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Brussels, 11 January 2012
1. Which types of payments are covered by this Green Paper? Why these specifically?
The Green Paper covers three types of electronic retail payments.
Card payments generally cover all payments made with a debit or credit card, either at the point-of-sale or remotely (e.g. through the internet or on the phone by voice communication).
Internet payments include online payments made with payment cards, online banking facilities or e-payment service providers.
Mobile payments cover all payments made with a mobile device. These could either be remote payments, i.e. internet or premium sms-based payments, or payments at the point-of-sale, using technologies such as NFC (Near Field Communication) which require specifically equipped phones and readers.
The three payment categories are not mutually exclusive and the line between them is blurred. For example, an internet payment made with a smart phone using a payment card would fall into all three of the above categories.
All three payment methods are very important to Europe’s economy: card payments are the most frequently used electronic payment instrument for retail payment transactions (second only to cash payments). On average, every EU citizen owns more than one payment card and makes over 40 card transactions annually. Internet and mobile payments, while still much less common than card payments, are the fastest growing payment methods in today’s market, very much driven by the developments in e- and m-commerce, i.e. the buying and selling of products and services over the internet or mobile devices.
Two core payment instruments, bank transfers and direct debits, are not covered by the Green Paper as they were the subject of a Commission proposal in the context of the Single Euro Payments Area (SEPA).
2. What is the objective of the public consultation and who can contribute to it?
The aim of the Green Paper is to identify the obstacles that potentially prevent European integration in the card, internet and mobile payment markets. An assessment was made on the basis of numerous discussions and meetings with stakeholders from the demand (consumers, merchants, enterprises etc.) and supply (banks, other payment service providers, card schemes etc.) side of the market. The public consultation is an opportunity to launch a broader debate on the subject. Its first objective is to validate the analysis of the Green Paper and to ensure that no critical issues have been omitted. Secondly, it gives stakeholders the chance to share their views on how to resolve the identified problems and, whenever possible, provide relevant data and information.
The Green Paper now aims to assess the current European landscape for card, internet and mobile payments in order to identify the best way to foster integration. The way in which consumers purchase their goods has changed significantly. Increasing mobility and the emergence of e-commerce have strengthened the need for Europe-wide, cashless payment solutions.
The contributions to the consultation will determine the need for EU action on the various issues raised and the form this action should take. The consultation is open to all parties and stakeholders interested in this issue field.
3. How does this initiative relate to the Commission’s Communication on e-commerce adopted on the same day (see IP/12/10 and MEMO/12/5)? Why are there two different documents?
There is a strong link between the two initiatives. In public consultations and surveys, payment issues are consistently mentioned by consumers and merchants as one of the key reasons not to use e-commerce. Various issues are raised, including the perceived lack of security, excessive or non-transparent payment fees, and the limited choice of payment instruments. The Green Paper covers all of the identified issues. Furthermore, card, internet and mobile payments are precisely the payment methods that are most often used in the context of e-commerce.
Although the two documents are closely related, they do not overlap. E-commerce covers more than payments and payments cover more than e-commerce. In other words, the issue of payments, although a very important one, is just one of many issues that need to be addressed in order to accelerate the growth of e-commerce across the EU. Likewise, the number of payments made directly at the point-of-sale, for cards and potentially also for mobile payments, significantly exceeds the payments which take place in the context of e-commerce. Therefore, the Commission has decided to address these topics in two different, but related documents.
4. What is the current market situation in the EU for payment cards?
In 2009, payment cards were used for a third of all non-cash retail payment transactions in the EU. But much remains to be done to create an efficient and competitive Single Market for cards. The European cards payments environment is largely fragmented along national borders with a small number of domestic schemes and only two main international players. Domestic debit card schemes are often not accepted outside their country of origin. With SEPA migration under way, and a number of domestic schemes closing down, a situation of duopoly on the card market could arise, with only the two international card schemes (Visa and MasterCard) remaining.
In addition, the business model in the payment-cards sector is dominated by inter-bank fees commonly agreed between payment service providers, also known as Multilateral Interchange Fees or MIFs. These fees determine to a large extent the charges merchants pay their banks for accepting the card to make a transaction. As the real cost of payment services at the point of sale is unknown to consumers and often opaque for merchants, there is no competitive pressure on the price of the payment instruments. Bonuses and rewards granted by card issuing banks and payment card schemes typically incentivise the use of higher fee cards.
As merchants dislike to refuse expensive means of payment, they typically pass the resulting higher costs of payments on to all consumers by adjusting the retail price of the good or service, rather than charging the specific user of the more expensive means of payment, in line with the ‘user pays’ principle.
