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Regulation is more important than technology when it comes to strategy

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The biggest factor shaping the strategic plans of players in the European payments sector is regulation and right now understanding the impact of new regulation is far more important than understanding the impact of new technology.

The wonderful people at Barclaycard were kind enough to invite me along to a seminar about innovation in payments. I was there as the tech guy and my job was to show the corporate clients how the mobile-centric payment ecosystem will enable new kinds of business, new opportunities for products and services, and new markets (and some ways to cut costs). I made the transition to in-app payments the central theme of my talk, explaining how APIs will enable great customer experiences.

Mike Walters, the Product Director, Global Payment Acceptance for Barclaycard Business Solutions gave a great presentation about the evolution of their product range and he made a really good point about the personalisation of the payment experience. Mike noted the range of options for both making and accepting payments goes beyond mobile phones. When we talk about the mobile phone as the key payment technology for most of our clients, we are really talking about mobility as the “strange attractor” and mobile phones as only one of the technologies that nudge us there. Wearables, digital coordination, smart TV and so on all have a role to play and I made a mental note to blog more about these in the future.

The main point I want to make, though, is that Mike flagged “EU regulations” as the number one strategic issue facing organisations such as his – above technology issues such as the shifter mobile – and the most important driver framing strategy. But, perversely, this also means that EU regulatory tinkering will therefore become a dominant driver for innovation. I’ll give you a couple of examples.

Earlier this year, I read Peter Jones’ comments in his article on changing EU regulation and its impact on the card payment schemes in the summer edition of the Journal of Payments Strategy and Systems (Volume 8, No. 2, pp.140-118). Peter said, in essence, and he is surely correct, that the major beneficiaries of the proposed rule changes around Visa and MasterCard in Europe will be the continent’s largest merchants. As far as I am aware, this has been the result of interchange capping in Australia and it will be the result of interchange capping in the US: money is reattributed from banks to merchants. In Europe, credit card fee income will drop by around €3 billion and debit card fee income will drop by around €2 billion.

But the consequences in Europe go further. Peter says that the changes will be good for large-scale non-bank acquirers who can consolidate across borders and he also explains that further likely consequences of DG Comp’s main proposals around the card market will be to benefit Visa and MasterCard at the expense of domestic issuers who will not be able to compete in a harmonised market. And, since three party schemes are excluded, is highly likely that we will see more of them, and not only from banks. I speculate that this means a proliferation of app-centric three-party schemes to replace the domestic debit schemes, which means in turn that a euro-MCX may not be a bad idea (contrary to the view that says that lower interchange in Europe reduces the demand for a euro-MCX). These potential new schemes can succeed because merchants will “tender steer” customers towards their preferred payment method which may not always be card based. I’ve written about this before, referring to the Polish example, where one of the biggest banks is launching its own three-party scheme.

If the mobile phone means that people begin to carry around some three-party payment schemes to support the majority of their spending (which is one the one hand domestic and on the other hand in a very limited number of retail outlets) it could lead to some rather interesting knock-on consequences, which may not be limited to the distribution of transaction fees.

[From Search Results three-party]

A particular point that interests me about the changes to regulations is their ultimate purpose. The Commission cannot seriously have the goal of increasing cash usage based on their nutty “merchant indifference test” that takes into account the private costs of the merchant but not the costs to society as a whole.

Furthermore, why the MIT should be used as input to regulation remains utterly opaque.

[From Forget the “merchant indifference test” and get on with eliminating cash]

With PingIt, a euro-MCX, a pan-European iDEAL and other new entrants, this all means that cards may cease to be the primary instrument of choice to replace cash – this is why, I imagine, that Visa and MasterCard are developing plans for non-card alternatives, new direct payment account mechanisms that abandon the PAN (that should, but won’t, form the son-of-EMV next generation standard). From Peter’s comments about the need for ACH investment, I am sure he shares our opinion that this next generation “Super EMV” for retail payment will be API-based direct access to payment accounts.

Underlying all of these discussions, though, there is the issue of why the European Commission is interfering in the card market in this way at all.

Taking into consideration relevant developments globally, this author concludes: card interchange fees do not cause market failure – at least as far as debit cards are concerned.

[From EPC | Card Interchange Fees Regulation: What is the Right Question?]

Norbert Bielefeld is an expert. A proper expert. He is absolutely correct. I don’t know what interchange fees should be. Norbert doesn’t know what interchange fees should be and he knows a hundred times more about the topic than I do. But most importantly, the European Commission doesn’t know what interchange fees should be. Only the market knows this and the only way to get the right answer is ensure a competitive market, which means regulating for competition, not for competitors.

It seems to me that of the reasons why regulation (and not only in the EU) may not be the optimal solution to real problems in the retail payment space is that regulation is forged in the crucible of vested interests and hammered into shape by lobbyists. It does not shift toward lower total social costs but instead focuses on the redistribution of (often marginal) private costs. This is particularly true in that narrow case of interchange, a point noted by The Economist.

The problem is that the European Commission just addresses the merchants’ opinion and forgets about all the other actors, and does not consider other costs and benefits of the means of payment that affect directly consumers and the economy as a whole.

[From Economist: Lower card fees did not benefit Spanish consumers | EurActiv]

A point that still holds. The Commission really should have some clearly-articulated and agreed-upon targets before it decides on the most appropriate regulatory strategy to reach those targets. This would mean that organisationds such as Barclaycard would at least know the direction of travel and might adjust their investment plans accordingly.

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