Debunking card myths with John Chaplin

Here's another blog with multimedia inserts, this time discussing John Chaplin who presented at the Club this week about trends in debit and credit cards.

Now John should know what he's talking about as he is European payments adviser for First Data,  liaising closely with the European Commission, European Central Bank and other
regulatory authorities on SEPA.  So it was interesting that he called SEPA, from the cards perspective, "something that frankly hasn't happened".

John's not one to mince his words - see his chapter in the SEPA book if you're not sure about that - but  will bring a reality check to the hype and baloney that surrounds this industry.

For example, we talked a lot about the four-pillar model of interchange.  The four pillars representing the fees between:

• merchant - the store / retailer;
• acquirer - their bank;
• issuer - the cardholder's bank; and
• processor - Visa, Mastercard et al.

Each of the latter three take a slice of each transaction and, although Denmark and a few other countries have interchange structures that encourage small card transactions, these fees generally make it undesirable for many to take card payments for under $10.

Contactless may change that but, as John said, "although there will be some real benefits in terms of utility to cardholders and some merchants, don’t forget that no-one makes much money out of low value transactions".

He also discussed the EU's issues with the interchange model, and why they forced Mastercard to suspend their European cross-border fees. 

Even so, the interchange debate is strongly defended by folks such as Peter Ayliffe, CEO and President of Visa Europe.  Interestingly John, who was an EVP with Visa Europe as Head of strategy and
Chief Information Officer, says that in his view interchange is essential for the market to work.  The question is whether it can be shown to be in the public interest as most regulators now take the view that it is "price fixing".

There is no real competition in the international scheme space - Visa and Mastercard are effectively it today as far as international schemes go.  Even though the Euro Alliance of Payment Schemes (EAPS) is trying to break the mould (!), John does not believe that it is easy for a new player to break in.

Therefore, maybe the EU should dictate the fee rates by law, even though they have come down 40% since 2003.

John then stressed how debit cards were becoming much more important than credit cards for payments.  With fees for debit cards typically 70% less than for credit, if cardholders switch their choice of card this would hit bank incomes heavily.

In a wide ranging discussion, John then covered the innovations in the market - contactless, prepaid, virtual cards and more, so I picked a clip from the meeting that I thought would be of interest. 

It was hard to pick one, as everything John covered is of interest to those of us in the cards space, but I thought the discussion about fraud was of interest, particularly as it covers Chip & PIN:

Now you all know I hate Chip & PIN and so it amused me that, although John says it hasn't solved all types of fraud, he praised the fact that at least it got rid of all the old legacy technology that was there before.

Excellent.

What is more interesting is the fact that fraud losses are about a tenth of credit losses, and credit losses are getting bigger thanks to this credit crisis. 

By way of example, HSBC pulled out of America this week by closing down Household, but they are keeping their card operations up and running.  That card operation holds about $50 billion in US assets, which is still some exposure if just 5% of those accounts default.

All in all, a great night of discussion again.

The  recording of the meeting along with John's slides are being made available for Club
members and Online Members.  If you’re not a member but would like details, then email me.

p.s. I know that some of you can't access YouTube or Slideshare whilst at
work or on the move, and so I apologise for using these sites more and
more in my blog if that's the case ... it's just that these are two of
the most popular websites in the world (#3 and #1101 respectively) with
millions of visitors per day, so your firms should really allow you
access to them by now shouldn't they? 

Added to which, going back to my Banking as a Service debate, they're a method of sharing all of this information for free - now that's worthwhile isn't it?