Cards and Payments throughout Europe
VRL Financial News Publishing, May 2011
Since the advent of the global economic downturn, European consumers have become more cautious. More people are using their debit cards to live within their means rather than borrowing to fund their lifestyles. The debit card is becoming the payment method of choice throughout Europe.
This report investigates cards and payments throughout key economies in Europe. It provides analysis of the main market trends in the UK, Germany, Spain, France, Italy, Ireland, Greece and Portugal, and examines the impact of Europe-wide initiatives that are impacting on the financial services sector.
In the wake of the global economic recession, the debit card has dominated the retail sector. Customer caution and tighter restrictions on lending have made it the payment option of choice for most consumers. In response, banks are introducing a series of cards and payments innovations in an attempt to coax back market share from low-yielding debit card transactions.
This report measures the progress of prepaid and contactless card innovations in key European markets, including Greece, Italy and Spain, and discusses the developments and probable outcomes of Europay, Mastercard and VISA (EMV) compliance and the Single Euro Payments Area (SEPA) initiative.
Read this report to:
- Increase the profitability of your cards and payments offering
- Adapt your approach to the payments sector to suit changing consumer trends
- Judge how the progress of EMV compliance will affect your business
- Prepare your business for the likely impact of the SEPA initiative in Europe
Executive summary
Despite the continued domination of cash across European payments markets, non-cash payments are beginning to make headway. In 2009, the total volume of payments made using non-cash mechanisms like cards, direct debits and credit transfers increased by 4% to €82bn. Conversely, the value of payments made by these methods decreased by 16% to €227tr, as did the average value of transactions, suggesting that non-cash payments are starting to encroach on the smaller value payments traditionally made using cash.
There is a war on cash in Europe. Used for 6 out of 7 payment transactions in Europe, cash is disliked by governments and financial services organisations alike as it is expensive to manufacture, administer and keep secure. Cash is also the currency of the black economy in Europe and costs governments billions in unpaid taxes alone. This is a particular problem in some of the economically-troubled southern European countries. In Greece, Italy and Spain, for example, tax evasion is estimated to amount to 30%, 25% and 20% of the overall economy, respectively. As these countries and others in Europe attempt to clear budget deficits, governments will be keen for consumers to migrate towards more formal and traceable payments systems such as cards, credit transfers and direct debits. Cash tends to be a more popular payment method in southern European countries, where it accounts for 70%+ of retail sales payments. In the majority of northern European countries, non-cash payments account for the majority of retail sales transactions, with 30% or less being made using cash.
New product innovations such as contactless payments have not yet started to make an impact on low value cash payments in Europe. Trials involving both contactless cards and mobile handsets have taken place in various countries, including Spain, Italy and the UK, with positive outcomes on the whole. A mobile payments trial in Sitges, Spain, for example, found that 85% of trial participants were happy with the security of the payment method (a major concern amongst consumers), and that transactions increased by 30% in comparison with those made on the participants’ traditional payment cards. The UK is the most evolved market for contactless payments, with c.11m cards in issue but merchant acceptance is lagging, and there are still issues concerning the commercial model for mobile payments. Prepaid cards are also beginning to emerge in the European market, but have yet to make headway. In France, Prepaid Card Services Ltd have launched a prepaid card that can be obtained through 5000 retail outlets with no requirement to complete an application form or credit checks. The card can be loaded with money and used immediately wherever MasterCard is accepted or online. Prepaid cards offer an ideal cash replacement option for young people and those on low incomes, as they open up new channels to these consumers without the risk of them getting into debt as spending is limited to the remaining value on the card.
Cheques are gradually dying out in most European countries having shown a year-on-year decline since 2000. The popularity of cheques varies significantly from country-to-country. In Germany, for example, cheque payments account for just 0.34% of the total volume of payment transactions, whereas in France, this form of payments accounts for just over 20% of all transactions. In France, it is illegal to write a cheque without having sufficient funds in the account from which it will be drawn, and often, additional identification is requested to authenticate the payment. Cheques are, therefore, considered to be a secure and reliable payment method in France. Their enduring popularity can also be partly explained by the nature of the geographic dispersion of the country’s population. Although the majority of the population is located in large conurbations throughout France, many also live in rural communities that are served by small local merchants, a lot of whom will not see the need to invest in card payment technology. In the UK, cheques are due to be phased out by 2018, although the British Chamber of Commerce is working with the UK payments council to ensure that businesses that are heavily reliant on cheque payments continue to be served in one form or another.
