Transcript: What’s Next in Payments in Europe

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DAVID S. EVANS: Hello everyone, this is David Evans. Today I’m with Maria Carioca. She’s a senior executive at the leading processor in Portugal, and she is one of the top figures in payments in Europe today. She can tell you a little bit about herself.

Maria, why don’t you start? Tell us a little bit about what you do.

MARIA CARIOCA: Hello, David, good morning. I think I’m actually lucky the way I started into payments. So 10 years ago, I got into this really exciting project that was starting to think of how can we do secure online payments with cards over the Internet, and back then, how could we start looking into mobile payments.

So I got exactly into the type of areas in payments where you have to switch both the technical aspects, so the technology that goes around payments, and the business model. We actually got the online secure payments solution going. It’s a 3D secured site solution and that runs pretty well. To this day, we’re still trying to get the mobile payments business model/connection with the operators to take off and work.

So I got into payments, and strangely enough, I think I do so because I find it kind of sexy industry.

EVANS: It really is. And what do you do at SIBS?

CARIOCA: I run the corporate office at SIBS. There’s mid-, large-size payments processor in Europe. It started out very much focused on the cost processing business, but it also runs the ACH platform for Portugal. Increasingly, still what we’re doing is both extending abroad and expanding into other back office areas, and the more issuing and processing focused areas for our clients.

So what I do is I look into the business portfolio for SIBS. I also run some of the institutional international relations that we hold. We’re present in many of the European foray. We deal with the European Commission with European Central Bank. We also deal with some of the emerging things that are coming out in Europe. Things such as Monet where I sit at this moment, and we can talk a bit more about that later if you like.

So that’s a little bit of what I do. I generally take a wide look at what’s going on in our business.

EVANS: Sounds like a full lot, a full plate of work, Maria. But thank you very much for taking the time for us today. Looking across Europe, what are the most interesting innovations you’re seeing? And where are they happening?

CARIOCA: There’s quite a few things happening. What I still see in terms of innovation in Europe is relatively significant differences between what is continental Europe and what is the UK, the non-Euros zone. The UK in particular, because it’s much more an Anglo-Saxon approach to the business.

What are we seeing these days? It’s still a tricky terrain for innovation, Europe. There’s a lot of uncertainty, there’s a lot going on with the agenda for the single Euro payments. That’s European Commission driven agenda, so sometimes business-wise it’s not an easy agenda to manage.

But what are we seeing? I think the new payments institutions regulation in Europe is bringing out a lot of new payments institutions that are finally having some more certainty as to their business set-up. So we’re seeing an incredible number of relatively small companies but rather dynamic companies coming up with things on Internet payment, coming up with things that bridge the connection between cash and lower value payments. So things that are very easy to use for young people to just go online and pay a game or buy a song or whatever.

We’re also seeing a lot of innovation. And that I’m finding increasingly interesting, although challenging for some of them that comes from the card business. We’re seeing a lot of innovation in ACH-driven payment solutions. Things that started out – Germany has had a pretty rough experience with EMV. That’s an ACH-driven direct debit sort of say supported solution.

But things around that notion that ACHs these day shave the technological ability to support mirror online, or at least much more user-friendly payments. Those are coming out, and I think we’re going to see some interesting developments there.

EVANS: If you named one country in Europe, Maria, and I hate to put you on the spot on this. But if you had to name one country where there’s the most vibrant innovation going on, which of the 27 member states would you pick?

CARIOCA: You know what? Actually I would go – can I pick two?

EVANS: Yes.

CARIOCA:I  think the Netherlands has been coming up with some pretty exciting ideas. They have a very objective approach to payments. They’re very self-careful with their business solutions. So they’ve come up with some very interesting ideas.

Now again, the UK is still an environment where, for instance, most of the payment institutions that we’re seeing coming out and really being aggressive and just having very tight, but almost niche products, but thought of products, those are coming out the UK.

So different approaches. The Netherlands is clearly within the SEPA area, so they’re thinking along different lines. But those two are the ones that I see exciting things happening.

