MARKET FRAGMENTATION, MARKET ACCESS AND MARKET ENTRY ACROSS BORDERS

Transcription

1 THE RESPONSE OF DINERS CLUB ITALY srl TO DG MARKET S CONSULTATION ON THE GREEN PAPER TOWARDS AN INTEGRATED EUROPEAN MARKET FOR CARD, INTERNET AND MOBILE PAYMENTS April 2012 Diners Club Italy s.r.l, based in Milan, Italy, is a privately-owned company regulated as a payment service institution under the Italian art. 114 TUB. It operates as exclusive franchisee of Diners Club International, Ltd. a subsidiary of Discover Financial Services, a publicly-owned United States bank holding company. Diners Club Italia s.r.l. operates both as issuer and acquirer in Italy. Diners Club Italy is pleased to be able to offer the comments in response to DG Market s Consultation on the Green Paper Towards an Integrated European Market for Card, Internet and Mobile Payments. Such comments will be mainly related to the specific situation of the Italian market and to the impact that existing and potential EU and domestic regulation can have on the market dynamics. For any comment not reported here, Diners Club Italia agrees and supports the comments submitted under the same consultation by Diners Club International ltd. MARKET FRAGMENTATION, MARKET ACCESS AND MARKET ENTRY ACROSS BORDERS Multilateral Interchange Fees (MIFs) 1. Under the same card scheme, MIFs can differ from one country to another, and for cross-border payments. Can this create problems in an integrated market? Do you think that differing terms and conditions in the card markets in different Member States reflect objective structural differences in these markets? Do you think that the application of different fees for domestic and cross-border payments could be based on objective reasons? 2. Is there a need to increase legal clarity on interchange fees? If so, how and through which instrument do you think this could be achieved? 3. If you think that action on interchange fees is necessary, which issues should be covered and in which form? For example, lowering MIF levels, providing fee transparency and facilitating market access? Should three-party schemes be covered? Should a distinction be drawn between consumer and commercial cards? A significant threat to a healthy competitive dynamic stems not from the MIF mechanism of 3-party schemes but rather from the dominance of high-market-share players against smaller market share. In fact, electronic payments are a network-based business. Like all such businesses, it shows remarkable Page 1 of 8

2 economies of scale. This applies to all levels of the value chain and particularly at brand (network) and acquiring PSP level. a. Brands that are highly penetrated among merchants benefit from easier and cheaper issuing and vice-versa. b. Large acquiring PSPs easily absorb fixed costs and investments (e.g. POS installation and maintenance, sales costs) and exert significant market influence. c. They also tend to belong to banking groups who are large issuers too, reinforcing the favorable issuing-acquiring cycle d. Belonging to large banking structures also allows them to benefit from large branch networks that are inaccessible to new entrants, dramatically reducing their cost of sale through an asset (the branch) that is sustained by other businesses (retail banking) thus creating an implicit subsidy. All these factors naturally favor further growth in large players at the expenses of smaller competitors/new entrants, be them competing brands (e.g. DinersClub, AMEX) or international acquirers. Indeed, in Italy, two brands completely dominates the market (VISA, Mastercard) and the two largest acquiring PSP represent roughly 70% of the market. Such concentration penalizes smaller volume who are forced to negotiate unfavorable terms in order to get access to the market through them. This, in turn, pushes up prices for merchants and cardholder and prevents a livelier competition. Cross-border acquiring 4. Are there any current obstacles to cross-border or central acquiring? If so, what are the reasons? Would substantial benefits arise from the facilitation of cross border or central acquiring? 5. How could cross-border acquiring be facilitated? If intervention is deemed necessary, which form should it take and which aspects should it cover? For instance, is the rule that prior authorization by the payment card scheme needs to be obtained for cross border acquiring justifiable? Should the MIFs be determined on the basis of the retailer s country (at point of sale)? Alternatively, should a cross-border MIF be applicable to cross-border acquiring? (see also reply n.3 above) Co-badging or co-branding 6. What are the potential benefits and/or drawbacks of co-badging? Are there potential restrictions to cobadging which are particularly problematic? Please quantify the magnitude of the problem if possible. Should restrictions by card schemes on co-badging be addressed and, if yes, in which form? The issue of co-badging needs to be review with a dominant player perspective. In Italy, approx 85% of debit volumes are through the domestic incumbent debit scheme, governed as a consortium of all national banks. When a bank account is opened, the customer is normally provided with a domestic debit card. Being the bank a Visa and/or Mastercard issuer, the card is often loaded with both a Bancomat and Visa (or Mastercard) profile. The network choice is done by customer via a POS-enabled functionality. This type of co-badging reinforces the idea that customer needs no other card and keep the business as Page 2 of 8