In turn, the high profitability of this model for banks may hamper the development of more innovative or efficient payment methods, as cheaper payment cards cannot provide banks with the same level of revenue they request for issuing. There is also a spill-over effect on non-card payment means which potentially hinders innovation in the European payment market.
5. What is the current market situation in the EU for internet and mobile payments?
Internet and mobile payments are now the fastest growing payment methods, driven by e-commerce and the dramatic increase in the number of smart phones. Both payment methods offer significant benefits — more convenience for consumers and more efficiency for merchants, provided that they are secure, transparent and cost-effective.
Despite these benefits, internet and mobile payments currently still represent a very low share of all retail payment transactions. To put it in perspective, only 3.4 % of the value of all European retail sales are made on the internet. The estimated value of all m-payments in 2010 ranges from EUR 50 to 100 billion worldwide. An impressive figure at first sight, but only a tiny fraction of the total retail trade volume at global level.
Internet and especially mobile payments are both relatively new payment methods which to some degree explains their lower share of transactions compared to more traditional electronic payment methods, such as card payments or bank transfers. But many of the teething problems for innovative payment methods are due to the current fragmentation of the market and the fact that many internet and mobile payment solutions are restricted to the domestic market.
Key facts and figures
Around 726 million payment (credit and debit) cards were used in the EU in 2009. This represents an average of almost 1.5 cards per citizen. The average spending per card amounted to more than EUR 2 000/year.
According to studies, the number of online shoppers in Europe is forecast to increase from 141 to 190 million between 2009 and 2014 with the average spent by each buyer increasing from EUR 500 to EUR 600/year.1
One in three European citizens used online banking in 2009. Studies indicate that by 2020, two out of three EU citizens may use online banking.
Almost one in three EU citizens currently owns a smart phone. This is expected to increase in the future, which will also drive emerging m-payment solutions. Studies indicate that the value of m-payments in Europe could be as high as EUR 250 billion/year by 2014.
Individual mobile payment solutions already cover a wide range of purchasing situations today, for example when paying for car parking or public transport tickets, paying for groceries and in restaurants, buying digital goods or making direct peer-to-peer payments.
6. What does ‘market integration’ mean in this context? What’s in it for consumers?
Electronic payments in Europe are currently based on different national technical standards and solutions. Common pan-European standards have been developed for credit transfers and direct debits (see question 9), but not for cards, mobile and internet payments. More EU market integration could yield a number of significant benefits such as: driving down the cost of payments, more convenience for consumers, more efficiency for merchants, cross-border competition and innovation at European level. Equally important, national differences at the technical level and inconsistent payment user experiences affect the actual, or at least the perceived security of payment transactions and consequently erode consumer trust in remote payment methods.
For the consumer, market integration means creating a true Single Market in payments. This translates into being able to use the same secure, efficient and innovative payment means domestically, abroad and across borders. In other words, independently of their place of residence in the EU, consumers should be able to use the most convenient and most efficient payment method for each transaction (online vs offline, micro- vs large-value payments, etc.). Furthermore, the user experience should not be significantly different between making a domestic or a cross-border payment within the EU.
Consumers would also benefit from increased competition and more innovation, resulting in lower payment fees and better and more tailored payment solutions for everyone’s needs. Furthermore, an integrated market would increase the security of and consumer’s trust in remote payments, such as e-payments and m-payments.
7. If market integration is so beneficial, is it not automatically achieved by the markets themselves?
In many Member States, domestic inter bank fees for cards are still considerably higher than the levels accepted by the Commission for cross-border transactions.2 Even when national card schemes are replaced by international ones, different interchange fees continue to apply within each Member State. Furthermore, merchants can often not benefit from lower fees in other Member States as they cannot use the services of an acquirer established in another country. Finally, companies cannot appoint a single acquirer for their transactions across several countries, which would result in administrative efficiencies and cross-border competition on Merchant Service Charges (MCSs). All this implies that a true Single Market for card payments has not materialised by its own means.
Other issues also hinder market integration: the business model of inter bank fees results in card schemes competing for issuing banks by offering higher interchange fees. Since the market does not provide transparent information on the price of payment services, consumers are generally not aware of the costs of using specific payment instruments. This hampers competition between payment schemes and hinders market entry from cheaper card schemes.
A number of other hurdles remain, in particular the lack of non-discriminatory common standards, which hinders the provision of EU-wide payment services. A number of industry initiatives aim to create EU-wide standards for payment processes and certification, but standardisation processes must be fair, non-discriminatory and open to all players.
In September, the European Commission opened proceedings against the European Payments Council (EPC) standardisation process in the field of online payments in response to a complaint alleging that these standards discriminate against players that are not controlled by a bank. The Commission is currently pursuing the investigation.
