It has been over two years since Visa last staged a gathering of its European bank members and during that time, the payment industry has experienced a number of significant developments that will undoubtedly shape the future of European payments. There have been the long-running debates over interchange, the migration from cash to cards and the development of contactless and prepaid cards.
Most notably for Visa’s members, Visa announced its intention to restructure into a publicly traded company, with the exception of Visa Europe which will remain as a membership association model.
Peter Ayliffe, Visa Europe’s president and CEO, began Visa Europe’s 2007 membership conference by listing the progress that Visa has made over the last two years. “The rate of change has been breathtaking,” he said. “Card payments are now woven into the fabric of consumer life – there are now 45 Visa cards issued every minute, and the rate of change is accelerating cash replacement. Visa cards currently account for €1 [$1.35] in every €9 spent in Europe – by 2015, we want to see that figure becoming €1 in every €5. We want to be the world’s most trusted currency.”
Visa restructure on track
Ayliffe told delegates that Visa’s restructure was on track to be completed within the previously announced 18-month timescale, and that Visa Europe’s decision to remain as a membership association would help to drive collaboration efforts as the European payment industry gears up for the implementation of the Single Euro Payments Area (SEPA). “We are at a critical stage of European payment development,” he said. “With 36 national environments, there is no such thing as the common consumer. There are different bank motivations which will require greater collaboration efforts. Our membership model enables that collaboration. Payments need to be developed by European participation in order to deliver business value at the customer and bank level.”
Referring to the tussles that Visa has had over interchange with European regulators, he added: “SEPA needs a common legal basis – the challenge now is for consistent implementation of regulation in member states. With regards to interchange, there is much uncertainty, and the industry needs certainty that regulation will respect the economic model of interchange. We need to engage in constructive dialogue with the regulators – the alternative [of having interchange reduced by regulators] means too much for us to lose. We are determined to keep Visa commercially viable.”
Carol Walsh, executive vice-president and general counsel at Visa Europe, continued the regulation theme with a session that addressed the most pressing legal concerns facing banks and the payment networks as they contend with regulatory interference.
Walsh said: “With interchange, we at Visa have won quite a few battles both nationally and internationally, but the war does rage on. As a financial institution, how can you create a successful SEPA and cashless payments for all when there is no legal certainty?”
Walsh outlined the main objectives for Visa and its members: continue to encourage demand and the usage of cards in Europe; set interchange at realistic levels at a rate that covers the cost of issuers’ business but enables them to invest in new payment services; implement a stable, long-term solution; and lobby for consistency of regulation applied to all member states and systems, so that competition isn’t distorted and no system is put at a commercial disadvantage.
Walsh said that a political agenda was underpinning regulation in the payment industry. “The industry is in an impossible situation,” she said. “We need to engage with regulators while at the same time protecting business economics.”
She noted that MasterCard had chosen to take a more combative approach to the regulators, but she stressed that Visa Europe would endeavour to seek a “negotiated outcome” on the issue of interchange. However, she added that Visa has only a limited window of opportunity to achieve this, given that its interchange exemption, which was previously negotiated with the European Commission (EC), expires at the end of 2007. “There is a real benefit to having a negotiated settlement, rather than protracted litigation. Decisions made over the coming months will have a significant impact on everyone within the payment industry,” she said.
“Although these decisions are being made at the European level, they don’t necessarily act as the benchmark for the whole region – there can still be national differences. There are eight national inquiries at varying stages and with different results, but the payment industry is being expected to create SEPA. If we’re going to do that, we need joined-up thinking and action at a national level.”
Constructive dialogue crucial
Walsh reiterated the economic benefits of interchange, and said that the risks of it being regulated meant that a constructive dialogue with regulators was crucial. “What lessons can we take away from our experience with regulation so far? Interchange is the lifeblood of the four-party payment system. It gives economic value to our members and it accounts for some €5 billion every year, and that’s just with Visa programmes. If we get this one wrong – if interchange gets cut back to the bone like in Australia, or eliminated altogether like [European Commissioner for Competition] Neelie Kroes was suggesting – the consequences could be immense. Our economic model would be in turmoil.”
The danger of having interchange reduced by the regulators would also fan out into the wider society, Walsh said. “Consequently, there would be little appetite for new products or new investments. And if we’re right with our economic theory, then the card market would contract, which is very funny when governments want us to become a cashless society. Following the European lead, every single national authority would probably dash into the fray and decimate interchange.”
Walsh urged Visa’s members not to take a combative approach when dealing with regulators. “We don’t want any risk-takers or any brinkmanship in this matter, and in these negotiations, at this particular time. When it comes to European competition cases, we have seen some monumental misjudgments over the years. The EC has identified a problem in the Sector Inquiry – it says interchange is too high. It thinks interchange has pushed up retail prices and it wants to make a difference. We’re approaching the matter accordingly. The whole policy of constructive engagement is the best way to secure the best outcome, because when you’re in dialogue, you can influence the outcome, and although perhaps you may not always get what you want, it’s better than waiting to be regulated as has happened in Australia.”