3 close as possible to the bank itself (being the bank sometimes often also a player in the VISA/MasterCard acquiring space and member of the Bancomat consortium). So, co-badging is used to reinforce the barriers to entry against non-bank players. As a mean to promote competition, co-badging of two or more dominant networks should be banned or penalized while co-badging with non-dominant brands should be promoted. 7. In case a co-badged payment instrument is used, who should take the decision on the prioritisation of the instrument to be used first? How could this be implemented in practice? The cardholder should be entitled to choose the preferred instrument. This already happens at POS level in Italy. The issue is not there for virtual POS, since the Pagobancomat does not allow the Card-not-present functionality at the moment. Separating card schemes and card payment processing 8. Do you think that bundling scheme and processing entities is problematic, and if so why? What is the magnitude of the problem? Bundling of scheme and processing does not happen in Italy for 4-party schemes. It is the overlapping of acquiring interests, processing interests and POS rental contracts that generates barriers (i.e. POS owners and/or processors that are also VISA/MC acquirers tend to discriminate new entrants/smaller brands). 9. Should any action be taken on this? Are you in favour of legal separation (i.e. operational separation, although ownership would remain with the same holding company) or full ownership unbundling? Acquiring and processing/pos ownership should be accounted for separately, either via legal separation of via regulatory accounting monitored by an authority. Discriminated players should be allowed to claim the protection of the Authority (e.g. Antitrust). Access to settlement systems 10. Is non-direct access to clearing and settlement systems problematic for payment institutions and e-money institutions and if so what is the magnitude of the problem? 11. Should a common cards-processing framework laying down the rules for SEPA card processing (i.e. authorization, clearing and settlement) be set up? Should it lay out terms and fees for access to card processing infrastructures under transparent and non-discriminatory criteria? Should participation of Payment Institutions and E-money Institutions in designated settlement systems be pursued? Should the SFD and/or the PSD be amended accordingly? Compliance with the SEPA Cards Framework (SCF) 12. What is your opinion on the content and market impact (products, prices, terms and conditions) of the SCF? Are there any areas which should be reviewed? Should non-compliant schemes disappear after full SCF implementation, or could arguments be made in favour of their survival? Page 3 of 8

4 Information on the availability of funds 13. Is there a need to allow non-banks to have access to the information on the availability of funds on bank accounts, with the agreement of the customer, and if so what limits would need to be placed on such information? Should intervention by public authorities be considered, and if so which aspects should it cover and which form should it take? Yes, a structured framework that would oblige banks to provide availability of funds information in a reliable (i.e. non discretionary) and efficient (i.e. through a secure IT interface) would enormously improve the effectiveness of the charge card business: a. It would reduce the advantage of the bank as an issuer and open to more fair competition on the payment instrument b. It would reduce the mutualization of the risk for non-bank issuers Dependence on payment card transactions 14. Given the increasing use of payment cards, including in the e-commerce world, do you consider that there are companies whose activities are effectively dependent on the possibility to accept payments by card? Please give concrete examples of companies and/or sectors. If yes, is there a need to define objective rules addressing the behaviour of payment service providers and payment card schemes vis-à-vis such dependent users? TRANSPARENT AND COST-EFFECTIVE PRICING OF PAYMENT SERVICES Consumer merchant relationship: transparency 15. Should merchants inform consumers about the fees they pay for the use of various payment instruments? Should payment service providers be obliged to inform consumers of the Merchant Service Charge (MSC) charged / the MIF income received from the customer s transactions? Would such information be of relevance for consumers and influence their payment choices? The Green Paper assumes that, because the consumer does not naturally chooses the cheapest payment method, the average cost of the goods is increased and this increase is transferred to those customers who actually choose the cheapest payment method. This assumption is not right in most cases. In fact, because of the low percentage value of the merchant commission, such commission can influence the final price of goods or services only for those retailers who have relatively low markups such as grocery supermarkets, hard discount outlets, white goods and electronics shops, petrol station chains, etc Most of these are large companies who can already exert a significant negotiating power towards PSP and easily obtain favorable conditions down to the level of their economical indifference between different payment methods. Other retail segments are very unlikely to pass the cost of more expensive payment methods down to the consumer (e.g. luxury goods). Finally, those retail categories that don t have strong negotiating power but low margins tend to refuse the most expensive payment methods (e.g. coffee shops, tobacco shops, ). Page 4 of 8