EVANS: We’ve mentioned SEPA, Single European Payment Area a couple of times. So a multiple choice question for you. Nice idea, will never work. Nice idea, give it another decade. Bad idea, national differences are important and will never disappear. Bad idea, Brussels should make beer and not regulations. And none of the above.

CARIOCA: Well, if you had mentioned chocolates instead of beer, you definitely would have had me for B. No, what do I think?

I don’t think SEPA is a bad idea. I think the underlying concept is a good concept. We’ve got a single currency, payments are all about currency. This is something that will truly add value to European consumers.

I do, nevertheless, think we’ve all experienced this to be a very challenging very often frustrating process. It’s been going on for a very long time. It’s brought a lot of uncertainty into the business. And it’s uncertainty across the spectrum. It’s uncertainty in business models, uncertainty in technological standards, uncertainty in all the core fundamentals of the business.

So that’s been painful. And I think a lot of uncertainty that’s brought on is because it’s a very directive regulatory approach. So the market itself is still trying to figure out how it’s going to influence the retail banking business, going to converge across Europe. Payments are a proximity business. So as long as retail banking and people’s current account are effortless and are being dealt with in very different ways across Europe, that’s always going to be a hurtle to an integrated payments area in Europe. And if we’re trying to push it, or force it regulatory as we are right now, that’s always going to bring a lot of noise, take a lot of time and drive to some very tough compromises.

Definitely not a bad idea. Yeah, give it a decade, and I’m afraid it’s going to be a painful decade.

EVANS: It sounds like pretty good idea, give it another decade, and maybe not have the regulators quite so involved.

CARIOCA: Yeah, you know focus a little bit more on the chocolate.

EVANS: There you go. Let’s focus on the emerging processing business. How quickly is that becoming a business dominated by Pan-European players? Will that come in the next decade?

CARIOCA: Again, it’s still a rather different market. Continental Europe versus the UK in particular.

EVANS: Let’s take Continental Europe and put the UK aside. Whatever number of member states, I guess is 25 on the continent minus UK and Ireland. We have all these member states. They all have very different payment system, different sets of plumbing, and so forth. And most in cases, a leading processor in one of them. Is that getting integrated and are players like First Data and SIBS for that matter becoming significant across Europe, and is one, two, three of those going to emerge as leading or dominant player in a Pan-European sense?

CARIOCA: There’s an expression that I’ve been using a lot lately which is there’s nothing worse than being right ahead of time. I think we’re all right when we feel that this is going to converge. And I think we’re getting all the right signs that it is, indeed, converging. And this, merchants processing and issuer processing, it’s just the overall processing business as a whole. And yet we are seeing quite some movements there across continental Europe.

We saw the piece in the first stages of this role coming into Europe. I think they are shielding up a bit of the initial investment efforts that they’ve made. But we are seeing people such as e-planning, such as ourselves, increasingly looking at what the opportunities to consolidate with smaller processes – processors.

Also looking into what is still what is the significant amount of processing that goes on within individual banks. For instance, German banks. They’ve got tremendous amounts of processing activity going on either in-house or in small business that they’re spinning out right now. So there is an opportunity to go and grab those pieces of the value chain that needs to be integrated within retail banking.

And there’s another force that’s playing very, very strongly on this increasing integration, which is the banks themselves. The financial crisis has some impact there, but you see players sometimes there, for instance, you see them increasingly thinking of themselves as Pan-European players, very strong players, very aggressive players that have a clear notion that processing is something that they have to look at as a part of their business. But that’s something that they have to think of whether they want to keep in-house or whether they want to bring outside. As they go into different countries, they realize that it’s probably something that will be best managed in that unified centralized way. So that’s going to push a lot for Pan-European solutions.

Acquiring, anyway, you get a lot pressure from the merchants who are Pan-European, sort of cross-border acquiring. And that’s where the exchange helped.

EVANS: Speaking of merchants, Brussels is still on the attack on interchange fees. But my sense is they really haven’t got that many of the national competition authorities on the band wagon. Is the effort to drive interchange fee losing some steam? Or is this still just a matter of time before they’re squashed down by the competition authorities?

