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Expansion in the use of mobile payments over time has corresponded with an increase in smartphone ownership. In 2011, 44% of mobile phones were smartphones. By 2015, the share had increased to 76%.

This chartbook presents findings from a nationally representative telephone survey, undertaken by The Pew Charitable Trusts, that examined consumers’ opinions, experiences, and expectations of mobile payments. The survey followed focus groups that Pew previously convened as a first step in understanding consumers’ views on the potential benefits and risks of mobile payments. Specifically, this chartbook reports statistics on consumers’ awareness and perceptions of mobile payments technology, their usage and motives for use, and any barriers to usage. The key findings are:

• Mobile payments users – consumers who have made an online or POS purchase, paid a bill, or sent or received money using a Web browser, text message, or app on a smartphone – are more likely than nonusers to be millennials or Generation Xers, live in metropolitan areas, and have bank accounts and college or postgraduate degrees. Of these demographic categories, age is the most predictive of mobile payments use, particularly as it relates to smartphone ownership. (See the appendix for the demographics of mobile payments users and nonusers.)
• Making a purchase through a smartphone Web browser or downloaded app is the most common mobile payments activity.
• Consumers see a number of benefits to using mobile payments, particularly receiving alerts, electronic receipts, rewards, discounts, and help with budgeting.
• Consumers often don’t know how mobile payments compare with other payment methods in terms of convenience, cost, privacy, and security.
• Barriers to usage include concerns about the safety of mobile payments technology, which might result in identity theft or the loss of funds, and poor compatibility with cash-based transactions.
• Consumers want the data they generate by use of mobile payments to be secure and protected and access to it to be limited across entities, from phone carriers to app developers and advertisers.

The charts that follow delve into these findings and highlight the advantages that consumers associate with mobile payments usage and the barriers that may prevent people from adopting or safely using this technology.

Many consumers, including a large number who have never made a mobile payment, have heard of different mobile payment activities, such as using a smartphone to make online or point-of-sale purchases or pay bills.

Mobile payments users are consumers who have made an online or point-of-sale purchase, paid a bill, or sent or received money using a Web browser, text message, or app on a smartphone. Users are more likely than nonusers to be millennials or Generation Xers, live in metropolitan areas, and have bank accounts and college or postgraduate degrees. Of these demographic categories, age is the most predictive of mobile payments use, particularly as it relates to smartphone ownership.

Getting a smartphone is the most common catalyst cited for adoption of mobile payments technology, and millennials and Gen Xers are far more likely than those from older generations to own smartphones. The majority of basic phone owners (77%) say they are unlikely to buy a smartphone in the next year, meaning the age gap in smartphone ownership will probably persist. Smartphone ownership also varies dramatically by annual household income. Only 53% of consumers earning less than $25,000 annually own a smartphone compared with 81% of those earning $50,000 or more annually.

Mobile payments use varies by type of activity and with age, with more millennials having used their smartphones to make a purchase through a smartphone Web browser or downloaded app than to send or receive funds. Overall, few consumers make payments or donations by sending text messages. PayPal’s smartphone app is the most commonly used, ahead of Google Wallet, Apple Pay, and the Starbucks and Dunkin’ Donuts apps, and millennial and Gen X smartphone owners are more likely than those from the baby-boom or silent generations to have used these apps, except for Dunkin’ Donuts.

Millennials and Gen Xers in particular are motivated to use mobile payments in part because they like receiving rewards, discounts, alerts, and electronic receipts. Consumers are also interested in avoiding fees, such as overdraft or check cashing fees, and using their smartphones to help them budget. In fact, research shows that consumers are using smartphones to help with budgeting more than in previous years.

Consumers cite a variety of barriers to mobile payments use; the most common is concern about safety, specifically the risk of identity theft or loss of funds. Some obstacles vary by generation, with older consumers being less informed about the benefits of mobile payments and millennials being especially concerned about running out of data on their phone plans. The use of cash to make payments is cited across generations as a barrier, because cash cannot be easily loaded onto a smartphone. Cash is still a very common payment method, and consumers average about 8.5 retail cash purchases a month.

