At its recent annual Debit and Prepaid Conference,
MasterCard Europe’s head of debit, Eric Tomlinson, spoke to John
Hill about the recent European Commission interchange ruling, and
also his view of the European debit market.
MasterCard Europe has been the subject of much controversy over the
last few months as it fought a new European interchange ruling. An
uneasy compromise has been reached over the matter but MasterCard
has made clear its intention to fight on.
Eric Tomlinson, group head of debit at MasterCard Europe, talks
about how the interchange ruling will affect the debit card market,
why contactless payments still have a way to go before they are
widely accepted, and what the current economic climate is going to
do to end card payment structuring as we know it.
CI: How does MasterCard view the threat of Visa’s rival
debit scheme V-Pay?
ET: I think we see it as a significant threat. At the moment it’s
difficult to take it on as a proposition due to the acceptance
side, and obviously fraud is a critical issue in Europe and it’s
not going to go away anytime soon. The trade-off on fraud is that
the higher the security, in general the lower the acceptance. With
Maestro we had the same problem, as acceptance wasn’t as great as
it was on MasterCard.
The question is: where is the sweet spot that’s going to be of
greatest benefit to the consumer and still be acceptable to the
issuer? It’s a timing issue. How do you find it, right at the point
that chip and PIN is being rolled out? Visa quite frankly didn’t
have an option. They didn’t have the option of the online PIN, and
they didn’t have the infrastructure that Maestro had built up over
the last 14 years. What V-Pay does do, quite apart from being chip
and PIN and as such a high security product, is it copies Maestro
in many other ways, which makes it more acceptable in the European
market. It’s going to be a serious threat when you’ve got a full
chip and PIN world.
CI: How do you view the current progress made by EMV
globally, especially the reluctance of the US to implement the
ET: It’s not just technology holding the Americans back – their
whole business case works on a totally different basis. Whereas in
Europe we’ve invested heavily in chip and PIN, in the US they’ve
already invested heavily in all of these other fraud tools to make
magnetic stripe cards work, and they’ve got the situation where
they get much better revenues out of a signature transaction than
out of a PIN transaction. They don’t want EMV to happen.
The bottom line is that EMV is a totally valid proposition if you
want a Europe-only card, a SEPA-compliant card. We believe
technically it would be a step backward. There’s nothing stopping
Maestro from being a chip-only card – it works totally in a chip
and PIN environment only without a magnetic stripe. We are just
hoping and looking for different ways of doing that, for example
with our inControl proposition, where you still have the full
capabilities but you can switch off the international as you want.
That basically leaves the magnetic stripe on the card but you can
completely deactivate it for international transactions and
internet transactions, or you can get SMS alerts if you don’t want
to deactivate. We think that that gives the same level of control
without taking away the level of acceptance.
CI: How has the recent interchange ruling affected
MasterCard? How are you looking to adapt if the changes suggested
by the European Commission become permanent?
ET: From a debit point of view, that the levels suggested are
pretty much where we feel the debit interchange should be, it’s not
a disaster at all. We tried to set a SEPA-wide interchange rate
about four or five years ago and the rate that we came up with was
pretty close to what the Commission has come up with for their
cross-border rate. So even if that became a domestic rate that
would not be a problem.
I think all of the concerns that we have are about the rate not
being sufficient from a credit perspective, so it’s a different
story as to how it might affect credit economics. Having said that,
from an economic point of view, debit is in the very fortunate
position of still being able to grow structurally as transactions
move over from cash. Every single year there’s almost built-in
growth coming from cash. While debit only accounts for about 20
percent of the total in Europe, it varies from country to country.
The ratio is moving up by 1 or 2 percent a year, which is already a
built-in growth of 5-10 percent in your business, and there’s not
that many businesses that boast built in growth before any other
features, and that’s structural growth.
The other thing is that debit is almost immune to swings in the
economy because it is very much targeted as day-to-day spend,
non-discretionary spend, and while there is some impact, it is
nowhere near what it is on consumer spend. So with those two
things, the debit profit and loss is still pretty much
CI: With the current economic situation, how important will
payments become to a financial institution’s bottom
ET: I think what you’re going to find is that the banking groups
are going to be looking to the retail bank to pull it out of the
mess they’re in, and more specifically they’re looking to the
deposit gathering parts of the bank to give them back some kind of
capability to lend, and that’s where I think the debit card comes
People underestimate the role of the debit card, which is still
seen as just a utility to access money. We’re trying to change that
view, so that it’s not just seen as a piece of plastic to access
your money, but as the only tangible thing which you have as your
core relationship with your bank. If you ask someone where his bank
is, it’s not where he has his mortgage or where he has his credit
card, it’s where he has his current account, and how often does he
even visit the bank? About every nine months when he goes into his
local branch. But he uses this piece of plastic every day.
