Andrew Dickinson takes a look at some big changes ahead in the credit card arena, particularly in Australia.By the end of 2008, in a population of 21 million, there were more than 14 million credit and charge card accounts in Australia.Traditional stakeholders will have to become participants with all other links in the payment chain, or risk losing their stake entirely.TRADITIONALLY, Asia Pacific has been a region dominated by the use of cash. In recent times, the increase in the use of credit cards and subsequent transactions had led to the evolution of the payments ecosystem. In this article we consider what this payments ecosystem looks like, outline the challenges and opportunities that exist in the payments system across Asia Pacific and in Australia and consider the next stage of evolution for payments.Growth in the use of card payments has been significant in recent times. As a result, some mature markets are struggling to cope with increasing volumes of transactions after years of under-investment in payments infrastructure.At a time when many banks are re-evaluating their core competencies, the future of payment systems cannot be ignored. There are many options available – payments can be streamlined, offshored or outsourced, and there are risks and benefits involved to consider. Much of the payments infrastructure around the region is inconsistent and inefficient, hindered by legacy systems and the contesting interests of different stakeholders. Consumers are increasingly concerned by security and privacy issues.In a world once dominated by banks, there is already a wide assortment of players from transaction processors and card scheme providers to technology vendors and connectivity partners.The Asia Pacific payments marketAt the end of 2007, credit card payments in the Asia Pacific region were close to $US1.3 trillion, about 30 per cent of the global figure. Being home to upwards of half the world’s population, this means card usage in the region has considerable growth potential.Nearly 70 per cent of card usage was for the purchase of goods and services, and about 30 per cent for forwarding or the withdrawal of cash. Visa and MasterCard accounted for 90 per cent of card usage by both volume and value (see table 1). Table 1: Card brands and transaction values in Asia Pacific 2007Card Brand Cards (million) Transactions Value ($ billion) Total Purchases CashVisa 446 845 556 289MasterCard 189 311 215 96JCB 59 67 62 5American Express 10 55 54 1Diners Club 3 11 10 1Total 707 1,289 897 392Source: The Nilson Report, #903, May 2008By country, Japan headed the rankings of total transactions (attributable to the size of the economy) with $US209 billion of purchases, followed closely by South Korea (see table 2). China and India clearly exhibit enormous potential with just $US24 billion and $US2 billion of payments respectively when considered in the context of population and economic growth indicators. Australia and Hong Kong have high transaction volumes on a per-capita basis.Table 2: Total value of transactions by general purchase cards by countryCountry Total Value of Purchases by CardJapan $US209 billionSouth Korea $US203 billionAustralia $US140 billionTaiwan $US24 billionChina $US24 billionHong Kong $US20 billionNew Zealand $US11 billionThailand $US6 billionIndia $US2 billionSource: The Nilson Report, #903, May 2008Japan is something of an exception. Although more than 99 per cent of card transactions in Japan involve credit cards, their use in Japan is limited. According to the Bank for International Settlements (BIS), in 2005 the per-capita use of all type of cards for transactions in Japan was just 22, comparedwith five in Singapore, the only other Asian country for which BIS data is available.In comparison, the per-capita usage was 104 in the UK and 145 in the US. However, in the UK and the US, credit cards were involved in less than 50 per cent of card transactions. Table 3 shows the relative importance of payment methods in these four countries.Table 3: Relative importance of payment instruments (percentage of transactions)Country Credit Transfers Direct Debit Cheques E-Money (SVC) Cards Credit CardsJapan 60% - 5.3% - 75.3%* 75.1%*Singapore 1.3% 2.7% 4.3% 83.2% 8.5% -UK 21% 19.9% 10.7% - 48.4% 12.1%US 6.5% 10.4% 28.6% - 54.5% 23.9%* Data from 2006 surveySource: Bank for International Settlements, 2009The Australian payments marketAustralia’s card payments market has been growing steadily, even if by regional standards the market remains relatively small.By the end of 2008, in a population of 21 million, there were more than 14 million credit and charge card accounts in Australia, up from 8 million 10 years earlier, and the average value of monthly purchases (excluding cash withdrawals) was more than $A17 billion. On an annualised basis, this represents 25 per cent of Australia’s GDP measured in terms of purchasing power parity.From 1974 until 2006, Bankcard was a card scheme issued and accepted by all of Australia’s leading banks, offering local competition to Visa and MasterCard.Over time, it proved unable to sustain sufficient investments in new products or match its rivals marketing resources, resulting in a decline of its market share to the point where the banks stopped promoting it. As a result, the banks have moved from close cooperation towards a more competitive stance.This is also partly a way to avoid future regulatory pressure. Efforts by the Australian Competition and Consumer Commission and the Reserve Bank of Australia to open the market to greater competition, both domestic and overseas, as a way to drive innovation has been controversial. A growing industryconsensus seems to be emerging in favour of more transparent and flexible practices, and open competition. Merchant groups have been pressing for this in their submissions to the Reserve Bank as part of the consultation process. The first, and so far only, non-bank to receive a special authorised deposit-taking institution (ADI) licence as an acquirer is Tyro