Nearly half of respondents say they don’t know whether mobile payments are faster, easier, or more private than other transaction types, and even more do not know if mobile payments are more common, cheaper, or safer. Reducing this uncertainty, especially about the safety of the technology, could increase use.

Mobile payments use is related to more favourable perceptions of the technology in terms of convenience, cost, privacy, and security. Users agree more often than nonusers that mobile payments are faster, easier, more common, cheaper, more private, and safer than other payment methods.

Consumers often assume that financial institutions, retailers, and others are collecting information about them, including tracking their locations when they execute financial transactions. In the focus groups, a number of consumers expressed moderate discomfort with the sharing of their personal information. About 8 in 10 survey respondents, with general consistency across political parties, say that steps should be taken to regulate how data are collected, stored, and used.

In focus groups, participants were generally unaware of which personal data are collected when they conduct mobile transactions or how those data are used. They also did not know whether or to what extent their privacy is compromised. When asked specifically who they think should have access to these data, only about half of respondents say that the payment sender should have access, and far fewer (5%) agree that advertisers should have access.

Conclusion

Age explains some but not all attitudes about mobile payments. About 90% of millennials and 83% of Gen Xers own smartphones, and individuals in these generations constitute the majority (72%) of mobile payments users. They are especially compelled by the option to receive rewards, discounts, alerts, electronic receipts, and help with budgeting and to avoid fees and are the most likely age groups to say mobile payments are faster and easier than other payment methods.

Across generations, concern about the safety of mobile payments technology is the biggest obstacle to use. Specifically, consumers are concerned about the potential for identity theft or loss of funds. Consumers of all ages cite the use of cash as a payment method as a barrier, because cash cannot be easily loaded onto a smartphone. And customers often don’t know how mobile payments compare with other payment methods in terms of convenience, cost, privacy, and security.

The growing mobile payments market has the potential to provide a convenient, affordable way for Americans to transact and manage their money. Yet concerns and uncertainty about the safety of mobile transactions and the lack of systems for depositing cash directly onto mobile websites and smartphone apps may be holding back this technology. Addressing these deficiencies could increase adoption, allowing consumers to take full advantage of the potential of mobile financial products to deliver safe and secure transactions.

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Consumers can send and receive e-mail across the globe almost instantly. They can stream digital content live, or summon a cab or a meal within minutes. What are the implications of this need for speed for the payments industry? And to what extent are real-time payments the rails on which future innovation will run?

Life in the digital age is resetting our notions of speed and time. The average attention span in 2015 was 8.25 seconds, down from 12 seconds in 2000, according to Statistic Brain. This is now less than the nine-second attention span of a goldfish. In a world that seems to be on permanent fast-forward, waiting five-to-six days for a cheque to clear, or three days for a bank transfer to reach the beneficiary’s account, is like being stuck in reverse. It seems like banking from a bygone era.

The payments industry is at the confluence of many trends, some behavioural, some technological and others regulatory. Momentum behind real-time payments is building globally. We examine the drivers, the implications for end-users and those who serve them, and what the future may hold for payments in real-time.

The real deal 

Real-time payments systems are not new. The first domestic real-time payments system was launched in Japan in April 1973, and there are currently 18 real-time systems live worldwide. But what are real-time payments exactly?

Definitions vary and not all systems worldwide currently conform to the one that follows. Generally real-time payments are where funds transferred are available on the beneficiary’s account instantaneously, immediately or in real-time. A real-time payment system must be able to send and receive payments 24x7x365. Once they are processed, payments cannot be recalled. There is a finality to payment, but also a certainty as payments sent to a beneficiary’s account are either confirmedto both the payer and payee or rejected.

“In most countries, you tend to have a couple of payment systems: automated clearing house (ACH) and real-time gross settlement (RTGS),” explains Barry Kislingbury, director, solution consulting, immediate payments, ACI Worldwide.

“ACH tends to be for low-value, high-volume payments, such as paying the gas bill. It takes about three days to settle. With RTGS, the payment is settled on the same day. This system was intended for high-value, low-volume payments, such as buying a house or for corporate or interbank payments.”

