme, with Glitnir launching a new
deposit account allowing customers to round up debit card purchases
and put the difference into the deposit account.

Glitnir also launched a new loyalty scheme, Vildarklúbbur Glitnis,
with the main objectives being to reward loyal customers with
points for using the bank’s services, and to facilitate
cross-selling of the bank’s various products and services. As of
2007, around 7 percent of the club’s members were new


In its 2007 annual report, Landsbanki stated that it had become the
first Icelandic bank to roll out prepaid gift cards with sales
exceeding initial expectations. A year after they were first
launched, Landsbanki reported that every major shopping centre in
the country had signed an electronic gift card agreement with the

Market research carried out by the bank in 2007 stated that it had
a market share of debit card turnover of 28 percent and credit card
turnover of 27 percent. The year 2007 also saw Landsbanki roll out
a new credit card loyalty programme called Aukakrónur.

While other bonus programmes reward credit card clients with
Icelandair air miles or a MasterCard travel bonus cheque.
Aukakrónur participants receive rebates on all card turnover with a
large number of participating companies. This credit can be
redeemed at any time through a variety of options, and no
substantial sums need be accumulated.


Kaupthing Bank in Iceland offers a range of Visa and
MasterCard-branded debit and credit cards, including a cardless
payment account enabling customers to make automatic bill payments.
As with most credit cards in Iceland, Kaupthing charges customers
an annual fee for its internationally-branded credit cards, ranging
from ISK2,600 for a classic card to ISK19,500 for a platinum

Kaupthing offers one of the few rewards cards still available in
Iceland, the Gold Awards card, which offers air miles with national
air carrier Icelandair, travel, health and trip cancellation
insurance, and holidays to select destinations or tickets to
special events. The annual fee for this card is ISK8,900 plus a fee
of ISK1,500 for enrolment in the Icelandair Award programme.

Kaupthing’s platinum card also offers Icelandair travel benefits,
plus free admittance to airport lounges. In co-branded cards,
Kaupthing offers a gold and platinum ‘golf’ card in conjunction
with the national golf association. The financial crisis of late
2008 led to Kaupthing taking over the entire operations of savings
bank SPRON, including its debit and credit card operations.