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EU Retail Payments - Interoperability and Networks

Merchant Acquiring Conference

London27th November 2014

Prepared by: Peter Jones,Managing Director

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Topics for Today,

Objectives: To review the EC/ECBs vision of SEPA for Cards and Technical Interoperability

Regulation

SEPA for cards

TechnicalInteroperability

Key Interoperability Issues

Network Architecture

Scenarios/Solutions

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ECB’s Vision

“  The  Eurosystem reiterates its

invitation to the industry to establish a SEPA card processing framework

and a technical interoperability

framework and strongly encourages all

interested stakeholders to product

tangible  results.  ”

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KeyHotter

Cooler

KeyToday

Directionand extent of

travel by 2020

4Source: PSE Consulting analysis

Six Key Retail Payments Interoperability Issues

ImpactInter Operability Requirements

• Consumers• Issuers• Merchants• Acquirers

NetworkProviders

• Brand/processing separation

• National Clearing and Settlement

• Best in Class Networks

Business Case

• Volumes• Architectures• Cost/Risk

Sovereign Debit Scheme

• Player Exits• New Entrants• Future Visions

National Market Governance

• Debit Schemes• Processors• Clearing/Settlement Barriers

• Pan EU Merchants• Pan EU Acquirers• Merchant Steering• Border Dematerialisation

NetworkProviders

ImpactImpactImpactImpactImpactImpact

1

2

4

Sovereign Debit

5

6

3

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Barriers to Entry1

• ICS Interoperability functions – but legacy and needs re-work!

• Domestic debit a long term barrier to acquirers

• EPC/EPASOrg standards – but when?

• Domestic acquirers advantages – On Us discounting

Conclusions: Full Technical Interoperability not being achieved

Where Interoperability is needed

Barriers • Pan-EU Merchants• Pan-EU Acquirers• Merchant Steering• Border Dematerialisation

Requirements• Consumers• Issuers• Merchants• Acquirers

• Pan

1

Requirements

2

National Market Governance• Debit Schemes• Processing• Clearing/Settlement

4

5

•

6EU Debit Schemes• Player Exit• New Entrants• Future Visions

Network Providers• Brand Processing Separation• National Clearing Settlement• Best in Class Networks

• Brand Processing Separation

3Network Business Case

• Volumes• Architecture• Cost/Risk

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2 Interoperability Requirements

• 95% transactions domestic issued, accepted and acquired

• Consumers want local, and occasional cross border

• Pan EU merchants want efficiency improvements

• Interchange++ merchants want lower costs of ICS processing

• Domestic debit impacted by brand selection/ merchant steering and no borders

• Some domestic debit issuers want cross border acceptance

The Needs of the Users

Demand for Interoperability amongst small group of multi country players

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Network Providers

• Few credible players – ICS + Trionis

• ICS Networks

- Monobrand offer- EU/worldwide reach- Multi currency ACS- Very significant investments- Wide range feature options

• Very strong competition - domestic debit hits

• Created tensions with regulators

Who can deliver ACS EU-wide

3

Conclusion: Competition between ICS has partly contributed to regulatory interventions

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Network Business Case

• Cross Border Debit/Credit volumes – only 4%-5%

• Revenue opportunity - €25m - €35m pa

• Current cross border contracted to ICS

• No business case for cross border only network – target domestic

• ACS have 10+ National Clearing and Settlement markets – 20bn+ transactions pa

Is there a Credible Business Case?

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Conclusion: Business Case for Cross Border Only Network weak – Additional Volumes needed

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“Sovereign”  EU  Debit  Scheme

• Loss of several domestic debit schemes –more to follow?

• EC/ECB pressure  to  build  “sovereign”  Pan  EU scheme

• Monnet last interaction – poor case!

• New EU schemes emerging

• Potential loss of low cost beneficial national cards

• New  regulation  threatens  scheme’s  future!

5

Is there a Case for the return of Europay?

Conclusion: Delay Pan EU debit – encourage cooperation – find new acceptance solutions

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Local Governance

• Several markets want local control of settlement

• Several fear loss of volume to any new Pan EU debit/ACH

• Finland/Malta implementing own ACH

• Reflects national market disillusionment with centralisation vision

6

The demise of Centralised solutions?