She added: “Crucially, we’re approaching it as a true industry association. We are at a critical point in our industry’s development and we want to provide leadership. We’re not chasing short-term profits – instead we’re trying to concentrate on sustainable, long-term solutions which will protect the ongoing profitability of the card for all card payments, for all European banks. We believe in constructive engagement with the regulators. We think that this is the only way to secure a favourable long term settlement. As we’ve seen domestically, this has provided a solution, albeit a temporary one. We need to do better this time and have a much more effective far-reaching settlement if we can. In contrast, we believe that antagonism, bravado and delaying tactics are dangerous games to play, and could undermine the economics of our entire business for everyone.
“We are constantly challenging regulators with information about the benefits of interchange – something which it appears they are now beginning to acknowledge. We’re also urging them to act fast and give this industry what it really needs – commercial certainty. We’re insisting that the regulators be even-handed. All systems should have the freedom to set their interchange at the most appropriate, most viable level, and none of them should be commercially disadvantaged. Aside from our dealings with the EC, we’re also working with national regulators and encouraging them to think and act in a joined-up way in order to get principles applied across the board. We will challenge in court where we think national authorities are acting unilaterally or abandoning the principles of the EU exemption.”
However, Walsh also said that Visa Europe would be prepared to take a harder approach to the EC if negotiations over interchange exemption failed to bring about a viable outcome. “With regards to our interchange exemption, by the end of this year, we will have a clearer view of where we’re going. If by that time we have not secured a satisfactory agreement, this is where we will modify our approach. When we believe that we have nothing to lose, that’s when we’ll change the rules of engagement. If we can’t get a deal with the EC that will give us certainty, and allow us and our members to run our business in a profitable way, then we’ve got nothing to lose and we will fight to the death,” she said.
“But, right now, we have everything to lose. For the sake of the industry, we believe we should have constructive dialogue and that’s what we will be doing on our members’ behalf.”
Marc Temmerman, executive vice president for SEPA at Visa Europe, then gave delegates a glimpse of what the European payment landscape might look like in five years’ time. “Monumental decisions have been made that will impact on Europe for years to come,” he said. Referring to the recent agreement on the Payment Services Directive, Temmerman said: “Non-banks will be able to enter the payment space. It is inevitable that large retailer groups will become issuers and acquirers. Also, banks are becoming bigger and leaner – they want payment solutions that will work across all markets.”
Consolidation in the payment processing market will also be a major driver for change, he said. “This has happened far faster than anyone thought possible. With more standardisation and harmonisation, this trend is bound to accelerate. To be competitive, processors will need massive scale, and they will want to be more active in acquiring. We’re also seeing distinctions beginning to blur, for instance, between automated clearing house processing and card processing, such as the mergers between Voca and Link of the UK. There is also the matter of pricing. The EC won’t let this go. As the European market becomes more integrated, the differences in price will become more apparent, and at some time in the future, we are bound to see more convergence,” he said.
“It’s clear that in 2012 the payments landscape is going to be very different. So how is Visa preparing for it? At the end of the day, it’s about choice and competition. The traditional value chain is being transformed. No more restrictive arrangements, no more proprietary standards, no more barriers to entry. Visa Europe stands firmly behind the SEPA vision.”
Philippe Menier, deputy chief executive of Visa Europe, addressed the continuing consolidation in the European processing sector. With Europe’s payment industry constantly evolving, no single provider yet has the scale, connectivity or credentials to do everything for everyone, but he said that Visa Europe’s membership model puts it in the unique position of being able to develop a Europe-wide processing solution.
Chris de Smet, head of payments practice at payment research consultancy Unisys, told delegates that the new Europe would provide the greatest opportunities for pan-European processors or global banks – conversely, there would be greater risk for small or medium players. “A diminishing supply of national processors is pushing up acquisition prices,” he said. “And convergence of technologies places new demands on processors. Domestic interbank processors are faced with restructuring, and if they don’t, standing still will mean margin erosion.”
International banks would need to consolidate processing options and invest further in processing platforms. They could also achieve economies of scale by offering processing to others, leading to the issue of outsourcing. The challenge for smaller players would be achieving SEPA compliance – would this lead to bundling volumes with other banks? Most likely in this scenario, he said, would be the smaller players having to outsource processing to third party providers with a pan-European presence.
Financial institutions would also have to expand their business model to incorporate a service model, he said. Banks need to drive cost reduction in all areas and track profitability. “Consolidation in processing is the first stage in processing convergence. Third-party processing expansion into non-card processing is also likely. Also, card schemes may move vertically and horizontally in the payment value chain.” The message, he said, was that banks should see this time of unprecedented change as a chance to build viable new business models.