We’re trying to examine ways to expand this relationship – how do
you drive your bottom line profitability through payments? There
are several ways to do it. One is by deepening your relationship by
encouraging better usage, knowing more about your customer, getting
them to use the card more, and perhaps better offers, but also
broadening out your relationship through cross-selling. In terms of
cross selling, in the US you have all the technical capability of
doing it, but not the data, whereas in Europe you have all the data
and banks there just haven’t switched onto it yet. But Europe is
the perfect market to do it.
CI: Would you say debit is more important in Europe or the
ET: I’d say it was more important in Europe, though probably not in
terms of direct profitability because the margins for debit cards,
with interchange fees as they are, are not necessarily that high.
But in terms of usage in relation to your debit card versus your
credit card, your credit card is probably less than 20 percent of
payments, whereas debit cards are more than 80 percent of payments
in Europe. That’s completely different even to the UK where you’d
have closer to an even split or maybe slightly more on debit. This
is probably the same in the US. Also, the credit you get in Europe
isn’t really traditional credit – there’s very little revolving
CI: How is MasterCard looking to move small value payments
onto debit card?
ET: The most obvious example is contactless, but even that doesn’t
go down to the very low payments. I think contactless will take a
lot of that share when it rolls out, but the roll-out is obviously
slow, although we will get there, there’s no question of that. In
Poland for example, we’re doing a pilot on their transfer to ‘tap
and go’ using PayPass, but it’s slightly different. There’s still
no CVM (card verification method) but there are rules around it, as
well as a €25 maximum transaction spend.
CI: What would you do to speed up the roll-out of
ET: One of the ways is transit. It’s just a problem trying to pull
it together, and there are the same problems we had with SEPA, with
all these proprietary schemes all over the show, none of them
talking to each other, all of them own it, and none of them trying
to give up their piece of the pie. However, things are coming
together. Transport for London (operator of London’s public
transport system) has now recognised the need to move onto
contactless technology which they are doing in a couple of years’
time. It makes a huge change when someone like that does it. Slowly
people are beginning to see in Portugal and about five or six
different countries that the local transport authorities are
beginning to set it up, but it’s going to take a long time. It’s
going to be great, because the technology was out and working fully
years before they started implementing it.
CI: So contactless needs more cooperation between
ET: It’s not really the contactless card providers, as that was a
little backstreet industry that started a long time ago before
MasterCard came up with its standard and then agreed with Visa on
the standard that we would go with. Although, going back to the
transit systems, for the metro in New York City, that is a
completely proprietary system. All we do is have PayPass on the
chip to pay for it.
On the other hand, we have applications with Hong Kong’s Octopus
scheme which we are integrated with, and in Korea we have a system
that we own outright that we developed with the Department of
Transport, where the payment application is totally integrated with
the transport application. The new Oyster system will be totally
integrated when they redo that in a couple of years’ time. So it’s
going to take a long time to get everybody to come together and
define that, although if something like Oyster gets going, it’s
something that will be looked at by the world.
CI: Are mobile pee-to-peer payment systems in the
developing world something that could evolve in parallel to debit,
or as a precursor?
ET: I think it is going to be more of a precursor to debit. I don’t
think you’re going to get the same infrastructure, as the banking
infrastructure’s going to take a long time in its own right. There
are some countries that are getting a strong middle class emerging
that are now opening up current accounts. I think you’re going to
find that before you get there, you’re going to get a prepaid kind
of environment with a prepaid account, but using a similar
structure that’s all going to be based on mobile technology. You’re
certainly not going to get back to land lines, so to that extent
there’s a lot of work being done with the mobile technology.
The other thing that I think is going to take a huge stride forward
is money transference from person to person, phone to phone, card
to card, whether it’s number to number or using our infrastructure,
whatever it is. Technology isn’t going to be the problem here. The
real problem is building the infrastructure around it from a rules
point of view and from a legal standpoint.