5 So, there might be a problem of electronic payment penetration, but not a problem of market inefficiency. Consumer merchant relationship: rebates, surcharging and other steering 16. Is there a need for further harmonisation of rebates, surcharges and other steering practices across the European Union in the card, internet and m-payments context? If so, in what direction should such harmonisation go? Should, for instance: certain methods (rebates, surcharging, etc.) be encouraged, and if so how? surcharging be generally authorised provided that it is limited to the real cost of the payment instrument borne by the merchant? merchants be asked to accept one, widely used, cost effective electronic payment instrument without surcharge? - - specific rules apply to micro-payments and, if applicable, to alternative digital currencies? The Green Paper underlying assumption that passing the cost of the payment system transparently to the consumer (via differentiated surcharges or rebates) would boost efficiency is unfortunately wrong, at least in the Italian market, because of pre-existing distortions in the availability of cost information. In fact, it is realistic to assume that most small/medium size merchants have a distorted perception of the real cost of some payment methods (e.g. most of them assumes cash has no cost). Besides, the use of cash, a non traceable instrument of payment, can offer significant incentives to some merchants, thus dramatically and artificially tilting the balance between cash and any electronic payment. So, if the merchant were left free to discriminate among different instruments of payments, there would be a strong bias toward cash even in those many cases when electronic payment would be the most efficient instrument. This bias would result in a lower share of payments through cards, lower economies of scale for most players, higher costs and lower competitions: a downward spiral. Surcharging and rebates should not be encouraged. Rather, competition should be promoted among brands and PSPs. It is widely accepted that a market with two dominant players (e,g, Visa and Mastercard; CartaSì and Setefi) are not competitive and tend to align prices up. So, smaller players and entrants should be encouraged and protected against unfair competition practices from incumbent PSPs and banks (see answer n.6, 8, 9, 10) Surcharging should not be generally authorized Imposing an electronic payment instrument is illiberal and goes against the healthy dynamics of a free market. We don t believe that an artificially regulated market would be in the interest of any party. Micro-payments are an industry opportunity whose barriers to diffusion are the cost of transactions and the investments required to build an efficient acceptance infrastructure. It is in the interest of the industry to reach that level of efficiency so that micro-payments become sustainable. No regulation is needed. Merchant payment service provider relationship 17. Could changes in the card scheme and acquirer rules improve the transparency and facilitate cost-effective pricing of payment services? Would such measures be effective on their own or would they require additional flanking measures? Would such changes require additional checks and balances or new measures in the merchantconsumer relations, so that consumer rights are not affected? Should three-party schemes be considered? Should a distinction be drawn between consumer and commercial cards? Are there specific requirements and implications Page 5 of 8

