Europe, Edgar Dunn & Co and The UK Cards Association joined
CI and other industry experts for an in-depth discussion
on the outlook for cards and payments over the next few years.
Despite current economic difficulties, there is plenty to be
Cards International had the
pleasure of hosting its first cards industry roundtable in April,
in conjunction with business consultancy Grant Thornton, in which
we invited a broad array of industry players across the entire
cards value chain to discuss the prospects for cards and payments,
how profitability can be protected in the current economic
environment, and what we can look forward to (or brace ourselves
for) in the future. The following article is an edited version of
what was said and discussed.
Victoria Conroy, editor of
Cards International: The European payment market is
dominated by debit payment, but as CI research has shown,
over recent months, cash withdrawal levels have shot up as
consumers have become fearful about their finances and the safety
of their banks. Consumers have been driven by a flight to safety,
with cash seen as the safest payment method in times of
There is also a lot of political pressure at
the moment on protecting consumer rights, especially when it comes
to banking fees, so that also begs the question of how to persuade
consumers to begin paying for services that they have come to
expect as free of charge.
On credit cards, payment volumes are still
growing, but the market has become much less competitive in recent
years with a lot of issuers shying away from the recruitment of new
Question to Jim Rowley: How
would you sum up the issues currently facing the cards industry
with the current economic backdrop?
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Rowley: The Grant Thornton report on the
economy makes for bleak reading. But we are at the bottom, and
during 2010 there will be improvements.
The concern I have is that the whole of the
Western world has been built on consumer finance and credit cards.
Consumers are used to taking out an unsecured personal loan, credit
cards, and then remortgaging once credit lines are used up and that
is how it has always operated.
There was around £200 million-£250 million
($292 million-$366 million) worth of second mortgages being granted
not so long ago, but now that is around £10 million a month. The
fact is property has dropped off 20 percent over the last year. All
of these customers can no longer get financing and they have
nowhere to go.
Now the music has stopped with the housing
market slump, and the credit card companies are left holding the
baby. Those customers with cash might as well pay off their credit
We may not see have seen all the bad debt so
far, as it will likely increase over next 12 months with an
increase in unemployment expected. If that is the problem, you have
to think of the solution. If that is the business model, how do you
turn that into profit?
Sanders: For some people, disposable income
has been reduced significantly.
We’ve also had one or two years of rampant
media attention on banking charges, so when finances are tight,
consumers are budgeting more carefully than they have in the past,
and nowadays cash is a pretty safe answer. The free banking paradox
may well be pushing some people towards cash, and there may be a
point at which the economics won’t stack up.
At the moment, in a world where disposable
income is under pressure and where your credit card company is
going to charge you or your bank will for going over your agreed
limits, one way of making sure you don’t break your budget is to
rely on cash. Things are a little polarised though.
Those people who are in work have generally
not had it as good for quite a while. But for those people who
don’t have lots of disposable income, their cost of living has
increased, energy prices are still high, and pay rises have been
For this group, many are feeling relatively
stressed and some of those people will be budgeting very carefully.
Some people will be holding the pound notes in their hand. It is a
case of paying off what you can from your savings and navigating
your way through.
Question to Dickie Davies:
With recession now here and with credit issuers slashing credit
lines and being much more cautious, is it realistic to say that the
credit card industry is unlikely to return to the profitability
levels it enjoyed before? Or are there any areas (such as
co-branding) which are likely to enjoy continued
Davies: I do not think it is beyond the bounds
of possibility. In 1990, Barclaycard made a loss due to credit
losses, but the business came back again. The credit card business
is cyclical, issuers could look at other sources of income (e.g.
annual fees) and credit losses will come down at some point.
Customers are looking for more from their credit card.
Van Dyke: It is a value play and people will
move back to value. But how long can the industry sustain zero
percent balance transfers?
Rodgers: The death of free banking has been
held up as one way of restoring some balance in bank finances. I’m
sceptical though! On the one hand, at a national economic level,
there is going to be a need to recoup the public debt. But we are
barely more than 12 months from a general election in the UK and I
think the politicians will keep the pressure on perpetuating free
banking in the UK. I hear all the arguments towards banking being
charged for in the UK, but I think there are major reasons why it
might not happen.