Payments. This has been possible because of a recommendation of the Treasury’s 1997Financial Services Inquiry, otherwise known as the Wallis Report, for the setting up of the Australian Prudential Regulation Authority (APRA) for all deposit-taking institutions.APRA issued two Specialist Credit Card Institutions (SCCIs) licences for deposit-taking institutions, one an issuing licence to foreign-owned GE Capital, the other an acquiring licence in 2006 to locally incorporated MoneySwitch, trading as Tyro Payments.With its special licence, Tyro Payments has become not a bank as such, but an acquirer with a banking authority and a principal member of the card schemes.Tyro’s licence restricts it to payments processing, including financial clearance and settlement, for credit cards, debit cards, direct debits and BPay, a subsidiary of CardLink.CardLink, owned by a consortium of Australia’s financial institutions, provides credit card authorisations, electronic bill payments (BPay) and paper voucher processing, which arises mainly on occasions when electronic communications fail.Tyro Payments entered the market with an all-IP platform, software that offers end-to-end payments processing for merchants using broadband internet connections. Their first major client was Medicare, the government agency that runs Australia’s universal health insurance program and for which Tyro Payments handles rebates and claims as part of payments processing.This development has given the four major acquiring banks further reason to fight back, making good on their promise to add value to the industry through cost efficiencies and innovative services. They have created more value and more “stickiness” by adding applications to their terminals, subcontracted to smaller, specialised local software players. They are working with middleware providers to integrate POS systems and e-commerce applications.On the other hand, some of the banks’ competitors in the acquiring business argue that new security standards such as 3DES encryption, EMV chips cards and contactless standards, as well as mobile payments, have been slow to gain traction. In their view, this is in part owing to the major acquiring banks owning the terminal fleet and legacy systems for the back-end processing, which are expensive to replace.There is another notable development in the Australian market that has driven competition and innovation. Coles and Woolworths, the dominant retailers in the country, have moved away from the big acquirers by taking the switching technology in-house and, in some situations, switching transactions directly to the issuing banks, circumventing the scheme networks. This self-acquiring model has provided the retailers with significant efficiencies, flexibility and control.These developments may explain why most Australian banks have been relatively guarded about outsourcing processes to third parties and wary of the risks of jeopardising a close and direct relationship with their larger merchant customers.For the future, the growth of independent processors is likely to continue, and this may necessitate some banks changing their position on outsourcing. In response, or in tandem, the banks are likely to pay attention to upgrading their networks to all-IP broadband. Such innovation could bring them into competition with the card schemes.ConclusionsIf payments are viewed as a service, it will require traditional stakeholders to relinquish their stake and become participants with all other links in the payment chain, or risk losing their stake entirely.The expected benefits include the following:• Offloading the capacity issues to TPPs with payments systems equipped to handle the volumes• Access to best-of-breed solutions, providing the latest functionality and innovation to which contributions are made by all participants and shared accordingly• Avoiding the sunk costs of investment in systems and networks (software and hardware) and sharing services fees with fellow traditional stakeholders andcompetitors• Handing regulatory compliance responsibility and cost to a TPP.The expected risks are:• Data privacy and security concerns from the offsite handling and commingling of information• A smaller slice of the revenue pie for traditional stakeholders, which is counteracted by the reduction in investment and the ever-increasing size ofthe electronics payment market, especially in the Asia Pacific region• Commoditisation of offerings, in that every bank using that TPP has the same service and there is limited scope for differentiation• Disintermediation of the bank’s relationship with the client, be it a merchant or cardholder.While there may be many risks, many organisations are taking a view that these can be mitigated and handled via appropriate commercial and legal arrangements and structures. At each stage of the payments chain there are opportunities to add value, lower transaction costs and enhance the effectiveness of marketing through data mining and the ability to offer a wider variety of options in payment methods and currencies to cardholders.Further, by using third parties to provide key business functions along this chain, businesses may benefit from the best-of-breed technologies employed by such entities without needing to make a significant capital investment, saving on the expertise and personnel required to perform functions that are often not core to the business strategy.This may lead to a better customer experience and a new business model in the payments market suited to the rapid evolution of electronic payment transactions. The traditional participants with a first-to-market advantage still have an opportunity to offer the newest solutions using the lowest-cost infrastructure. Over time, the newer participants may settle into their niche positions in the payments chain, but they may also bypass traditional players with next-generation solutions.Andrew Dickinson is a Partner and National Banking Sector Leader at KPMG.
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