“Real-time payments sit in the middle. They are an ACH-type payment over an RTGS-infrastructure, so they are performed in real-time but at the sort of price an ACH would charge for a payment — so much lower than RTGS.”

The drivers for real-time payments 

The speed, certainty, coverage and cost of real-time payments is driving increasing interest in the mechanism. Consumers do not necessarily understand bank back-office clearing and settlement processes, and nor should they. When they can browse, buy and download digital goods in real-time, any time of the day or night, they cannot understand why the digital movement of money is not instantaneous. They expect to be able to make and receive payments faster.

Advancements in technology are also making real-time payments possible. There were around 4.7 billion unique mobile subscribers worldwide in 2015 (a 63 percent penetration rate), according to the GSMA, a body that represents the interests of mobile operators worldwide. When the smartphone is the device of choice for accessing the internet — and is the only means a consumer has of getting online in some countries — this cannot but change the way consumers, businesses and governments interact and transact. Mobile phone ownership and access to high-speed broadband are also pre-requisites for mobile-initiated push and pull payments.

Enterprise technology has also advanced significantly since the first real-time payments systems were launched 40 years ago. “The banking community has ambitions to improve and modernise the payments infrastructure,” says George Evers, immediate payments services director, VocaLink. “This allows innovation and defends against FinTech activity that is starting to bite into every element of a bank’s product portfolio.” The infrastructure investments made now will power the products and services of the future.

A combination of factors is driving the change [towards real-time payments] and these differ from country to country. George Evers, immediate payments services director, VocaLink 

Policy makers and regulators are clearly interested in making payments more efficient, interoperable and cost-effective, with a view to driving economic growth, innovation and financial and social inclusion. The lower costs of real-time payments versus traditional card-based or RTGS payment is also an attractive feature for regulators, as well as other participants in the payments system.

This time the revolution is for real(-time) 

‘Revolutionary’ is a somewhat over-used and de-valued term in the age of PR and hype. However to what extent is the term justified in the context of real-time payments?

“Real-time payment is revolutionary because it’s game-changing,” says Kislingbury. “If you take any bank payment process, what would happen if that could be done in real time?”

Businesses and corporates have huge scope to use real-time payments to improve their cashflow, supply chain management, stock control and reconciliation. This could lead to productivity and efficiency gains but also to direct bottom-line benefits.

For example, a company with a global supply chain could offer to pay suppliers ten percent of the fee in real time when goods were loaded onto a ship. They would then pay the next ten percent when the ship arrived at its first port and so on until the ship arrived at the final destination whereupon the payer would settle the outstanding amount in full. In this way, real-time payments could enable businesses to offer improved invoicing terms to suppliers that could help increase working capital.

For retailers, real-time payments could enable just-in-time stock management with the associated operational and cost efficiencies. This obviates the need to carry an inventory, and could lead to fulfilment efficiencies. When a customer ordered an item, the retailer would in turn place an order with their supplier and pay in real time. The supplier would then dispatch the item either to the retailer or to the customer directly. The retailer would not have to pre-pay or store stock. They would also increase fulfilment options to the customer, and cut the costs of wastage due to unsold goods. Just-in-time stock management also has implications for the retail store of the future in terms of the purpose, design and number of stores.

For consumers, a number of possible propositions draw on the speed of real-time settlement. For example, emergency funding propositions where the transferred funds are available immediately to the beneficiary (e.g. social benefit claimant or child). With the rise of of part-time work, mini jobs and zero-hours contracts, employers could also pay workers quickly and easily via real-time payments. Gambling operators could accept wagers and pay winnings in real time, avoiding customer disgruntlement at the traditional two day wait for payment card credits to settle.

For banks, real-time payments will be no less significant. They will be the catalyst — and perhaps the imperative — for them to devise new business cases and revenue streams. “The banks actually have to change their business models. It’s no longer about making money from the payment. It’s about making the payment invisible and offering value-added services around it,” comments Kislingbury.