The concept that cash is free is also a
fallacy. The banks are essentially offering a free cash service in
the UK, but now they are quite substantially owned by the
government, these costs will be increasingly recognised by the
Treasury and the Bank of England. While it is not the norm, people
are willing to pay for using ATMs. They go to independent machines
and get charged £1.50 for the privilege of using them. The value in
terms of convenience and service needs to be communicated.
In the debate about contactless cards and
cash, it is cheaper for retailers to take cash until you take cash
out of the equation completely, because the fixed costs of cash are
Schloenvoigt: Britain has been free for a long
time, whereas across Europe there are a selection of fees. Consumer
expectations play a major role.
In Germany, you have to pay up to €5 ($6.6)
for cash withdrawals, and it would be very difficult to introduce
similar charges in the UK. There are many examples in the world
where banks charge consumers for certain activities.
In South Africa, consumers paid more for using
a branch than for other distribution channels, or in Denmark,
consumers had to pay initially a fee for using ATMs during
out-of-office hours. It is about how you communicate the value to
Marsh: You still have this phenomenon where
the retail community can go to the press with some justification
and say cash is cheaper for them than cards. It is because it is
subsidised. At some stage, someone has to get to grips with the
cost of cash.
Question to Kahina Van Dyke:
How will the possible end of free current account banking in the UK
affect card issuing business models, given that banks are already
under severe profitability pressures? Will we likely see an
increase in the number of card-related fees?
Van Dyke: In Germany, the Czech Republic,
Hungary and Russia, people will pay for services they find
valuable. If you develop something that people like, they will buy
For example, several contactless pilot schemes
in the US have retailers reporting a reduction in labour costs. To
have a global payment infrastructure, you have to have standards,
and we have that now. It is time to be a little more creative.
In places where GDP is 25 percent of what it
is in the UK, they will buy a credit card for $40 and they will
push all their spending through that card.
The opportunity for the UK is to go back to
where we were 15 to 20 years ago. The retailers are not the enemy;
they are the front line and the people who interact with our
customers. I signed several deals, and people asked me, “What are
you going to pay me for my customers?” instead of, “How are we
going to be more collaborative to deliver better value to our
Question to Mark Sanders: TDX
Group is a leading provider of analytics-based debt management and
you recently issued some statistics that stated there will be a 50
percent increase in people seeking formal debt solutions in 2009.
What impact will this all have on the cards market?
Sanders: We get to see around 80
percent of individual voluntary arrangements (IVAs) proposed in the
UK and we provide debt management plan administration services for
our clients as well. Lately we have seen a removal of refinancing
alternatives for consumers.
Historically, the middle class
consumer way of solving a debt problem was to go and borrow more
money and stretch the length of the agreement: credit card, loan,
second mortgage, remortgage. Now, remortgaging has been
significantly reduced so people unable to service their debt no
longer have the solution of rescheduling payments. We have seen a
growth in IVAs and debt management plans as a result.
A key issue for card issuers therefore is how
to discern between those who are creditworthy and those who are
over-indebted? And how do you know that a proposed debt solution is
the right one? A third point is how you generally think about
managing charge-offs in your businesses. There will be an increase
in losses and a big driver of that will be unemployment.
For companies that win in this environment,
they will be thinking about the kind of services they provide to
customers to help them manage through difficulty. It is interesting
to note that around 90 percent of people who seek out a structured
solution to their debt problem take the solution from the first
provider they talk to, whether it’s an IVA, or a player who does
debt management plans.
For credit card companies that are subject to
UK accounting regimes, there is work to do in understanding the
true value of assets on the portfolios. One of the challenges is
that as the composition of debt changes, how do you understand what
it’s really worth. In the debt sale market there is a disconnect
between the banks’ book values and the real value. That is one
disconnect. In addition with the growth in the number of debt
solutions being proposed, how do you understand the true value of
options for customers who have got into financial difficulty? The
smart guys will be the ones who understand the true value of the
options and manage their customers accordingly.
Rowley: UK unemployment is due to go from 2
million to 3 million. The people in that position just won’t have
the money to pay. The banks and credit card companies will now go
and sit down with the consumer and help them.
Sanders: One of the challenges is the
perennial problem of those who can’t pay versus those who won’t
pay. There is evidence of a reduction in the ‘contactability’ of
the delinquent customer as multiple creditors try to secure payment
from them. You have to educate your delinquent customers, and there
is a very uncertain and fluid outlook for the next year.
