The Market and Public Policy Environment for Card, Internet and Mobile Payments in Europe

1- A difficult political and economic environment

The attention being paid to the Card payments market by the European Commission and national competition authorities, whose aim is to act increasingly and strongly to disrupt the status quo, is one of the major factors contributing to the changes the payments industry is going through.

[protected]This scrutiny needs to be seen against the background of the financial crisis, where the regulation of financial services, including rules impacting payment systems, has become highly politicised. At the same time, the media and general public have also become drivers of policy. Public perception is increasingly forcing companies to rethink how to engage in a more politicised and emotive debate.

The Public authorities at the European Union as well as Member States levels are clearly and increasingly considering that the current anti-competitive bottlenecks existing in the Card Payments sector are preventing the emergence of truly competitive benefiting the general economy, retailers and consumers at large. They are also increasingly making a connection between these bottlenecks and Internet and Mobile Commerce an essential dimension of the future economic growth and competitiveness, noting in particular that the positions and behaviours of banks and card schemes are holding back innovation and new payments products such as Mobile Payments.

And as in cue, the woes experienced by European Banks, the weaknesses of this sector and lack of appetite for innovation and new product developments although of a varying degree depending of which country is concerned and with some exceptions we will discuss later in this post, are clearly not supporting innovation and audacious strategic moves. European policy-makers therefore will have to contend with two countervailing pressures over the next five years: the need to enforce new rules across the board in financial services, while stimulating enough confidence and demand that lending flows back into the economy, in support of innovation and growth.

For the payments industry, there is an opportunity to set out some of the real economy implications of its business model and regain some influence over the political and regulatory debate lost in the crisis years. For participants in the payments sector looking to have a stake in the future legal framework, these seismic shifts mean that they need to engage in a regular and structured dialogue on policy and regulatory issues – rather than purely on commercial considerations with key decision-makers in Europe, on a sustained basis.

2- Regulation: A busy agenda until 2014

The combination of distrust towards the banking industry, the economic and financial crisis, consumer resistance to hidden charges, the irresistible emergence of the digital/mobile convergence ecosystem and the increasingly essential articulation between the physical and virtual / digital retail distribution channels are driving the debate on interchange.

In the wake of the Green Paper on Cards, Internet and Mobile Payments presented and submitted to public consultation in 2012 by the European, the full extent of the possible changes should become apparent during the summer months of 2013, when the European Commission will adopt a wide-ranging legislative agenda including a possible Regulation on Multilateral Interbank/Interchange Fees related to card payments, which will then be scrutinized for adoption by the 27 Member States and European Parliament. The legislative agenda will include other provisions on market access, transparency and possibly on an open, European standard for Mobile Payments.

In parallel, the Commission is continuing and increasing the pressure on competition law-based investigations, with on-going scrutiny of Visa and MasterCard expected to lead to some commitments over debit and credit card rates in the near future.

The legislation implemented in the United States on Multilateral Interchange Fees (Durbin Amendment in the Dodd/Frank Act capping credit cards interchange fees), the first recent moves by US retailers to set up their own innovative payments networks without the banks and card schemes involvements and concerted European regulatory activity are creating a new reality.

Moving away from the debate surrounding interchange fees, the Commission also identified other areas, such as co-badging, the structural separation between card schemes, processing, settlement, clearing and interoperability, transparency and technical standards issues. These are seen as fundamental to solve before the market can become more fluid and optimal, and innovation flourishes.

The Commission will also publish a review of the 2009 Payment Services Directive in June 2013 to adapt it to the new payments ecosystem outlined, alongside a communication on the governance of the Single European Payment Area. Associated with further actions in the field of banking regulations, open technical standards and favourable consideration of strategic developments led by mobile operators and technology providers in the field of mobile payments, the Commission is clearly willing to implement a highly aggressive enforcement strategy to open the market to competition and innovation.

Finally, Member States could implement far- ranging policy actions that either anticipate or complement EU policies. This was demonstrated by the proposed creation of an economic regulator for the payments industry in the UK, in charge of implementing utility-style economic regulation implemented by a new independent regulator (or maybe extending the remit of an existing economic regulator such as the Office of Communications or Ofcom) to the payments market as well as sector specific competition law.

The possible inception of EU/US Free Trade Area negotiations will without doubt add another pressure for changes in the Payments industry, with the aim to promote competition, reduce costs for retailers and consumers alike and foster innovation in particular in the area of Mobile Payments and Mobile Wallets. It is likely that these pressures toward some forms of harmonisation of the US and EU Payments legislations (including the Durbin Amendment in the Dodd/Frank Act) will create additional incentives for the EU to reform of current fees and card schemes structures.

With or without commitments, the changing political agenda in 2014 should keep card fees and innovation in the field of payments high on the political agenda. With elections for the European Parliament in May 2014, as well as the selection and composition of a new EU Commission in Autumn 2014, Brussels will be keen to show citizens how and why the EU acts in their interests. Tangible deliverables, such as the capping and then elimination of roaming charges by 2014 and lowering interchange are clearly tempting targets and low-hanging fruits for EU policy-makers, increasingly seeking legitimacy and recognition.

3- The Payments Ecosystem

As a new set of policy-makers arrives in Brussels in 2014, it is incumbent on the payments industry to educate stakeholders on the evolving nature of the industry and its development. We see a much more complex ecosystem where market players are at the same time cooperating and competing quite fiercely.

Policy-makers understand the essential role that payment cards have played in the growth of e-commerce. Cards have, for many years, been the key instrument allowing customers and users to purchase, sell, subscribe and trade over the Internet – providing the essential infrastructure to support the emergence of new services and new market participants. This transition was further facilitated by the substantial growth of card payments in Europe, where the “plastic- based” economy developed into the principal way for consumers to pay for goods or services.