From a US point of view the problem is of course with the Patriot
Act and money laundering. Making sure you don’t fall foul of these
things with any new communication corridor you open means it’s not
just a case of ‘we’ve got rules, we’ve got the product, so do what
you want?’. For instance, imagine a route from Afghanistan to
Pakistan – it’s very difficult and there’s a huge amount of work
that goes into opening up the corridor, such as making sure you
know your customer and putting all the limits in place.
Having said that we’ve done five or six fully up-and-running
corridors and we’re now at the stage where we can say ‘how do we
institutionalise this?’ By that, I mean that you don’t just take on
each case as a separate project, but it’s a case of ‘how do we roll
this out?’ You can’t just launch a product as there’s so much
action behind the scenes. But it’s going to happen, and we’ve seen
volumes growing. In Europe we’ve only have one or two small
corridors that we’ve opened in the last few months, where we’ve
been putting the resources in place and having a full-time team
opening that up.
CI: As many banks attempt to recoup their losses, how will
the payments aspect of their business change? Will it be the end to
the ‘free banking’ you have in some countries, like the
ET: You don’t get anything for free, so to this extent you have to
analyse where the banks are making up for losses: on hidden things,
on the cross-border transaction which everyone’s complaining about,
and most importantly they’ve been making them up on compliance
fees, so there are ways and means of doing it.
The problem now, and this is just on the payments side, is that
everything is free; the free banking and free transactions and
everything else. The problem that you have now in the very low
interchange world is that you need to start rethinking the whole
business model. The way that we worked before was like this: I’ve
got a new product, how much do I think I’m going to ask the
merchant to pay for my new product? And if the merchant pays that,
can I give it to my consumer for free? The days of that are gone,
and even if it is legitimate, and we believe the merchant should be
paying his fair share, that’s not the argument. If the regulation
says you’re not going to be able to charge the merchant, even
legitimately, then that particular model is finished.
The other model was a European model which was almost a closed-loop
system. There is no risk, there is no float, there is no credit. It
is a utility and that is one of the reasons why the merchants have
never seen a reason why they should pay for it. I think with the
interchange coming down, in a utility model, what you’re going to
find is that you are going to have to adopt this system. In other
words, the payment is there but the interchange is going to cover
just the benefit to the merchant, as defined by the Commission,
which is what you otherwise would have had to pay in cash. Whether
you agree with that definition or not, that’s all it’s going to pay
and nothing more.
So then you’re going to have to think, what is my new business
model, who should be paying for all this, where are the benefits?
There are real costs the issuer is bearing in issuing the card, in
maintaining the card and so on, and I think what’s going to happen
is you’re going to get more and more polarisation in the credit
card area as well as the debit card area.
When it comes to the pure payments, you’re going to find no such
thing as a freebie. You’re going to find absolute consolidation
which is absolutely low cost and highly efficient. You’re going to
rule out any floor limits, everything is 100 percent authorised, it
will be all chip and PIN, fraud will be absolutely cut to a minimum
– if there’s anything that constitutes fraud, all the rules will be
tightened up, so the risk reward that you used to be able to get
will go and it will come down to a genuine no-frills payment
Then what you look for is ‘who’d pay for anything more?’ because
it’s not going to come out of the pure payments model. Then you
start looking for value-added services to the consumer and they
will have to be genuine value-added services, things like our
inControl safeguard for example, which offer the ability to switch
features off and on when you travel. If the customer wants anything
extra at all, he has to pay for it, but we’re not forcing anything
on them. So, nothing is for free, as everything is paid by the
user. The consumers won’t like it, but they are going to have to
learn to live with it unfortunately.
MasterCard Europe’s first quarter 2009 results
MasterCard Europe recorded a rise in transaction volumes as it
released its operating results for the first quarter 2009.
The processor reported sustainable growth in gross euro volume, up
3.9 percent, as well as an increase in purchase volume of 4.2
percent, purchase transactions of 6.4 percent and a rise in cash
transactions of 4.3 percent compared to the same period in 2008.
European cardholders made over 1.5 billion purchase transactions
with their MasterCard cards in the first quarter.
The company also expects several pan-European contracts it closed
during the quarter to contribute to the ongoing business: the PASS
card was released in partnership with French retail giant
Carrefour, a new joint venture with Accor Services called PrePay
Solutions combining electronic and prepaid payments, a mobile
payments service with French telco Orange, and the implementation
of PayPass in Poland alongside ING Bank Slaski.