Question to Michael Hutko:
Vanquis Bank provides credit to people who are having trouble
finding finance. With unemployment increasing and debt soaring,
your service must be more important than ever for many customers –
how do you manage the demand against the risk? How do you feel
about the proliferation of companies soliciting borrowers to demand
penalty fee refunds, payment protection insurance mis-selling
claims, and debt enforceability challenges?
Hutko: I think this is a macro issue
more than a micro issue. In terms of demand out there, it still
exists. There is reduced demand in some segments but increased
demand in others. HSBC and RBS are all going for ‘prime’ customers,
and as they move out, we move in. We are getting better responses
than a year ago, although the definition of what is prime has
Rowley: The acceptance rates were between 20
percent and 30 percent for prime – near-prime and subprime are now
the main market and prime is the niche.
Hutko: Regulatory burdens have gone up. We are
seeing a proliferation of these marketing companies who are looking
for mis-selling of payment protection insurance plans. They are
using the Financial Ombudsman as a threat. The message from these
marketing companies is: ‘If you don’t make an offer to us, we’ll
make a complaint that will cost you £500 from the Financial
Ombudsman regardless of the outcome.’ The problem is the vexatious
claims. It is an extortion process.
Conroy: In the UK market, we are
seeing more and more banks engaging in pre-emptive customer
advisory activities that are designed to make those banks appear
more friendly and more approachable to customers who may be in
Sanders: Two major banks I know of are talking
to their customers. The biggest challenge is the false positives
that come from consumers: ‘I’m struggling. Can we drop my interest
rate and take a break?’ You can run the risk of offering up
something you did not need to that costs you money.
Penn: Prepaid is a huge area that needs to be
catered for. The peripheral third-party players saw the opening in
the market and jumped in. If the mainstream card issuers like
Barclaycard had seen that, they could have serviced the industry a
bit better. There is a real need for prepaid that could be met by
mainstream issuers and could help us move towards that cashless
society. Prepaid is the real answer for a lot of people.
Question to Paul Marsh: EMV
was viewed as a sure-fire way to cut down on card fraud and to some
degree it has succeeded. But it has also helped to push fraudsters
towards areas where EMV is no defence, such as card-not-present
transactions. Is the card industry guilty of doing too little, too
late, and is there a basis for exploring other anti-fraud methods
such as biometric technology?
Marsh: It was a sure-fire way and it has
succeeded. Lost and stolen rates are at their lowest on record. If
we exclude cardholder-not-present fraud, then UK domestic fraud is
half what it was in 2004.
We have always been interested in biometrics
but one issue is the false rejection rate. So it is a real card,
the right person, but faulty machinery. Biometric technologies with
a high false rejection rate are not suitable in retail locations
such as a Saturday afternoon in Tesco.
The second point is international acceptance.
EMV is still not fully rolled out in many regions. Given that EMV
is still being rolled out, we’re not so interested in biometrics
that duplicate the functions of EMV.
Is the card industry guilty of doing too
little too late in the card-not-present environment? Roll-out of 3D
secure authentication, with services such as Verified by Visa and
MasterCard SecureCode, has been slower than originally hoped,
despite the protection against liability for fraud losses it gives
to retailers. However the positive signs are that things are now
moving faster, with registration of UK cards at 2 million a month
and 40 million cards now registered.
Penn: The important thing is perception. EMV
has totally delivered what it was set out to deliver and 3D secure
is starting to deliver the same for internet payments. But the
fraud problem always moves to the next level. We now desperately
need something to clamp down on mail-order fraud.
Marsh: The parting shot is about the mobility
of the criminal community. To dodge EMV, we have seen they’ve moved
on somewhere else: it’s Canada for ATMs and to the US for point of
sale fraud. Fraudsters move as and where it suits them. The answer
is EMV but we need to take a missionary approach to the Western
world. Europe is committed to full implementation by 2010. But it
is an uphill struggle with certain domestic markets.
Rodgers: Isn’t the real challenge for
governments that they should be shamed by the level of
collaboration? It’s taken a war on terror to find that terrorism
has been funded by credit and debit card fraud. There is an army of
fraudsters internationally that seem to be able to operate together
but this isn’t matched by international fraud prevention
Question to Connie Penn:
Connie, you have done a lot of work with companies that are trying
to become PCI-DSS compliant. How close do you think companies are
getting to being totally compliant, and what are the current
barriers to achieving compliance? Do you think that the standard
has gone far enough to protect against fraud?
Penn: I am project managing PCI for a major UK
retailer and we have now started our PCI audit.