Conclusion: Danger of displacing efficient national settlement processes and infrastructure

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Network Topographies and Architectures

Typical Star Central HubNetworks (one or multi hub)

Processor Peer to Peer Linking Networks

Bank1

Bank 3

Bank 4

Bank 2

Processor1

Processor3

Processor4

Processor2

Benefits and Issues: Peer to Peer Networks Benefits and Issues: Hub Network

• Conceptually simpler to implement• Original basis of Berlin Group standards• Basis of UK Switch network• Major problem is cost of new members,

support and enabling change

• More complex and costly to develop• Imposes common API/interface on all players• Much easier for new members to join/new

releases/change• Can  be  a  “Star  or  Multi  Hub  combination”

11

Conclusion: Recommended Architecture is Central Hub and/or Multi Hub

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Scenario 1 - Improved Status Quo

Scenario 1: No Change for 3-4 years

• ICS Co brands continue in short/medium term

• Drop brand selection, steering and borderless regulations!

• Place technical inter-operability on hold

• Discuss/Defer sovereign debit card scheme

• Mandate EPASOrg and Card Settlement Standards

• ICS to focus on cross border only – no more National Clearing and Settlement

Advantages - Domestic debit national clearing and settlement protected

Disadvantages - Loss of cherished SEPAconcepts, lack of competition andno efficiency improvement.

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Scenario 2 - Network Competition

New Structure for ICS Networks ?

• ICS separate brand and processing

• Both migrate to multi brand (from mono brand)

• Both  offer  universal  access  via  their  API’s

• Unbundled basic ACS

• Cross border only focus

• National clearing and settlement option

• Enable national debit scheme reach across EU

• Interface with ACH’s

• Low cost utility service

Advantages - Lower processing costs, decline in national market erosion and benefits of multi brand network

Disadvantages - Potential for duoplay - too fewplayers

?

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Scenario 3 - Cross Border SEPA Payments Hub

• Gateway hub interfaces into national market

• Cross border only – card and ACH

• Multi scheme/currency – national debit

• Common API for acquirer access

• Potentially real time processing

Advantages - Enables national debit reach/acceptance- Domestic ACS continues- ACH generates more volume for

business case

Disadvantages - High costs/risk to develop- Low volumes/ ICS lower cost- Potentially inefficient- Not all markets fit model

Is there a Cross Border Only Hub Business Case?

Processor1

Hub

Processor2 Processor

3Processor

4

Processor5

Processor6

Acquirer1

Acquirer2

Acquirer3

Acquirer4

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Scenario 4 - Universal Central Payments Switch

• Single central solution for domestic and cross border

• Embraces all payments - national debit cards/ACH

• All Issuers/acquirers directly connected – Pan EU reach

• Local card/ACH processors displaced

• One common clearing and settlement process (eventually multi currency)

• Potential to support ICS and Alternative Payments

Advantages - Massive volumes and very low cost- Removes surplus capacity

Disadvantages - EU monopoly (but competition from ICS)- National market pushback- High risk and complex- ICS needed for worldwide interoperability?

With a Single Monolithic Retail Platform Weak?

EUPayments Hub

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Scenario 5 - Market Demand Driven

• EC/ECB to lead but not mandate

• Need for a common API

• Commercial/interbank innovation

• Gateway sector to provide card/ACH interfaces

• Payment schemes (iDeal/MyBank) to extend

• Overlay/account access new models

Advantages - Many components already in place- Strong competition- Stimulates Fintech

Disadvantages - No over arching vision of architecture- Costs may not decline- Has failed to deliver in the past

Can Markets be Made to Deliver?

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Analysis of Scenarios/Options

Scenario Credibility/ Feasibility

Low Risk/Cost

MeetsUser

RequirementsCompetition

ImprovementsEfficiency

Improvements

MakesBusiness

Case Total

Scenario 1Improved Status Quo 17

Scenario 2Network Competition 20

Scenario 3Cross Border Only SEPA Payments Hub

21

Scenario 4Universal CentralSwitch

15

Scenario 5Market Demand Driven 13

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Conclusions

• More competition and unbundling needed

• Potentially ICS can deliver significant benefits

• Political perception is local/domestic control

• Monolithic central solutions unlikely to be effective

• Key  stakeholders  need  to  “get  real”  and  accept  reality