CORIOCA: I think Brussels has been struggling, and it’s been doing so for a very long time. So again it’s the type of process where you’ve been in pain for quite a while, so it’s not an easy thing to do.

They’ve been struggling for a very long time with something which, if you’re in the business, you kind of feel it. Which is there is no right regulatory answer for this niche issue. They struggle with different methodologies. They struggle with cost based approaches. We’re now having quite a lot of debates and quite a lot of push towards what is the surest test methodology. And I don’t know to what extent people are familiar with that, but it’s just saying that to some extent mix should emulate to some degree what is the cost of cash. And how do you – how cards play against that cost of cash.

Again, it’s trying to regulate something that one, it’s not clear whether the regulatory answer is the right answer. Two, it’s a complex market, it’s a four-party, or two-sided market. So that’s never an easy to strike the right balances.

And it’s trying to do so in the context where indeed the fundamentals behind the card business, things such as the balance between issuers and acquirers that goes back to the structure of the retail banking and the retail financial payments in Europe goes. So it’s trying to regulate against things that are not yet settled and are still merging and are still undergoing change.

So, I think that’s what’s behind a lot of the pushing and then setting back that the Commission in Brussels has been going through. I think we are heading for another wave of more intense pressure towards that. And I also think that we’re starting to look at an interesting phenomena which is –

EVANS: Coming from Brussels, Maria?

CARIOCA: Excuse me?

EVANS: Coming from Brussels, a more intense wave coming from Brussels?

CARIOCA: Yes, yes coming from Brussels. And again, coming into some of the local authorities, but also pushing again for things such as the cost of cash being the benchmark for niche, so intense pressure downward in a lot of these – in all the European countries. I think we’re seeing a little bit more – again the resurgence of that trend.

I think we’re also seeing phenomena, which I think will play out interestingly here, which is as some of these innovations are starting to get a fuller sense, things such as contact lists, things such as mobile payments. As these things get more room into the discussion, what we’re starting to see is the mix itself being broken down into different discussions.

So if the pure debit, for instance, emulates cash, then what’s your reference for something that’s a contact close payments, or an online payment? That’s not a cash substitute. So we’re going to get into another wave, and I think the market is going to always find ways around if you offer them and fewer debits, then we’re just going to go around it.

It’s going to be a very long – another 10 years of mix discussions. I’m not sure there’s a right answer there.

EVANS: Let’s turn to the financial crisis just for a second, and then I want to come back to the subject we were just talking about and its implication for the schemes in Europe.

The financial crisis has stunned the growth of credit cards in the United States. In many of the European countries, credit cards had a small but rapidly growing share of payments. Has the worldwide recession, which we’re supposedly out of, but it doesn’t necessarily always feel that way, has that slowed things down when it comes to credit cards? And we’ll come back.

CORIOCA: There was a lot of room to grow in many of the European countries. Credit cards didn’t get entirely squashed. Numbers coming out of the European Central Bank, Portugal, for instance, is still growing at double-digit rates for credit cards. The number of other European countries that are still growing at a healthy rate, I’d say. I do believe that a lot of that is the fact that there was still room to grow. Europe is not a very hard credit card culture, if you like.

Now we did see some changes in behavior. I think actually what we saw, this is a little bit my experience being a processor and looking at payments profiles. We saw people retreating into debits as the hard part, as the media hit the crisis sort to say. So we saw people thinking about their spending, cutting back on their credits, going back to debit as a way to control their spending further. We also saw, of course, banks being much, much more careful with the way they were handling revolving and the way they were handling different credit allowances to people.

So we saw a slow down of credit. Now we’re seeing it take up again. I think we’re seeing it take up again in a much healthier way. So I’m not too worried about the prospect of growth for credit cards. It’s just not going to grow in bubble mode as it was growing before.

EVANS: Not having a bubble is a very, very good thing. There’s a lot going on with the card schemes in Europe. It’s a very complex and dynamic environment. And I was wondering if you could tell us a little bit about your perspective on what’s going on with regard to the card networks.