With their widespread and commonly accepted use in the offline and online world, card payments are currently the predominant force globally. This unique market position reinforces the close links between card payments and emerging innovative systems such as mobile payments, which could underpin new products and services that are drivers of new economic growth.

Mobile payments have the potential to contribute to more socially acceptable banking products such as micro-loans, financing, trading and person-to-person money transfers that can be used more responsibly by all citizens, including those most impacted by economic and social challenges. Mobile payments and banking services developed in emerging markets in Africa and Asia have demonstrated the viability, attractiveness and success of such business models, particularly for the so-called ‘unbanked’.

This growing segment could create new realities for traditional payments market players by moving from the bank account or card-based payment environment to mobile device-based wallets and accounts. This will increase the growing importance of mobile operators and technology companies, combining residual cooperation and increasingly fierce competition between the players of the global ecosystem.

These new realities resulting from both commercial, market and societal evolutions such as mobile device penetration rates, increasing use and role of social media, geo-location and requirements for localised information whilst
on the move) are opening new segments and patterns such as Social Local Mobile (SoLoMo) or Research Online, Purchase Offline (RoPo) that will support a range of innovative new payment options.

The payments ecosystem has now become increasingly complex with multiple players sometimes cooperating and increasingly competing in a fast changing sector. Technology companies and Mobile players (both Mobile Network Operators and Mobile Virtual Network Operators) are frontally attacking the payment market and competing with banks and payments technology providers.

Mobile players in particular have some real assets such as their control of their customer bases, their expertise in dealing with fraud and security issues, their customer relationships management tools and of course the control over the mobile customer accounts (either pre-pay or post-paid that could be easily converted into debit/credit accounts).

Some commentators are reflecting on the disappointing first results of NFC developments in Europe and the low adoption rate of existing Mobile Wallets as the evidence that there is a need for shifting the focus. A number of comments have to be raised regarding some fundamentals aspects of the mobile payments ecosystem, namely a new vision for Mobile Wallets and the importance of the retailers and merchants to incentivise user adoption (including with regard to security).

Mobile Wallets could be one of the vectors for an integrated ecosystem if market players are able to stop focusing purely on technology to rather give priority to customers and users experience. They would also need to develop a truly innovative vision of integrated mobile wallets: a product based on the Mobile devices Sim Cards/handsets that would be much more than a simple virtual purse.

The relative lack of success of Google Wallet or ISIS could be an indicator of what is not attractive for users. The idea of a Mobile Wallet that would be an integrated “Digital Swiss Knife” assisting the user in a large part of his/her life as a digital assistant is a far more innovative proposition. In this instance, the mobile wallet would be used to pay for goods or services, but also integrate a number of personal Identity elements (e.g. including personal ID, personal medical information file, students ID, Social benefits ID, etc.), all payments and store/loyalty cards (with associated added value services around them), a ticketing device, digital keys, etc.

Finally, the fact that a number of major retailers in the U.S. and in Europe have now decided to throw their weights – sometimes together – behind the development of innovative Mobile Payments systems, often breaking rank with the banking industry – are a positive indicator that should sustain a much quicker adoption rate by consumers.

The Payments infrastructures are critical ones and underlying many of our most essential daily activities, with enormous economic, commercial, social impacts. It is therefore not surprising that the payments industry is attracting the acute interests of both policy-makers and market players. Changes are coming in an increasingly complex ecosystem, some market players will find new competitive opportunities for new revenue streams and products, other market players will face increasing challenges and risks. New policy and regulatory agendas will amplify the market and technology disruptions… We will without any doubt follow-up on these evolutions….

Feel free to contact me directly and stay tuned![/protected]

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About jsgourevitch

Jean-Stéphane is the Managing Director, Founder and sole Director of Mobile Convergence Ecosystems Ltd. He is an expert in strategy, public policy, regulation and lobbying in the fields of the Digital Communications ecosystem and convergence with other highly regulated networked industries (e.g. payments/mobile payments, mobile education, mobile healthcare, smart connected living, mobile marketing, mobile content). In the last 20 years, he has held senior management positions in the fields of Strategy, European Affairs, Public Affairs, Policy, Regulation, Compliance and External Relations at the International, European and UK levels with major blue-chip mobile and fixed telecom operators (France Télécom Group, Orange Group, Global Crossing, Verizon Business, Colt Technology Services, Everything Everywhere Ltd.), a top-tier management consulting firm (Deloitte Consulting), a major regulatory agency (the UK Office of Communications/Ofcom) as well as with a marketing agency focusing on the mobile and developer community (Wireless Industry Partnership) and a PR/Communications firm. He has a particularly strong track record in using policy and regulatory tools and expertise to: Understand and monitor market/policy evolutions to anticipate changes, assess opportunities and risks; Contribute to and support strategic planning, business and product developments; Improve revenue and cost structures, streamline operations and implement compliance and risk management policies; Generate involvement from and consensus on strategy and regulatory plans with internal stakeholders; Define relevant strategic and regulatory messages to communicate to external stakeholders and enhance brand and business reputation and influence. He graduated from a Post Graduate Degree in European Law and Business and earned two distinct Master's Degrees (European Law and International Economic& Public Law) from major Universities in Paris. He has taught European Competition Law and EU Telecoms Regulation in the University of Paris 11 Sceaux and Telecom Paris for 4 years. He also contributed in 1999 to a seminal book on the emergence of virtual and e-money. He authored the section on the market and policy issues of the convergence between the Digital Communications and Banking industries ("The New Virtual Money: Law and Practice by Olivier Hance and Suzan Dionne Balz, Kluwer Law International, 1999). Jean-Stéphane is a French national based in London. He lived and worked in Paris, Brussels, Amsterdam. He is a native French and fluent English speaker with basic Italian and Spanish.