Of the many disruptive forces now hitting European payments, regulation is arguably the most potent of all.
At Visa Europe we have our own opinions on the likely impact. We also track the views of other stakeholders. And we have been scrutinising the flurry of recent analyst reports from the investment community (from the likes of Barclays, Morgan Stanley and Brean Capital).
Of course, these analysts don’t get everything right. But they are uniquely influential, and their views have a big sway over investment decisions and market sentiment. So what do they expect to happen in the world of payments?
Let’s look at it by audience. But, before we do, here’s a disclaimer: these aren’t necessarily my views, nor are they those of Visa Europe. Instead it is a summary of what the analysts are saying…
Issuers: adjusting to lower levels of profitability
One of the most obvious impacts of the regulation is reduced issuer profitability. In response, analysts predict that issuers will simplify products, hack back rewards, and increase fees – all of which have already begun in some markets. They will also simplify their operations to ensure that the cost-side of the equation is geared towards lower profitability.
However, there do remain some pockets of growth potential. Premium products are one example. In addition, as the size of the pie increases, so does the opportunity to pursue profitable segments such as travel.
Overall, successful issuers will pursue a more streamlined, targeted approach – and differentiation will matter more than ever.
Acquirers: pursuing a bigger potential opportunity
Analysts believe that acquirers could well benefit, just as they did in the USA following the Durbin Amendment.
They may increase their fees. They may also withhold from merchants some of the savings from reduced interchange. However the European Commission’s transparency provisions may result in less flexibility in practice.
Cross-border acquiring is expected to be the bigger beneficiary. In the lead up to the regulation, the structure of the sector is already shifting. And the prevalence of e-commerce (where cross-border acquiring is often the norm) is accelerating the change.
Schemes: a definite dichotomy
Analysts see a dichotomy between domestic and international schemes.
Domestics, many of which operate on a low-cost, low margin-basis may be hindered – finding it hard to absorb the costs of compliance (let alone the innovation burden),and facing the reluctance of already cash-strapped banks to stomach any fee increases.
Even so, recent years have seen a resurgence in the domestics, which tend to benefit from strong national and political ties, and often operate well-regarded local products. And this puts them in a stronger position to fight their corner.
For international schemes, the opinion is generally favourable, albeit mixed.
Card volumes are expected to escalate. Armed with scale and superior technology, international schemes are well-placed to adapt to the changes, absorb the compliance costs, and find ways to create new value. In addition, international schemes tend to have greater access to innovation, as well as deeper resources to incentivise merchants. But, with the coming of the second Payments Services Directive (PSD2) and open access to bank accounts, real-time Automated Clearing House (ACH)-based payments could become an ever more formidable alternative to traditional card-based solutions, so competition within electronic payments is expected to intensify.
Merchants: benefiting from a big value shift
Analysts believe that merchants are to be the beneficiaries of a €7bn value-shift. And with increased power and deeper pockets, they will inevitably create new dynamics for our industry.
We can expect them to take greater control of transaction routing. To secure their custom, we can also expect banks and schemes to incentivise them.
The big question is what they will do with all of that extra revenue? Hand it over to their customers? Invest it in friction-free payment solutions? Scepticism abounds, but the true impacts are yet to be seen.
Consumers: igniting an increased volume of cashless payments
Here’s where the opinion is most divided.
Some analysts believe that innovation will offset the negative impacts of regulation. Others dwell on the likelihood of increased fees and reduced rewards. Many believe that consumers will consolidate their spend across one or two favourite cards – igniting a scramble among issuers to be the card of choice.
There is also some concern about the withdrawal of the Honour All Cards Rule. Will some retailers reject credit cards? What about commercial cards? Will consumers be forced to consolidate spending on their debit cards?
But, overall, the consensus is that cashless payment volumes will increase.
So that’s it, a whirlwind tour of analyst sentiment.
Analysts are well-informed, well-researched and well-read. But while they are often correct, they are not always right. What will be interesting to uncover in the coming months is the unconventional wisdom, the moves that very few of us predicted, the surprises that arise as the regulation sets in. Is there something coming that none of us yet see? The beauty of our industry is that there very well may be, so it is worth staying tuned!