In the first of two special
reports on SEPA, Louise Naughton looks at the way the European
Commission-led initiative is breaking down barriers and allowing
new players in. But, she asks, is the newest player to enter the
market – PayFair – really able to compete with the dominant global
brands?

Photograph of Dominique Buysschaert, CEO and co-founder of PayFair

One of the main stated goals of the
Single Euro Payments Area (SEPA) initiative is to usurp the duopoly
that card schemes Visa and MasterCard currently enjoy. For decades,
that duopoly has operated free from any challengers or serious
threat to their respective market shares.

While both card schemes have tried
to establish themselves as a European solution, the European
Commission is not satisfied that enough has been done, and it is
looking to SEPA to throw open the doors and encourage truly
European card schemes to make their presence felt.

A fitting way to start an analysis
into the SEPA’s influence on cards schemes in Europe is with Gerard
Hartsink, chair of the European Payments Council quoting Jean
Michele Cortios, former director general of the European Central
Bank: “Visa and MasterCard for the Americans, UnionPay for the
Chinese, JCB for the Japanese but what about the black hole in
Europe?”

The single harmonised European
standard towards which the SEPA and the Payment Services Directive
(PSD) are working, would rid card schemes of the burden of having
to comply with a plethora of different domestic standards, which is
an expensive process, and one that has arguably sheltered Visa and
MasterCard from an onslaught of pan-European card network players.
Step forward PayFair.

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“The European authorities do not
want a paradoxical situation whereby the European Commission [EC] has opened up the European market and there are two non-European
players dominating. This is not their intended goal,” says
Dominique Buysschaert, CEO and co-founder of PayFair.

 

Gradually growing its
market position

The concept of PayFair was born in
2007 and a year later “substantial funding” from a
Netherlands-based family-run investment centre, Janivo, allowed the
project to pick up pace, employing UniSys and Distra as its
technology partners.

October 2009 saw the first pilot of
PayFair’s financial services products in Belgium in partnership
with Colruyt – the country’s largest retailer. It claims it will
achieve 100% acceptance at POS terminals by the end of first
quarter of 2011 – no mean feat for a pilot project less than 18
months old.

While its acceptance may well be
growing at healthy levels, there are no banks committed to issuing
PayFair cards at this time. Is that a worrying fact? No says
Buysschaert. He claims this is normal at this stage, and that
growing acceptance first is essential before they can enter into
positive discussions with banks.

“If banks were to think there is
only one corner shop down the road that accepted the scheme,
PayFair would not be an attractive business case for them,” says
Buysschaert.

As CI pushed Buysschaert
for clarification on the markets PayFair is currently active in, it
became clear he took an unnecessarily defensive stance to the
scheme’s seemingly immature position.

Although no bank commitments have
been announced, there is undoubtedly an overwhelming desire among
the European cards and payments industry for a truly pan-European
card network to change the status quo. It is this desire that gives
PayFair a platform to realise its potential as a competitive
alternative to the international card schemes.

“To be honest, I thought that at
the beginning I had come up with a solution that would be specific
to Belgium, but almost immediately I could see it had potential to
become a European alternative to Visa and MasterCard,” says
Buysschaert.

MasterCard Europe head of debit
Luke Olbrich says, while he is aware of PayFair, it is this lack of
bank commitments that serves to allay any fears of its plan to take
a slice of MasterCard’s market share.

“When PayFair first came on the
scene, it intended to be a retailer-focused organisation,” Olbrich
says. “They found they needed the issuing side and to date I am yet
to hear of any banks that are willing to commit to that.”

In October, PayFair launched
e-lunch vouchers to challenge Accor and Sodexo – the dominant
players in the market. It says its solution stands out from its
competitors by making the prepaid vouchers more attractive to
retailers by waiving the subscription fee.

Retailers are paid on the same day
or next working day at the latest, a stark contrast to other
e-lunch voucher providers, PayFair argues, which force retailers to
wait a lot longer.

 

Bridging the interchange
gap

PayFair claims to set itself apart
from other card schemes in its plan to bridge the gap between banks
and merchants. Never the most harmonious of relationships, a
constant source of tension between the parties is the subject of
interchange fees.

Buysschaert wants to eliminate this
tension by facilitating communication and positioning PayFair as a
neutral player in a “very two-sided market”.

“Our proposition is to have an
interchange fee discussion, just as we would have with any ordinary
commercial negotiation between the party that is providing the
service and the party that is benefiting from it,” he adds.