6 for micropayments? We believe that NDR, HAC and blending make prices simpler to understand and facilitate price comparison between providers. Regulation should not change. STANDARDISATION 18. Do you agree that the use of common standards in the area of cards would be beneficial? What are the main gaps, if any? Are there other specific domains in card payments, beyond the three mentioned above (A2I, T2A, certification), which would benefit from more standardisation? Yes, we agree that protocol standardization would foster efficiency and intra-eu competition. The T2A domain is probably one of the most relevant, although Italy has a fairly organized and efficient POS infrastructure. 19. Are the current governance arrangements sufficient to coordinate and drive the adoption and implementation of common standards for card payments? Are all relevant stakeholder groups properly represented? Are there ways by which conflict resolution could be improved and consensus finding be accelerated? 20. Should European standardisation bodies, such as CEN or ETSI, play a more active role in standardising card payments? In which area do you see the greatest potential for such an involvement and what are the potential deliverables? Are there other bodies, either already existing or new, which could facilitate standardisation for card payments? 21. On e- and m-payments, do you see concrete areas where more standardisation activities would be crucial to support fundamental principles, such as open innovation, portability of applications and interoperability? If so, which? 22. Should European standardisation bodies, such as CEN or ETSI, play a more active role in standardising e- or m- payments? In which area do you see the greatest potential for such an involvement and what are the potential deliverables? INTEROPERABILITY BETWEEN SERVICE PROVIDERS 23. Is there currently any segment in the payment chain (payer, payee, payee s PSP, processor, scheme, payer s PSP) where interoperability gaps are particularly prominent? How should they be addressed? What level of interoperability would be needed to avoid fragmentation of the market? Can minimum requirements for interoperability, in particular of e-payments, be identified? Page 6 of 8

7 24. How could the current stalemate on interoperability for m-payments and the slow progress on e-payments be resolved? Are the current governance arrangements sufficient to coordinate, drive and ensure interoperability within a reasonable timeframe? Are all stakeholder groups properly represented? Are there specific ways by which conflict resolution could be improved and consensus finding accelerated? PAYMENTS SECURITY 25. Do you consider that physical transactions, including those with EMV-compliant cards and proximity m- payments, are sufficiently secure? If not, what are the security gaps and how could they be addressed? 26. Are additional security requirements (e.g. two-factor authentication or the use of secure payment protocols) required for remote payments (with cards, e-payments or m-payments)? If yes, which specific approaches/technologies are most effective? 27. Should payment security be underpinned by a regulatory framework, potentially in connection with other digital authentication initiatives? Which categories of market actors should be subject to such a framework? 28. What are the most appropriate mechanisms to ensure the protection of personal data and compliance with the legal and technical requirements laid down by EU law? STRATEGY IMPLEMENTATION/GOVERNANCE Governance of SEPA 29. How do you assess the current SEPA governance arrangements at EU level? Can you identify any weaknesses, and if so, do you have any suggestions for improving SEPA governance? What overall balance would you consider appropriate between a regulatory and a self-regulatory approach? Do you agree that European regulators and supervisors should play a more active role in driving the SEPA project forward? As highlighted above, as far as Italy is concerned, there is no pan-european competition in the issuing and acquiring businesses; i.e. acquiring is dominated by domestic acquirers that have no significant business in the rest of western Europe and issuing is dominated by local issuers that has no significant business in the rest of western Europe. Such local dominance is exerted thanks to a dominant position on distribution channels (e.g. bank branches) and to de facto bundling of payment services with other banking services. Existing financial regulation aimed at different objectives, such as KYC regulation, reinforces these competitive advantages by imposing heavy burdens on operators. Only those operators that can spread such burdens on many different services can thrive. Page 7 of 8

8 A regulation that would aim at breaking such dominance factors (for instance by forcing bank issuers to open their channels to three party models) would foster competition and improve the service/cost ratio. Governance in the field of cards, m-payments and e-payments 30. How should current governance aspects of standardisation and interoperability be addressed? Is there a need to increase involvement of stakeholders other than banks and if so, how (e.g. public consultation, memorandum of understanding by stakeholders, giving the SEPA Council a role to issue guidance on certain technical standards, etc.)? Should it be left to market participants to drive market integration EU-wide and, in particular, decide whether and under which conditions payment schemes in non-euro currencies should align themselves with existing payment schemes in euro? If not, how could this be addressed? 31. Should there be a role for public authorities, and if so in which form? For instance, could a memorandum of understanding between the European public authorities and the EPC identifying a time-schedule/work plan with specific deliverables ('milestones') and concrete target dates be considered? 32. The Paper addresses specific aspects related to the functioning of the payments market for card, e- and m- payments. Do you think any important issues have been omitted or under-represented? Page 8 of 8