Looking back at the Belgian decision to block non-European Maestro transactions really highlights an ongoing question in the cards industry – How many people ACTUALLY need global interoperability? And more pertinent, why should everyone pay for the global interoperability of a minority?
Take Belgium for example. Here we have near-100% debit card penetration (cobrand domestic scheme with Maestro for international) and around 40% penetration of credit cards (Visa:MasterCard 3:1). Around 77% of Belgians head abroad for holidays and business, but importantly only around 18% of these leave the EU. This means that only 1,4m (or 11%) of Belgians actually need ‘global’ interoperability. Similarly, 80% of US travellers will only visit destinations in the US.
With the SEPA-mandated EMV migration in the EU now near complete (according to the EPC), it can safely be assumed that all you need for transactions in the EU is a chip card. Couple that with a ‘short stripe’ containing only the start sentinel needed for EMV initialisation and you’ve got a card that is already accepted for sure in 32 countries and throughout Asia, the Middle East, Canada, Mexico and Brazil to name but a few. With this card being DDA (as mandated by the two major schemes), current likelihood of fraud is exceptionally low – and of course the absence of a magstripe allows automatic declines of these transactions. These cardholders will have partial global interoperability and still the option of international ecommerce transactions due to the presence of the PAN on the front of their cards.
Furthermore, there are 23% of Belgians (2,5m people) that never venture past its borders and so need no more than a domestic card.
Given that card schemes tend to spread the costs of fraud pretty evenly around the world – and also that banks will be paying to hedge the risks associated with global interoperability, in the end every cardholder is paying for the risk that only a few are actually taking. This is in essence the same model as car insurance – where we all pay higher premiums for the based on the overall risk exposure of the insurer’s portfolio. However, unlike on the roads, here there is a possibility to make your card safer by closing the riskier elements of cards where the risk is unnecessary. What this should mean is that in EMV migrated markets such as Belgium, banks could offer 3 types of card – domestic risk, European risk and Global risk – each with a different price point for both the consumer and the merchant. Why for the merchant? Because it is technically only acceptance of ‘risky’ magstripe cards that opens them up to fraud potential – and so accepting lower risk cards should be cheaper.
OK, so who loses in this scenario? Of course the fraudsters lose as the pool of cards that they can clone becomes much smaller – but perhaps this will increase focus on defrauding EMV. The schemes will likely lose as the revenue flow from global interoperability is part of their business model – although they are proven champions of reshuffling fee structures to keep any revenue reduction to a minimum. Issuers will have a lower risk portfolio, so they could be counted as a winner in this. So it seems that the likely loser will be the Acquirer – interchange will remain steady but their income from merchants would drop. However, if card acceptance becomes cheaper, perhaps an accelerated growth in card transactions through new merchants could offset this.
So it seems that the risk of global interoperability is a continuing loss of faith in the cards system as more cardholders experience fraud and so become more cautious with card usage. Moving to multi-tiered interoperability in the short term, prior to the anticipated shift in the US (likely beginning soon, but ending in the 20’s) could be a way to boost card payments and create a fairer system for all.
- U.S. Bank Goes Global with EMV Chip Cards (credit-land.com)
- Credit Card Fraud Protection From The Big Banks (creditcard.com.au)
- Frost & Sullivan: U.S. Should Aim To Achieve EMV and NFC in Single Migration Project (virtual-strategy.com)