Recently I published a white paper with CGI on the business case of Immediate Payments (here) and while looking into the topic, it raised a number of questions about domestic debit card schemes in the EU.
The link between the two is quite clear. Where international debit brands such as Maestro, Visa Debit, and the like bring international interoperability as their major USP, European domestic debit brands such as Bancomat, Servired, APS and Bancontact Mistercash have an uncertain future as they struggle with both diminishing interchange levels and increased competition from mobile schemes. In the past I’ve looked at how they could form alliances to survive like their counterparts in the US (here) but the truth of the matter is that many of them view their independence as more important than long term survival.
So what is the reality that domestic debit schemes are facing? Their battleground is a tough one and a few have already dropped out of the race (PIN, Laser, Pankkikortti) but essentially it’s a war on two fronts. The first of these is business model driven. As regulators and market forces squeeze the pricing of card transactions, the cards business has become increasingly tied to growing volumes in order to achieve economies of scale. For schemes tied to single domestic markets, volume growth is typically only organic as a factor of GDP growth – unlike the international schemes which can open new markets or expand services into under-served growth markets. The second front is new, viable competition in domestic debit’s home turf, POS & ATM transactions. As immediate payment schemes appear across the continent, overlay services are being leveraged via mobile interfaces to offer transactions that perform exactly the same function as a debit card – immediately reserved debits direct from a current account – although usually running on a platform that has lower hardware requirements if any beyond the participants needing a smartphone and leveraging a payment instrument with zero interchange. As PSD2 is transposed and the reality of XS2A realised, it is likely that more competitors will arrive in a very short space of time. The US is racing ahead with cardless ATMs based on mobile app pre-authorisation, with many banks in Europe already deploying similar solutions.
So with margin erosion, tough competition and increasingly unfavourable regulation, where do the remain domestic debit schemes go? Is the bell indeed tolling on domestic debit?
Unless effective ways to collaborate can be found, the answer is probably yes. However, there are routes forwards for those willing to accept change and implement in the timescales available – which could be as little as two year’s time for the front runners. Europe’s remaining domestic debit schemes can only capture new volume by creating an environment which facilitates increases in their volumes – which either means cooperation or co-opetition. Additionally they will need to look at their value proposition towards their issuers, acquirers and merchants – as consumers will see little change as a mobile debit card transaction is hard to distinguish from a mobile transfer if the experience is right. And I believe that is the space that domestic debit schemes need to be playing in – become early entrants to the XS2A and immediate payments space and build overlay services that facilitate both card and interbank transactions seamlessly across multiple channels. Give consumers the brands that they already trust and change the back end, give merchants the price deals that they are pushing for, and give issuers the tools that they need to differentiate their offer.
Furthermore, given their control over much of the card infrastructure in Europe, domestic debit providers could potentially collaborate on the mobile overlay scheme and make it interoperable with other domestic schemes (an EMV equivalent for XS2A) so that standard technologies could be rolled out across the continent. This would be a difficult step, but in the framework of the EPC, perhaps achievable. But whatever the choices, they need to be made soon as the bell-ringers are pulling down their ropes, and will shortly let go.