The European payments market is fragmented and complex, consisting of c.9,900 monetary financial institutions (MFIs), just under 8,000 of which operate in the euro area. Interchange fees, charged between banks for the acceptance of card payments, vary significantly between countries and differ depending on the type of card used. European countries are at different stages of migration to Europay. MasterCard Visa (EMV) compliant card payments require the card to contain a chip and for payments to be verified by the entering of a Personal Identification Number (PIN). In the UK and France, for example, 95% or more of retail Point of Sale (POS) terminals have been updated to facilitate chip and PIN payments, whereas in Greece, less than 70% of terminals have been migrated. There are clear benefits that result from the migration to EMV compliance. The chips that are embedded in compliant cards are much more secure than the traditional magnetic stripe, the latter being open to replication through card skimming. Since its introduction in the UK, for example, fraud on lost or stolen cards has fallen year-on-year since 2006, and reduced by 7% from 2009 – 2010. Card not present fraud has also declined in the same period by 15% to £226.9m, and counterfeit fraud reduced to £47.6m representing a 41% fall during that period. Overall, card fraud losses fell by 17% from 2009 – 2010, totaling £365.4m. Cards in most European countries however still contain a magnetic stripe and until large payments markets like the US begin a mass migration to chip and PIN, this is likely to remain the case, leaving cards open to skimming attacks.
As the migration to EMV/chip and PIN progresses, attention is increasingly focused on the development of a Single European Payments Area (SEPA). SEPA aims to create a more competitive and harmonised payments area throughout Europe, and where payments in Euros are treated like domestic payments. Although a number of key deadlines, such as the facilitation of SEPA credit and debit payments, have largely been met, less than 10% of credit transfers and fewer than 1% of debit transfers were SEPA compliant by August 2010. This has led to calls on the Commission to set a mandatory end-date for migration to SEPA instruments, which should be no later than 31 December 2012, after which all payments in euros will have to be made according to SEPA standards. However, there is some resistance towards a migration to some SEPA changes, such as compliant direct debit payments, in a few European countries . In Italy, for example, the new SEPA debit payment is perceived as being a step back from the existing domestic payment system for both the consumer and in terms of security.
European banks have, in general, become more selective when it comes to acquiring new credit card customers to reduce the risk of delinquency and bad debts. In Spain, for example, this is a growing problem with the non-performing loans (NPL) ratio rising to its highest level since 1995, at 6.06% in January 2011. The NPL ratio, which measures the ratio of NPLs to total loans, has been steadily increasing in Spain throughout 2010, rising from 5.69% in November to 5.81% in December. The popularity of credit cards amongst consumers varies from country-to-country. In Germany, for example, just 5% of the population holds a credit card with only 4m cards in circulation. Credit cards lack iappeal in Germany, as consumers are less reliant on revolving credit to fund purchases, preferring to use their overdraft facilities instead. Current accounts in Germany usually include a credit facility, such as an overdraft, but this is paid in full each month by most consumers. In the UK, there are more credit cards in circulation than in other European countries, although their popularity has declined over the last few years. According to the UK Card Association, 61% of UK consumers hold a credit card. This high level of card holding is partly due to the ease of obtaining cards in comparison with other European countries and the lack of regulation in terms of interest rates, allowing card issuers to price according to a risk assessment of the consumer’s situation. In France, the APR that cards providers are allowed to charge is capped, meaning that sub-prime markets are less well served by French credit card providers than in countries like the UK, where risk-based pricing is the norm.
