A friend in Seattle was telling me about the proud coffee culture there. For the longest time, coffee shops were considered a European thing, small French cafés with tiny coffees, Italian cafés with their tiny coffees and frothy milk – in essence not at all the American way of doing things (where BIGGER is ALWAYS BETTER). But there was certainly a desire for this wonderful wake-up juice – and in the 1970’s America worked out how to adapt Europe’s coffee culture for itself – and it turned out that bigger actually was better in this case. The rest is pretty much history, Seattle’s coffee culture has conquered the world.
So why do I tell you about coffee in a payments blog? Is it because we payment professionals are one of the largest consumers of coffee on the planet? Kind of, but seriously, the cards industry is going through it’s own Starbucks moment today. EMV has finally been pushed upon the US market – but of course it won’t be done there the same as everywhere else in the world. I won’t bore you with the details as plenty of other places exist to do that (try here for example), what is most interesting is the way that the US has solved the problem of multiple domestic debit schemes in EMV.
The traditional approach to adding multiple schemes onto an EMV card is to have a separate application for each one – which may or may not use the same funding source. For example, my personal debit card here in Belgium carries the domestic debit scheme (Bancontact/MisterCash) and an international debit brand (Maestro). Which gives acquirers in Belgium the choice of which scheme to run their transactions through. The same isn’t true when I go elsewhere in Europe though and so the mandate from the European Commission’s SEPA program that I be able to perform transactions anywhere in Europe as I would at home is impossible in the cards world.
Step forward Team USA. Traditionally through back office systems, merchants in the US have had debit routing choice through up to 18 different networks which creates a dynamic and competitive landscape. This was cemented into legislation by Senator Dick Durbin when he added an amendment to an unrelated banking bill that enshrined the right for a merchant to have the choice from at least two unaffiliated debit networks when processing a transaction – this created a problem in EMV as it suggested that cards would need to be issued with many applications to ensure nationwide acceptance.
The solution created by the EMV Migration Forum (EMF) members is pretty elegant (here) and essentially uses a single application for all of the debit networks – common keys, common messages and a common funding source – with routing still performed outside of the EMV transaction itself. This Common Debit AID solution uses a component in the EMV specifications called Multi-Access (essentially the ability for multiple applications to access single data elements) and in doing so creates the infrastructure where the card is more an identity than a network-specific credential.
So what can Europe learn from this – why is it a Starbucks moment? For the past 7 or 8 years, the EU, EPC and ECB have been grappling with the difficult problem of what to do with Europe’s diverse national debit schemes – and how to achieve the SEPA objective of a competitive cards landscape that allows cardholders to feel at home anywhere in Europe. Perhaps the US has provided an answer – the Common Debit AID concept – which could be adopted by the 20-odd national debit schemes across Europe and give them access to corners of the union that they cannot reach alone, and provide healthy competition for two international debit brands currently dominating EU cross-border debit transactions. The beauty of using a single application is that future technologies created by national debit brands, such as Bancontact/MisterCash’s mobile application (here), could be used across Europe instead of just being restricted to a single market. This enriching and simplification of the merchant acceptance environment for debit could greatly reduce the operating costs – particularly for those merchants in border towns and tourist centres where supporting multiple national and international debit brands carries a large overhead.
Put Common Debit AID together with an existing European initiative like OSCar, which standardises the interaction between the payment terminal and acquirer host, and the world of cards becomes a whole lot simpler. And there are many proven cases where simplification of a market increases competition. Perhaps these steps would make the upcoming legislation on multi-lateral interchange fee reduction just a little easier to bear – and most importantly make the European card payments market truly one market.