“If banks and merchants fail to
come to an agreement we can act as a facilitator to allow the
parties to come up with a solution that is acceptable, reasonable
and even attractive to all players.”

As consumer demands for innovative
payment methods increase and markets become more economically
developed, merchants find themselves having more freedom in what
payment method they choose to accept.

As Buysschaert says: “The
acceptance side will no longer accept everything. It will choose
what is the most profitable and interesting.”

Pull quote by Dominique Buysschaert, CEO and co-founder of PayFairCo-branding deals
will also play a part in creating competition at the checkout and
will allow merchants and consumers to select their preferred scheme
at the POS. Buysschaert says this will help keep interchange fees
under control and change the minds of those merchants who criticise
the system. This strategy will also give PayFair a leg up in its
race for market share. “There is always room for competition,” says
Olbrich.

“There are other schemes in the
market – PayFair, EAPS and domestic schemes that are SEPA
compliant.

“If those markets open up and
develop a ‘Monnet environment’, it still allows MasterCard to
capture domestic business.

“As long as it is a level-playing
field and we are allowed to act as a domestic provider alongside a
new third-party scheme, bring it on.”

Buysschaert told CI that
MasterCard has spoken of its interest in co-branding with PayFair
and is more open to the concept than Visa. And this strategy may be
more in MasterCard’s interest than first meets the eye.

The threat posed by a new European
scheme such as PayFair might reduce the risk of competition
authorities seeking to enforce legislation against MasterCard and
Visa in a bid to achieve more competition into the market.

“It is better to have a reasonable
market share than to be obliged by the competition authorities to
reduce your market share to allow others into it,” says
Buysschaert.

Looking forward to next year,
PayFair is gearing up for further pilots in Central and Eastern
Europe – individual countries were not disclosed due to
confidentiality agreements – that will focus primarily on online
and mobile solutions.

Talks are not limited to this
region however. As Buysschaert reveals, discussions are currently
ongoing with issuers in the UK, Italy, Spain, Germany, Romania and
Hungary. He claims Central and Eastern European countries are more
open to a European solution due a lack in domestic schemes.

Hartsink of the European Payments
Council is wary about PayFair’s strategy in Central and Eastern
Europe and feels the scheme may be biting off more than it can
chew.

“Changing consumer behaviour is
very difficult and takes time and money,” Hartsink says. “I do not
know what their game plan is in that respect.”

The big focus for PayFair for 2011
has to be confirmation of bank commitments for its challenge of
Visa and MasterCard’s market share to hold any weight and be taken
seriously.

“[PayFair] had no bank commitments
until now because our product was not ready,” says Buysschaert.

“It is only when it is a finished
product that you can start to have conversations with issuers and
we are in the process of doing that now. Stakeholders we meet are
very surprised we have got to the stage we are at so quickly and
that is one of the main reasons they are interested in us.

“Simply replacing a country’s
domestic scheme with an EMV SEPA compliant scheme is not sexy
enough for consumers; they will just perceive it as another brand
on their card. We need to bring innovation and convenience to
consumers.

“It is a new chapter that is
starting here and we are all waiting to see the reaction of the
consumer to the scheme. We are absolutely convinced the consumer
will find this a very convenient solution as they battle through
paper-based transactions.”

Under the SEPA Cards Framework, as
drawn up by the European Payments Council, which came into effect
on 1 Jan 2008, European countries are obliged to open their
domestic markets to international card networks and migrate all
payment cards to the EMV standard.

The European Central Bank enforced
this initiative with a view to increasing competition and allowing
a truly pan-European card scheme to emerge. Yet it seems that the
unlocking of the European domestic markets may serve to increase
Visa and MasterCard’s dominance in the market.

Since issuers are now able to break
away from domestic networks, they are increasingly turning to V Pay
and Maestro debit products and not, as is crucial for the SEPA
vision, alternative pan- European schemes.

The Netherlands and Finland are
among EU countries that have announced plans to phase out domestic
cards schemes. It is possible other markets will follow suit and we
may see Visa and MasterCard’s presence being felt in place of these
schemes.

No wonder Olbrich is unconcerned
about whether MasterCard is viewed as a true European network or
not.

“I don’t get too worked up about
it,” he says.

“Going from no domestic business
two and a half years ago, we are now seeing quadruple growth in
virtually every country They can call us whatever they like as long
as the business keeps growing.”

As the SEPA ball starts rolling and
gaining pace in the cards market, more schemes may also start to
emerge, threatening PayFair’s position as the European alternative
to MasterCard and Visa.

According to Hartsink, whether it is able to withstand that
pressure depends on how deep its pockets are.