There is an obvious parallel with merchant acquiring, which is becoming an increasingly commoditised business at the transaction processing level. Acquirers are already revising their business models to secure their futures. They are exploring how they add more value to customers, and devising innovative, chargeable services for which merchants would be willing to pay. “It’s exactly the same argument across correspondent and retail banking. Moving money is what banks do, but there’s no real value in that these days because everyone can do it. It will be about what value you bring to your customer,” says Kislingbury.

The revised EU Directive on payment services (PSD2) is intensifying the pressure on European banks. Improving access to payment accounts and increasing transparency around payments and charges are two of the main themes running throughout the Directive. This is not a peculiarly European phenomenon. Banking executives worldwide are currently grappling with how they can create and maintain value. And how they can capitalise on the move to a more open banking environment.

Faster, richer data 

Value is increasingly bound up with data. Thanks to the ISO 20022 standard, real-time payments come with speed but also with richer data. Kislingbury explains the background and differences between ISO 8583 and ISO 20022.

“ISO 8583 is a small, lightweight message, designed to move the value of a payment quickly across systems built on the technology of 40 years ago. It’s quite a complicated, heavily modified standard because there is such a small amount of data. All the schemes use the standard differently to achieve what they need to. Although it’s a standard, it’s a type of non-standard as well.”

ISO 20022 is not actually a messaging standard. It is a standard to develop standards. Or a standard that helps define a business process. ISO 20022 comes with a large data dictionary, defining a wide range of business processes and the data required to support them. “It’s a much bigger message, but technology has moved on and can cope with that. You can describe the entire transaction: remittance information, purchase order numbers, invoice numbers. There’s a whole raft of things you can do, if you’ve got that data,” explains Kislingbury.

The banks actually have to change their business models. It’s no longer about making money from the payment. It’s about making the payment invisible and offering value-added services around it.

Barry Kislingbury, director, solution consulting, immediate payments, ACI Worldwide

There is huge potential for banks in terms of innovative, chargeable services they can overlay on a real-time payments infrastructure based on ISO 20022. Unsurprisingly, many countries with live real-time payments systems are actively looking to upgrade to ISO 20022. This includes China, South Africa and Switzerland. Meanwhile, countries such as Australia, the Eurozone countries and the US are building real-time payments systems on ISO 20022 from the outset.

However to enable cross-border payments regionally, if not globally, requires interoperability. This came a step closer in August 2015 with the publication of the first draft of ISO 20022 messages. The draft was the result of work by the ISO real-time payments group (RTPG), made up of over 50 international experts.

“There are a lot of countries designing and building real-time payments on ISO 20022. Historically those countries, which have already built systems on the standard have used it slightly differently. We wanted to put together a best practice guide to ensure interoperability,” explains Kislingbury, who participated in the ISO RTPG.

Keeping it real 

Besides interoperability to facilitate cross-border payments, what needs to be in place at a domestic level to implement a real-time payments system? According to George Evers at VocaLink, alignment across a broad community within the country is critical.

“Real-time payments delivers benefits to banks, consumers, government and businesses of all shapes and sizes,” he says. “To ensure ubiquitous adoption, it is best to engage widely to agree a common approach to solving problems and ensure the needs of these different communities are met through the solution.”

As with the implementation of many payment technologies — everything from EMV chip and PIN, to contactless, to mobile payments — critical mass on the consumer and merchant side together is key. Achieving this is partly a matter of ensuring that the system supports end-user requirements from a technical and operational point-of-view. However it is also a question of coverage (or reach) and access.

Faster Payments Scheme Limited (FPSL), the company behind various UK payments systems, is looking to open up the infrastructure to a broader base of banks and PSPs to provide easier and more cost-effective access. Consequently it is having to address challenges germane to real-time payment schemes generally, namely balancing access with security and the integrity of the system, particularly around 24×7 operation, payments delivered in seconds, high availability and certainty of funds.

FPSL is introducing aggregator models plus a new settlement model between participants to encourage direct access. “This creates a much easier environment for small banks, who are currently restricted to being secondary suppliers through a major bank, as they will have direct access,” explains Bob Mackman, director, Mackman Associates, a vendor participating in the Access to Payment Systems programme run by FPSL.