Chapter 1: Introduction to cards and payments in Europe
1.1 Non-cash payments in Europe
1.2 Cash is still king in Europe
1.3 Contactless payments – the rhetoric and the reality
1.4 Debit cards are reducing the share of other payment methods in some markets
1.5 Consumer confidence is inhibiting consumer spending on cards
1.6 Low consumer confidence will affect spending on cards
1.7 E Commerce and the growth of new payment systems
1.7.1 PayPal and Payfair are growing their market share
1.7.2 Non-traditional challengers are beginning to emerge in the European payments market
1.8 EMV migration has reduced the value of fraud losses, but skimming remains a problem
1.9 Progress towards SEPA is off target
1.9.1 Size and complexity of the European financial sector
1.9.2 Interchange fees differ by European country
1.10 The troubled European banking sector
1.11 Summary
Chapter 2: Making inroads into cash reduction in the UK
2.1 Cards account for over half of non-cash payments in the UK
2.2 The decline of cash
2.3 The proportion of banked consumers is at an all-time high in the UK
2.4 Debit cards are growing at the expense of cash, cheques and credit cards
2.5 Credit cards take a hit as consumers consolidate cards
2.6 Charge card volumes have remained flat for a decade
2.7 POS and ATM transactions reflect UK market trends.
2.8 The death of the cheque by 2018?
2.9 Contactless payments are growing but still in their infancy
2.9.1 Contactless payments trials and roll-outs
2.9.2 Interchange fees have been lowered to encourage merchant participation
2.9.3 Mobile devices will become the new wallet
2.10 Summary
Chapter 3: The war on cash in Italy
3.1 Contactless payments in Italy
3.1.1 Contactless payments trials are Milan-centric
3.1.2 Transport paves the way for NFC payments
3.2 Plastic cards in Italy
3.2.1 Debit cards provide an opportunity for cash replacement in Italy
3.2.2 Credit cards in Italy
3.2.3 Prepaid cards in Italy
3.3 POS and ATM transactions see recent decline despite increased availability
3.4 Overall lending is down from previous years
3.5 Tighter lending criteria provide opportunities for organised crime
3.6 Progress towards EMV migration in Italy
3.7 Internet banking has room for significant growth
3.8 Summary
Chapter 4: cards and payments in France
4.1 Plastic cards in France
4.1.1 Debit cards continue to show steady growth
4.1.2 Credit cards have also seen slight growth
4.1.3 Interchange fees by payment method
4.1.4 Launch of the MasterCard Display Card in France
4.1.5 Charge cards are almost as popular as credit cards in France
4.1.6 Contactless payments have been trialled in France but remain in their infancy
4.1.7 Prepaid cards: the PCS MasterCard
4.2 Cheques are in decline but still significant in France
4.3 Stagnant growth in the number of POS and ATM transactions, despite increased availability
4.4 Summary
Chapter 5: Spain
5.1 Contactless payments in Spain
5.1.1 Contactless mobile payments – the Siteges experience
5.1.2 Definition of the economic model for contactless payments is required
5.1.3 Room for growth in debit cards
5.1.4 Credit cards decline in volume
5.2 BBVA – increasing cardholder value through consumer focus and product rationalisation
5.2.1 BBVA consumers want simplicity and security
5.2.2 Rationalisation of the product portfolio to meet consumer needs
5.3 Internet banking in Spain
5.4 Summary
Chapter 6: Cash is still king in Germany
6.1 Debit cards dominate the German cards market
6.1.1 Figure 25: Growth in debit cards in Germany 2000 – 2009
6.2 Credit cards are unpopular with German consumers
6.3 Charge cards have become increasingly popular in Germany
6.4 Prepaid Credit Cards in Germany
6.5 Contactless payments in Germany
6.5.1 Mobile payments trials in Germany
6.5.2 German consumers want the banks to manage mobile payments
6.5.3 Convenience payments dominate mobile payment preferences in Germany
6.5.4 PayWave and PayPass in Germany
6.6 Over half of German consumers bank online
6.7 Summary
Chapter 7: The need for product innovation in smaller European countries
7.1 Cards are the non-cash payment method of choice in Portugal
7.1.1 Portuguese consumers favour pay now cards in times of austerity
7.1.2 Debit cards dominate the Portuguese cards market
7.1.3 Interchange fees in Portugal
7.2 Cash still dominates the Greek payments market
7.2.1 Debit card volumes significantly outstrip credit cards
7.2.2 Contactless payments – a long way off for Greek consumers
7.2.3 Interchange fees in Greece
7.2.4 Internet banking has not yet gained momentum in Greece
7.3 The decline of Ireland, the Celtic Tiger
7.3.1 Debit cards are increasingly popular in Ireland
7.3.2 Prepaid cards offer a growth opportunity in Ireland
7.3.3 Credit cards will be the losers during times of austerity in Ireland
7.3.4 Interchange fees in Ireland
7.3.5 Contactless payments in Ireland
7.4 Summary
Chapter 8: Cards and payments in Europe - conclusions
8.1 Cash reduction is a key objective in most European countries
8.2 The decline of credit cards in Europe
8.3 The decline of cheques throughout Europe
8.4 Contactless cards are a long way off mass market adoption
8.5 Mobile wallets are even further from mass adoption than cards
8.6 Payment innovations will enable access to new market segments
8.7 The development of SEPA will continue to raise challenges
8.8 Summary
Sarah Richardson-Clarke is a specialist cards writer. She has worked for a number of financial services organisations in strategy and analysis, including GE Money and Mintel, where she was responsible for providing insight and analysis on international store and card markets. Sarah has a M.Phil from the University of Durham.
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