My client is in a good position with regards
to compliance because they already stringently adhere to the ISO
27001/2 security standards, so I have ensured that we comply with
PCI by making PCI a subset of their ISO 27001 framework and part of
their overall security posture.
In terms of other merchants, I belong to the
British Retail Consortium PCI Group. It includes 25 of the top
retailers in the UK. Most are struggling with PCI because unlike
the company I am working with, they do not have a security standard
to align with, so many are starting from scratch.
The standard, which started out as too
disjointed and too prescriptive, is now a rather good road map to
help merchants formalise their approach to protecting data. But the
thing that is very much overlooked in terms of the whole area of
PCI is that following the standard and getting the Record of
Compliance is not going to protect the card data from fraud and
PCI-DSS is no substitute for a secure
environment. By just aiming to reach compliance, merchants will
likely fail to be secure.
However, if merchants look to their legal
requirements to protect personal data as required by the Data
Protection Act, which includes credit card data as well as personal
data, and build their systems and networks securely and ensure they
have enforced strong security processes and procedures, they will
more easily achieve compliance and will in fact exceed the
requirements of the PCI-DSS standard.
If anything, the mistake the card schemes made
with regard to enforcing PCI-DSS is that they initially ploughed
their own furrow. They should have drawn their acquirers’ and
merchants’ attention to the fact that personal data has to be
protected and one of the primary standards that helps build a
framework to make sure that data is secure as the ISO 27001/2
standard. Then they should have identified card-specific policies,
processes and procedures that were required in addition to the
Is the standard enough? The answer is no, it
is not, because a standard alone, however stringent, will not
prevent fraud and compromise. What is required is a
security-centric approach to card data as part of a merchant’s
obligation to protect personal and card data, which should be done
as part of their overall security posture. The standard has gone
far enough, but must not be expected to stand on its own. If we
don’t protect our data, the whole card industry will implode on us.
When Visa and MasterCard say: “We will fine you if you don’t do
it,” then we will get focus.
Rodgers: I am encouraged by the level of
collaboration that has taken place through organisations such as
EMVCo, and the PCI Security Standards Council. Sometimes the
regulators don’t value this industry self-regulation as much as
The fundamental concept is: “What is
regulation for?” Surely it is to establish confidence, stability
and best practices in an ecosystem.
In March, when Hector Sants made his “be
afraid, be very afraid” speech, it was clear that the gloves were
off. But fear should surely not be the primary motivator of
regulation – that smacks of the school bully. Unless government
regulators really understand the dynamics of this market, then
we’ll be faced with a very difficult situation.
Equally, if the cards and payments industry
wants to be self-regulating it must win that right; something that
it is singularly failing to do at present.
Question to Volker
Schloenvoigt: Contactless and mobile payments are now being
introduced to the UK and European payments market, although
progress appears to be slow so far. What are the reasons for this –
is it reluctance on the part of consumers and merchants, or is it
squabbling between various industry participants over how to
structure models and share revenues? What needs to be done to move
Schloenvoigt: While there is talk of
conversion, I think it is still necessary to look at mobile and
contactless cards separately. On the mobile side, there is a lot of
activity. New players emerge and even incumbents like RBS and
Deutsche Bank in Germany are seriously looking at it.
Anyone who has ever experienced migrant
workers in Dubai using their phones, downloading applications to
their phones and sending stuff to each other, will see the
potential for mobile.
These people were doing many things on their
phones and they are so comfortable with it. It is this leapfrogging
of technologies that will make mobile possibly more successful in
developing countries where you don’t have to worry about existing
infrastructure. In developed countries, there is also a
Contactless is not a new product, it is a new
data transmission mode. Therefore I would not see show-stoppers on
the issuing side. One key for contactless to succeed is the
merchant side. If you can not convince the merchant, it will not
work. Just throwing contactless technology at the retail community
will be difficult as the value proposition for contactless is very
different for different merchant segments.
For example, there are merchants for which
cash handling is cheaper than cards and the cash substitution
argument will not convince them, but the reduction in transaction
In many other cases, cash is however more
expensive. But I think contactless will succeed within the next 18
to 24 months.
Penn: It is most likely we’ll see less of a
gravitation to contactless payments and mobile here in the UK in
the immediate term. There will be more interest in contactless in
the emerging markets.
