Card, Mobile and Internet Payments

Future Trends and Scenarios

April 2013

This paper from MHP Communications, one of the UKs leading public policy and communications consultancies, sets out some of the major trends impacting the payments industry, as well as some ideas about how important stakeholders can help shape this fast moving public policy environment. MHP sees three major changes on the horizon:

1.

A sea change in financial services policy-making

2. Th 3.

e emergence of a new European regulatory framework

A constantly evolving payments ecosystem

A new public policy 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.

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. The ownership of financial regulation by the G20 means that Heads of State and Government take a personal interest in issues, which has led to a complete overhaul in the dynamics of decision-making in Europe. 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. As decision-making on financial services regulation in Europe has shifted so decisively from the UK to Continental Europe, politicians in Germany, France, the Netherlands, Finland and Spain have gained control of the agenda. The recent debate over bonus payments in banks is a clear demonstration of how the UKs influence has waned. In addition public authorities at the EU (such as the European Commission) as well as Member States are clearly considering that the establishment of a competitive level playing field in the payments industry will help boost innovation and growth in the wider economy. According to EU policy-makers, existing bottlenecks limit competitive opportunities and remove incentives to innovation in areas such as mobile payments. From a regulatory perspective these bottlenecks have to be removed as soon as possible.

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. This is where MHP Communications can help; our role is in helping companies understand the public policy agenda and how it interacts in support of your business strategy.

Regulation: the end of interchange

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

Add to that the Durbin amendment in the Dodd Frank Act, the first moves by US retailers to set up their own payments networks and concerted European regulatory activity are creating a new reality. Zero interchange is now openly being discussed by policy-makers around Europe first on debit cards, with a cap on credit card payments to follow. The full extent of the possible changes should become apparent in June 2013, when the European Commission adopts a Regulation on interbank fees related to card payments, which will then be scrutinised by the 27 Member States and European Parliament. In parallel, the Commission will continue competition law-based investigations, with ongoing scrutiny of Visa and MasterCard expected to lead to some commitments over debit and credit card rates in the near future. With or without commitments, the changing political agenda in 2014 should keep card fees 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 capping roaming charges and lowering interchange will be tempting targets for EU policy-makers, increasingly seeking legitimacy and recognition.

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 prospect of negotiations on a Transatlantic Free Trade Area between the U.S. and the EU could give additional impetus to the Commission to act strongly to address many of these issues. 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 farranging 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 regulation to the payments market as well as sector specific competition law.

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. From our point, 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 plasticbased 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: ICT Businesses The pre-eminent place that major technology companies such as Google, Amazon and PayPal are now holding has contributed to a large extent to stimulate the high level of competition. There has also been an emergence of smaller start-up companies proposing new technologies, products and services with a more specific focus on a vertical market, customer base or communities.

The Payments Ecosystem continued

Banks Financial institutions need to keep control of new products that could potentially compete with their own, whilst providing customers with innovative products and services. Innovation is crucial for them to rebuild loyal and more trustful relationships that have been damaged since the start of the financial crisis in 2008. PSPs and Schemes Payment Service Providers and card payment platforms need to maintain their positions as the core of the payment system and maximise their market share by anticipating technology and market evolutions. These include MNOindependent solutions as well as embedding their mobile payments solutions directly on mobile devices through partnerships with manufacturers, such as Visa and Samsung integrating NFC-enabled payments. MNOs Mobile Network Operators (MNOs) need to generate new income in a maturing market with decreasing revenues, saturated penetration rates and an economic crisis, while also facing important investments into 4G. They have to increase traffic on their networks, further grow ARPU and reduce churn rates. MNOs could decide to take off the gloves and show a far more aggressive attitude by breaking the traditional cooperation with banks and other financial services players, and taking advantage of regulatory developments at EU level. MNOs

are not hesitating to acquire E-Money or Payment Institutions Authorisations in a number of key EU markets, as seen by Telefonica O2s acquisition in the UK in 2012. Mobile operators are also extremely eager to avoid the dumb pipe sickness and to increasingly become a commodity, producing low added value and stagnant revenues. They are keen to be an attractive partner to content providers, leverage their huge customer base and acquire a fundamental stake in the payments system. Other constituencies are important for the mobile payment ecosystem in particular:  Mobile device manufacturers are trying to increase and maintain attractiveness of their devices and for some of them re-imagine themselves with a survival imperative.  Consumers are looking for more personalised, competitive, convenient, secure systems for all payments on the go.  Merchants need cheaper, diverse, secure, faster, customer-friendly, integrated payment options than currently available.  Governments want to promote more competition in the payment market, achieve less reliance on PSPs, create new tax revenues and promote economic/technological progress by offering new opportunities for companies and citizens.

Working with MHP

About 50% of all European legislation originates from the European Union institutions in Brussels, but in financial services this figure jumps to near 100%. Over the past five years of Single Market Commissioner Michel Barniers term, in the region of 70 pieces of legislation have been proposed, debated or implemented at European level with an immediate impact on the financial services sector.
At MHP we help our clients understand and engage with the key financial services policy-makers in Europe. They include: T  he Heads of Government, finance ministers, administrative heads of the finance ministries and central bankers or regulators of France, Germany, Poland, Italy and Spain. T  he leaders of the opposition in France, Germany, Poland, Italy and Spain. K  ey Committee Chairs of the national Parliament; where appropriate. T  he Heads of Government and finance ministers of the country holding the EU Presidency (rotating every six months). The next Presidencies are Lithuania and Greece. T  he National Regulatory Authorities in charge of the sector. The key players in the European Union institutions are: T  he President of the European Council in Brussels, currently Herman van Rompuy. T  he President of the European Commission Jos Manuel Barroso and the Commissioners for the Internal Market and Competition as well as the Commissioners for Justice (e.g. new Data Protection Regulation) and for the Digital Agenda (ICT policy). The Commission will be renewed in 2014.  The Directors General in the European Commission in DG Internal Market and DG Competition.  The President of the European Parliament, Martin Schulz, the Chair of the Parliaments Economic and Monetary Affairs Committee Sharon Bowles and the coordinator of the largest Group in the Committee the French Conservative Jean Paul Gauzes.  The President of the European Central Bank, Mario Draghi. MHP helps our clients develop coherent strategies underpinning engagement with the European Union institutions, measured against previously agreed benchmarks. In addition, we help clients to create, maintain or change their external perception in the market place by creating a constructive dialogue with the key media. The opportunity is to take greater control of the regulatory environment and where possible, to positively influence the thinking of the above target group of senior key decision-makers on financial services regulation in the European Union institutions and Continental Europe. Doing this successfully, you open the way to becoming the industry partner of choice for regulators, policy-makers and businesses in Continental Europe in the payments arena.

For more information about MHP Communications and for specific questions on mobile payments please contact:

Alisdair Gray Brussels

Robert Roessler London

Jean-Stphane Gourvitch London

payments@mhpc.com
www.mhpc.com tel 0044 203 128 8100