8. Are the subjects raised in the Green Paper related to the Single Euro Payments Area (SEPA)? What about payments in non-euro currencies?
The SEPA project aims to abolish all differences between national and cross-border payments for the key retail payment instruments: credit transfer, direct debit and payment cards. So far, the only retail payment methods for which a pan-European payment scheme exists are SEPA Credit Transfer (SCT) and SEPA Direct Debit (SDD). In an integrated market for e- and m-payments, the SCT and SDD rulebooks can provide a valuable basis for more integrated and secure payment innovations.
In 2010, the European Commission tabled a proposal for a regulation introducing obligatory dates for migrating from national to pan-European SEPA schemes for credit transfer and direct debit transactions in Euro. In December 2011, the European Parliament and the Council achieved an agreement on this proposal. This constitutes an important milestone on the way to an integrated payments market and creates the backbone for further market integration for payment instruments such as cards, as well as m- and e-payments. The SEPA rules and standards can be considered as building blocks for integrating electronic payments that can also be used as starting point for integrating non-euro payment instruments.
9. Why does the Green Paper cover market access and entry of new players? Are there not more than enough payment instruments for consumers and merchants to choose from already?
Market access and entry of new players is currently limited due to distorted incentives resulting from Multilateral Interchange fees (MIFs) as a widespread business model in the cards market. Because issuing banks favour payment solutions with the highest MIFs (resulting in higher costs being passed on to merchants) and merchants cannot influence consumer behaviour, the most efficient payment instrument is not chosen or able to compete at the point of sale.
In addition, market access could be improved by extending the choice of payment method at the point of sale, for instance through co-badging which allows different payment brands to figure on the same card or device. This would make it possible for consumers to choose between these brands (provided the merchant accepts them) taking into consideration any incentives from their issuing bank (air miles, etc.) and from the merchant (surcharging, rebating, steering). Co-badging with international existing SEPA compliant schemes could be an effective way for new schemes to access the market.
Another option to explore could be access to information on the availability of funds in consumers’ bank accounts. Banks have the monopoly of deposits and restrict access to this information. This prevents non-banks from guaranteeing payments, resulting in barriers to entry. They need to count on the cooperation of banks to verify the availability of funds in payers’ accounts.
10. What are MIFs? Why does the Green Paper cover MIFs and other business practices of card schemes? Are these practices not covered by competition law?
Multilateral interchange fees (MIFs) are multilaterally agreed fees payable between the Payment Service Providers (PSPs) of the payer/consumer and the payee/merchant. MIFs are passed on to retailers. Retailers in turn will pass on these costs to consumers. In the absence of signals to consumers and merchants indicating the true costs of payments, this leads to a distorted system of incentives. Consumers are incentivised by issuing banks to use high-fee cards which retailers are reluctant to turn down for fear of losing business. Since consumers and merchants value the most widespread cards, card companies compete primarily for the number of cards issued rather than on merchant fees and attract issuing banks by offering higher interchange fees. The result of this competition between card schemes is an increase in the amount of interchange fees, increasing the price for retailers. Competition authorities and regulators have been looking at interchange fees for some time. In certain non-EU countries, they have been addressed by regulation. In the EU, the European Commission and national competition authorities have adopted several decisions prohibiting specific MIF arrangements under EU competition rules. So far the Commission has accepted that collective interchange fees are not necessarily unjustified. In the undertakings accepted by Visa and MasterCard, fees were set at the level of cost savings retailers make when accepting cards instead of cash.
In addition, certain card scheme rules make it difficult for merchants to influence consumer decisions on the choice of a payment instrument and limit their ability to accept only selected cards. The Commission has addressed these practices, along with MIFs, by enforcing competition law, for instance under the Visa and MasterCard cases, and within the cooperation framework with National Competition Authorities under the ECN for national cases.
However, simply enforcing competition law may sometimes be insufficient to solve the wide range of competition problems on the payments market in a comprehensive and timely way. The market requires fast and comprehensive solutions to address structural anti-competitive obstacles and problems, which lengthy competition proceedings are not always able to deliver. The question is whether the current imbalances and obstacles in this market should be addressed differently to create a level playing field allowing market entry and promoting consumers and merchants’ choice.
11. Payment fees are often perceived as high by consumers. What is the advantage of making the costs and prices of payment instruments transparent?