“At the moment, the smaller banks are dependent on the facilities of the major bank. This way, they’ll get much closer to 24×7 at a much more realistic price, so they’ll be able to offer these sorts of services,” says Mackman.

I believe that real-time payments will be the new normal for payment. And that real-time payment infrastructures will allow convergence of batch multi-day or same-day systems through to card clearing infrastructures. 

George Evers, immediate payments services director, VocaLink

Real-time payments is not the panacea to cure all payment ills. Real-time payments are fast, but how much speed does the end-user need, and when? Real-time payments based on ISO 20022 can pass richer data, but how much more data does the end-user need, and when?

The future is happening in real-time 

Unless there is a compelling reason to change, payers are not usually looking for a new way to pay. Thus, devising compelling use cases and propositions at the right price will be critical to the take-up of real-time payments. As will getting more participants to use the system, thereby generating more value for everyone who participates.

However, the momentum and excitement around real-time payment is justified. Real-time payment has the potential to be game-changing for all participants in the payments system. So far, the majority of real-time payments systems are based on push payments. But pull-based real-time payments in the retail and government sectors will have an even greater impact on incumbents’ business models and revenue streams. The risk of disintermediation, particularly for card schemes, of future innovation based on real-time rails is very real.

How long will it take for real-time payments to become a reality in more and more countries, and internationally? When will then be now? Soon. While there is no such thing as a simple payments system, the future is happening soon. However it may yet be happening sooner than soon. It may be happening in real-time.

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The report Investments in Paytech analysed the investment lifecycles of 113 PayTech companies founded or operating in key western markets (France, Germany, Italy, Spain, UK and US) between 2010 and 2015. It found that UK and US companies dominate the market almost completely, with 90% of start-ups originating in these countries.

While the US has more PayTech companies overall, the UK punches well above its weight. In 2010, 13% of PayTech start-ups were based in the UK compared to 58% in the US. By 2015, the US had remained nearly static with 61% of start-ups based there, while the UK had more than doubled its share to 28%. Seed funding growth reinforces this view.

The average UK PayTech start-up received $1.8m in seed funding in 2015, more than double the $0.84m from five years ago, and is now nearly on a par with its US-based rivals ($1.8m).

The lifecycle of UK PayTechs is also impressive, with start-ups remaining independently active for longer than peers in other western markets including the US. After five years, 43% of US PayTechs had either failed or had been acquired, while all of the businesses in the UK remained active and independent. While this indicates that the UK is better at creating and fostering sustainable PayTech companies with long-term prospects, the lack of acquisitions suggests some caution about acquiring start-ups before they are fully scaled up.

Key findings

o    The US and UK dominate payments in western markets

• 90% of PayTech start-ups originate in the US or the UK

o    The UK is the second most attractive place to set up a payments business after the US

• In 2010, 58% of PayTech start-ups were in the US and 12.5% were in the UK
• In 2014, 61% of PayTech start-ups were in the US and 28% were in the UK

o    UK PayTech seed funding more than doubled between 2010 and 2014

• In 2010 UK seed funding averaged at $0.84m and grew to $1.8m in 2014

o    The UK is now on a par with the US when it comes to seed funding

• In 2014 US seed funding averaged $1.9m compared with $1.8m in the UK

o    UK PayTechs remain independently active for longer than US players

• 43% of the US PayTech companies which were established in 2010 have either closed or been acquired
• 100% of the UK PayTech companies included in this survey are still independently active

“It’s gratifying to see the UK PayTech sector punching well above its weight – not only creating new ideas that become new companies, but also creating businesses that thrive beyond the start-up phase to challenge the bigger players,” said Tony Craddock, Director General of the EPA. “While investors have recognised the potential in UK PayTech for some time now, it seems that prospective acquirers are less certain. PayTech companies and the broader payment industry needs to do a better job at showcasing the scale and scope of success in the UK.”

“One area the UK has led on is regulation and start-ups are clearly taking advantage of the unique conditions of the UK to create sustainable businesses. However, much more can be done. Regulators should take note of what’s possible even when some aspects of the system work against start-ups, such as the cost and complexity of accessing Faster Payments,” concluded Craddock.