CARIOCA: Yeah. Europe is dual worlds, sort to say. The international card scheme is a large one these MasterCard, AmEx, they’re all here, they’re present, they’re very significant. They’re definitely a part of the landscape. And there you’ve got people such as Visa setting up to be different in Europe from what they are worldwide, we’ve got Visa Europe choosing to be apart from Visa International. And always making it a very – making it a point that they are Visa Europe. They’re different.

What we do see in the market is that I think there’s always going to be uncertainty by other players, by issuers, by processors by whomever’s looking at them in the sense that, yeah, you’re Visa Europe, but there is always some degree of fear, if you’d like. Or the notion that you will step back into Visa International if things don’t go in Europe as you expect them to go, and if your issuers are not as comfortable with you as you’d like to them to be.

So Visa is always going to be struggling with us. They’re also playing a game in Europe where – there’s whole notion attached with SEPA, which is a notion of bundling. So a scheme must not mandate processing with a different processor. And any issuers or any card must be free to choose the processors, which is not exactly the way things used to work in Europe. A lot of the relationships were sort of intertwined. And there was bundled pricing, etc.

So Visa has been putting itself much more out there in the processing business, and they are trying to still fine-tune their relationship and the way they see themselves in between being a scheme and being a processor. So there’s a lot of dynamic there, and it’s, of course, dynamic that spills over into what are the domestic schemes that still have a pretty significant share of the market in Europe. Both in debit, less in credits, but a lot in debits.

There was a domestic schemes, what we’re seeing is the Brussels looking at the schemes and the way Brussels has handled their relationship with the schemes has always been a mixture of love and hate, if you like. They’re European schemes, so of course if you’re Brussels you don’t want to kill off what’s European innovation in payments, or European solutions. But they are very domestic focused, so that’s very much against the notion of a single Euro area. So Brussels doesn’t like that, and for a while a lot of things coming out of Brussels were get done with your domestic schemes, get a single European scheme out there, or get a solution that clearly works as a unified solution model, the bundle of domestic solution.

So you get things such as – I think the first really meaningful one was European Alliance of Payment Schemes, the APS. And now we’re getting Monet. Monet is driven by the major issuers and acquirers and got a very significant potential market scale, a very large number of major banks. Deutsche Bank… and the French banks. Most of them from Credit Agricole to just about any one you can think of.

So this is a very market-driven attempt at building a European scheme and we’ll see what comes out of that. It’s –

EVAN: They are, as I understand it, and just for our non-European listeners, Monet is a work in progress. But possibly a work in progress that’s going to be completed in the not-to-distant future.

CARIOCA: Yeah, so it is a work in progress. Not much information being put out there. It’s a team that’s working and trying to figure out whether we can actually put out an investment trial that’s interesting for whomever wants to set up a scheme. And whether there’s a value proposition that can be put out there in the market for a European scheme.

So that means looking into all the security, to all the value proposition. But it’s still in design mode. So all the uncertainty in the world concerning whether or not that will come out.

So, it’s a tricky landscape. You have the SEPA international schemes, those are there. Themselves, they are separate compliance. So they are – they fill all the requirements – they fulfill all the requirements that Brussels has set out for what is a compliance scheme. Something that can be used across Europe, something that’s – a Portuguese card holder can use in Germany without having to think twice, or without having to feel that it’s not in its home market. There is compliance.

New schemes coming out, terribly difficult to set up, as you probably know, David. Terribly difficult to set up a scheme value proposition, a winning value proposition from scratch. Have to bring issuers onboard, have to bring merchants onboard. And interests are not necessarily coming to them – coinciding.

EVANS: Starting a new card is a very hard thing.

CARIOCA: Yeah. What we’re also getting is there are other schemes in Europe. The whole notion of SEPA meant that we also wanted to bring the notion of scheme into payments such as direct debits or credits transfers. And there again a bit of recent developments that can be interesting in the market, because the way Brussels went about thinking about this was talking to the banks and saying, guys, get organized, set up something that will be self-regulatory, but will make you put out in the market a solution for such a scheme.