Consumers are seldom aware of the full cost of using specific payment instruments, i.e. the costs that are not only imposed on them directly, but also on the merchants. If the cost of using different payment instruments (e.g. different card brands, cash or e-payment solutions) is the same for consumers, they tend to believe that their choice of payment method is irrelevant to the merchant. Consequently, consumers base their choice of payment method either on convenience or on individual benefits they obtain by using a specific method (e.g. air miles). However, the payment instrument chosen by the consumer may not be optimal in terms of the full cost to the economy. Merchants typically include their transaction costs for payments in the price of goods and services they offer. The end result is that all consumers pay more for their purchases in order to cover the cost of more expensive payment methods used by potentially only a small group of consumers.
Making the total cost of using different payment instruments fully transparent to all payment service users could therefore change consumer behaviour and reduce the costs of transactions for all parties. This would optimise costs across the EU and could drive down prices for the benefit of payment service users. The ‘user pays’ principle states that costs should be borne by those who use a specific service and not distributed between all consumers. For example, the merchant could encourage the use of the most efficient payment instruments by using rebates, surcharging (i.e. charging consumers for the use of specific payment means) and other practices (e.g. selective acceptance of certain cards only above a certain amount, explicit indication of the preferred means of payment). However, surcharging may not be used as an additional revenue source by merchants but should be limited to the real cost of using a payment instrument, as established by the Consumer Rights Directive.
12. What is the benefit of technical standardisation and inter-operability between providers? Should this not be left entirely to the market?
Interoperability is a commonly used concept in network industries. It means that any payment instrument or device can be used anywhere to make a payment between a payer and a payee. An old example in the card payment industry is the card reader. Retailers now only need one card reader but in the past they needed to have a card reader for each card brand.
Technical interoperability is linked to standards. The various links in the payment chain can only come together if they use the same standards. At the moment, standards are very different.
Fragmented standardisation results in a lack of competition. For example, the absence of common standards in the relationship between retailers and banks has several consequences:
- It often prevents debit cards from being accepted abroad. Almost all cards without the Visa or MasterCard logos can be used only in their country of issuance. There is a lack of competition between card schemes and issuing banks.
- It obliges retailers to use domestic acquiring banks and therefore limits the completion of a competitive Single Market for payment services. There is a lack of competition between acquiring banks.
- It obliges big retailers or oil companies present in more than one country to maintain different systems to manage the data exchanged in the acquiring process — at least one for each country they operate, and in many cases even more. This significantly reduces the opportunities to centralise operations and effectively limits efficiency gains.
Mobile payments are still in their infancy. Nevertheless history shows that common standards (like GSM or SMS standards) have been a key factor in their successful development. Standardisation in the m-payments area should ensure full interoperability between m-payment solutions and favour open standards to give consumers mobility when they decide to change telecom operator or bank.
Open standardisation in network industries is pro-competitive. This explains why many companies try to maintain proprietary and private standards, thus keeping their market closed to outsiders that use open standards. A recent example was the universal mobile phone charger. Only after a request of the European Commission did handset manufacturers decide to use the same standards for their chargers, thus allowing full interoperability.
13. Consumers are concerned about payment security. Does the Green Paper address this?
The security of retail payments is crucial for payment users. Surveys have shown that a lack of trust in the security of internet payments is one of the key reasons for consumers not to use e-commerce. Merchants are also exposed to potential fraud and therefore value payment security as much as payment users do. The increasing use of ‘Chip and PIN’ cards instead of signature-based cards or PIN with a magnetic stripe has already significantly reduced fraud at the point-of-sale and at ATM withdrawals. However, remote card payments and other remote payment methods, such as e- and m-payments, are subject to increasing fraud rates.
The Green Paper does address this issue. Potential remedies for the risk of fraud, such as two-factor authentication, i.e. the use of a PIN in combination with a one-time transaction code received through an SMS or token device, are available but require more consumer intervention and could therefore be perceived as burdensome, especially for low-value transactions. Data protection is also considered to be very important. Consumers want sensitive customer information to stay within a secure payment infrastructure, both in terms of processing and storing data. It is crucial to ensure this consistently for all payment transactions.
The Green Paper raises questions about potential security gaps, effective technologies to address these gaps and a potential regulatory framework or mechanism to ensure payment security and data protection.
14. What are the next steps?
All stakeholders are invited to submit their contributions by 11 April 2012. At the end of the consultation period, these contributions will be published on the Commission’s Payment Services website (indicated at the end of this document) unless specified otherwise by the respondent. In addition to the consultation, the Commission plans to organise a public hearing with stakeholders shortly after the end of the consultation. Details of the event will be posted on the Payment Services website.
On the basis of the feedback received, the Commission will announce the next steps by the second quarter of 2012. Proposals, if applicable, will be adopted by the fourth quarter of 2012 or the first quarter of 2013. Any future legislative or non-legislative proposal will be accompanied by an extensive impact assessment.
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