In the UK, we led the market and electronic
processing at the point of sale, now that we have a mature
electronic environment there isn’t the same need for mobile payment
and contactless cards. People like Tesco are not going to be
running towards contactless cards for their mainstream
The thing that will make contactless work in
the UK is renewal of point of sale chip and PIN systems. Merchants
in the UK may have to renew their point of sale chip and PIN
terminals within the next six years, and while that is a big
problem for merchants, when they do, they will pick up devices that
support contactless as well.
Don’t forget the Olympics will drive the
convenience of contactless, in terms of speed through the check-out
for low-value and self-vent products.
Van Dyke: Developing a contactless ecosystem
is ideal when you introduce it into the transit system, and then it
expands out, like the Oyster card in London or the PayPass
MetroCard in New York City. ‘Tap and go’ behaviour is what you’re
trying to get to the customer used to.
We need to be more innovative. The stand-alone
payments products don’t drive the profit and loss accounts of major
banks. Customers are expecting more than we’re giving. In the US,
retailers are pushing contactless cards so that they can do
self-service checkout. And key retailers have removed purchase
limits to encourage and enhance customer usage of contactless
Question to Paul Rodgers:
Vendorcom is a membership organisation which represents key
stakeholders in the cards and payments industry. Its primary aims
are to promote innovation and thought-leadership; what would you
view as being the most positive innovations to have occurred in the
payment industry over the last few years?
Rodgers: The level of innovation compared to
some industries is pretty poor. When you look at how the industry
operates as a whole, we just have not seen true innovation in the
same way that, for example, the mobile GSM Association has promoted
in the mobile phone arena.
There is a bigger market to be established
around more coherent standards and best practice. As a specific
example of innovation, the OnePulse card from Barclaycard (a
combined transit, contactless and credit card) has stolen a
In terms of the real experience on the ground,
we have to communicate innovation to the merchant and the
cardholders better or it becomes meaningless. We also need to
nuance the messages around innovation.
Any individual solution is not a panacea for
the whole market. A healthy dose of reality is helpful too;
sometimes you can innovate until you’re blue in the face, but there
will be resistance to leading-edge propositions that are little
more than solutions looking for problems.
With the breakdown of the traditional,
hierarchal influence structures in cards and payments, we are
beginning to see grassroots collaborative approaches deliver a more
radical ‘bottom-up’ model that will be a positively disruptive
force in the introduction of new technologies. Increasingly
connected with retailers and merchants, these alliances will
deliver solutions that are truly fit for purpose.
Schloenvoigt: For many banks, payment was not
top of their agenda. The contribution of payments in the bottom
line was overshadowed by other banking activities in recent years.
Whatever money was given to the payments practice was very often
eaten up by making products or processes compliant with regulations
and industry standards (EMC, SEPA, etc). When you take that money
away, there is hardly any left to put towards innovation.
Cooper: It is easy to look at Web 2.0 as being
a point solution. To me, Web 2.0 is purely another channel, and
there is a lot more cost and complexity in the marketplace. For
other people, Web 2.0 is the way to go.
What it will drive is not a reduction in costs
for marketing but actually an increase. Banks and issuers will
start to look at this and really have to evaluate who they do their
It does not change any of the dynamics of the
market that we are in. It is exciting, it is sexy stuff, and it is
part of an answer.
The question for the industry is not what they
use this technology for; it is whether they are capable of moving
it in the right way.
Question to Jim Rowley: Jim,
any final thoughts that you would like to share with the group
Rowley: There are a lot of troubles
ahead but because of that companies will be forced to innovate
because their backs are to the wall. To be as profitable again, we
will also be forced into innovating again, which can’t be a bad
Conroy: It is a very difficult time now. But
it represents an opportunity for those players who are nimble and
responsive enough to adapt their business practices and really pay
attention to what customers want. It is not all doom and gloom at
all. Now more than ever the industry needs to collaborate.
Round table: Attendees
The Cards International/Grant
Thornton Roundtable participants were, in alphabetical order:
• Victoria Conroy, editor, Cards
• Richard Cooper, marketing
• Dickie Davies, head of business
and partnership development, Visa Europe
• Michael Hutko, commercial
director, Vanquis Bank
• Paul Marsh, director, The UK Cards
Association (formerly part of APACS)
• Connie G Penn, managing director,
Kilrush Consultancy Ltd
• Paul Rodgers, chairman,
• Jim Rowley, head of consumer
credit, Grant Thornton
• Mark Sanders, UK managing
director, TDX Group