So banks set up the EPC. There is a setup of direct debits from the separate credit transfer scheme being put out, being implemented by all the countries across Europe.

But now we’re getting a reaction by the Commission that’s says hold on. We do want to have solutions that will work across the whole European space, but that doesn’t mean we want to set up a monopoly on one single scheme being the one that serves this purpose of the scheme that worked around Europe.

So we know we’ve put together a solution for separate direct debits, for separate credit, and for credit transfers. But be careful, it just doesn’t have to be just one solution. So set up the standards and requirements and go and do many and whichever way you want them to be, to be dealt.

So we spent the last two years thinking we had one solution for these payments methods, and now we’re again in the space where we have to look and figure out if the solutions that are out there are the ones we want, or we should just design or adjust the ones that we had before.

EVANS: I think we’re back to chocolate and beer. But let’s not go back to that topic, and let me finish with one last question for you. There’s lots of innovation around mobile going on around the world. Are there significant developments around mobile going on in Europe? And is there any chance that a mobile carrier – that the mobile carriers in Europe will get together again and try to introduce a mobile payment scheme? So broadly speaking what’s going on in mobile, and who’s doing it?

CARIOCA: Yeah, we think there’s a common way, let’s say. When you asked me earlier on how had I gotten into payments, I got into payments with the mobile payments project 10 years ago. Ten years ago it definitely didn’t work, and it was too early for these things to come out.

I think we’re going through another of these waves. So I’m seeing again a lot of intent by the mobile operators to get together. I’m seeing some of the hand set producers coming up with solutions… but again, just a general feeling I’m getting in the market is another wave or trying to come up with a solution that will solve both the technical aspects of these payments, and the business model aspect of these payments.

What I see differently in this wave that I’m seeing here, is that contrary to what was the case 10 years ago, where mobile operators didn’t really have their ideas clear on whether or not they wanted to be part of the risk managements and credit management aspects of the payments, what I’m hearing now is we are mobile payments – operators. We want to traffic, we want to enable payment solutions to our customers, and we want to leverage this platform that we have that fits in everybody’s pocket or hands.

So that’s what we want to do, we want to leverage this. But we understand that there are financial institutions that are probably more experienced and better equipped to handle the risk and to handle the financial aspects of the business model.

So I’m seeing things – I think the GSM Association, for instance, has an interesting solution. I’m seeing a bunch of smaller initiatives happening in quite a few countries. Again, linking up the mobile operators, linking up the people that are sitting in the universities, in some cases, trying to still fine-tune some of the technological aspects of this. But definitely it stands for a second wave, so to say – and I think this time a wave with more chances of coming up with the business model. Which has always been the problem with mobile payments. It’s not at all about the gadgets, the SIMS or whatever. It’s always been about who actually drives this thing in the market.

EVANS: And therefore still a possibility at this point in time despite the collapse of the previous effort that there will be a Pan-European solution involving one or more of the mobile operators, possibly in combination with a financial institution. Is that solution now on the table?

CARIOCA: I would – I think there are attempts to such a solution on the table right now. I think that the EPC, that’s the European Payments Council that’s the body got – the banks have set up to try and self-regulate some of these solutions. The EPC is certainly looking into this. Some of the recent features I’ve heard from the European Central Bank and from the Commission also have the mobile payments concern very much close to their heart. I think the whole – you have to be aware that the European Commission has given a lot of weight to what they’re calling the Information System Society agenda. So they’re pushing a lot of these both e-payments and m-payments. They see it as a way for Europe to keep ahead, so to say, in what’s going on in payments worldwide.

So that’s certainly a lot of interest there. I see the mobile operators engaged and trying to reach out with such solutions. So, I wouldn’t close my door to the possibility of something trying to come up with standards. Payments you always have to – once you think you have a good idea, you have to go out in the market and suffer for a while before it actually blooms. And not many bloom unfortunately.

EVANS: Yes, indeed. Maria, thank you very much for this wonderful call of what’s happening in Europe. We hope to talk to you again very soon. And have a great rest of the day.

CARIOCA: Thank you, David. Have a good day. It’s a pleasure.

EVANS: Thank you.