“With the unprecedented speed of evolution in payments, it’s critical that we take a breath and evaluate whether as an industry we are doing enough today to support the payment businesses of tomorrow,” said Kriya Patel, European Managing Director, The Bancorp. “The report highlights the challenges and opportunities involved with funding, an analysis of the investment trends currently being witnessed, as well as an assessment of the business and investor lifecycles currently anticipated in this growing sector. From entrepreneurial start-ups to those on recognised global indices, it’s required reading.”

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Thinking ahead from the past is always fraught with hazards. When it comes to the future of digital payments, it may be a case of same-same but different. Various technologies, propositions and use cases will continue to co-exist in the digital payments future.

“We believe the pace of change taking place in the payments industry is going to increase as digital technology continues to advance,” says E-bai Koo, senior vice president, global network business, American Express. “While the number of digital payment options is growing, we believe it is too early to determine whether any one platform or form factor will win out. Customers adopt new technologies when they meet their current needs better than how they are being met today.”

For John Berns, managing partner, Accourt, co-author of the Digital Payments Report 2016, various factors are coming together to drive the perfect storm for digital payments.

“Historically innovation has generally been hardware-driven so you have had to wait and catch the innovation wave. For example, no-one upgrades to the latest model of digital television immediately. Consumers only adopt new technology as and when their old device or technology reaches the end of its natural life or breaks down,” says Berns.

“The payments industry has invested heavily in EMV so I think that this will be the consumer interface for some while to come in the physical world — and the survey results particularly around contactless reaching critical mass bear this out. In the digital world, however, it’s a complete revolution.”

“Consumer adoption of new digital payment methods will be far more rapid as you’ve got the perfect storm as technology, regulation and social desire to operate via a single device are coming together.”

NFC contactless: the de facto standard

Contactless payments are growing strongly and NFC technology will be one of the drivers of digital payments at point of sale (POS). The Smart Payments Association reports that around 40 percent of chip cards shipped in 2014 included contactless functionality. Meanwhile on the acceptance side, 9.5 million NFC-capable terminals were shipped globally in 2014. This represented a 33 percent increase on 2013, bringing the worldwide installed base to 21.4 million units, according to Swedish research firm Berg Insight. 

Although consumers can already make higher value contactless payments, typically for payments more than €50, by authenticating themselves with their fingerprint or PIN on their mobile devices, this is currently only available at selected merchants. However, the acceptance infrastructure for mobile contactless is to be extended. By 2017, all contactless terminals already deployed across Europe will be upgraded to allow high-value contactless functionality. And by 2020, all European POS terminals will allow this.

Survey respondents were confident about contactless acceptance reaching critical mass. The majority of respondents believed that this would happen by 2018. 52 percent thought that North America would achieve critical mass by 2018, whereas for Asia and Europe the figures were higher at 59 percent and 75 percent respectively.

On the issuing side, 53 percent of survey respondents thought that critical mass would be achieved in North America by 2018. 62 percent thought that Asia would be ready, whereas 72 percent felt that Europe would be at this level by 2018.

Wearables and connected commerce 

Where are wearables? They are already here, for example American Express and fitness tracker Jawbone announced a partnership in April 2015. This marked the first time consumers could use a wearable fitness tracker with an embedded NFC chip for Amex payments.

As second- and third-generation devices are deployed, the market for wearables and connected commerce generally will continue to grow. According to the International Data Corporation Worldwide Quarterly Wearable Device Tracker, the wearable market worldwide will reach 111 million units in 2016, an increase of 44 percent on 2015 figures. By 2019, total shipments are forecast to reach 214 million units, a five-year compound annual growth rate of 28 percent.

The debate around when wearables will reach critical mass, how much they will displace cash and cannibalise existing card spend almost misses the point. Wearables are not for every consumer or every payment situation. However they broaden the scope of digital payments beyond the plastic card. They are also part of the greater trend of integrating and embedding payment into a broader experience — making them invisible — for greater speed, convenience and ease-of-use.

Digital wallets 
With Apple Pay and Samsung Pay live in many markets, digital wallets are firmly back on the payments agenda. That said, there have been various high-profile causalities in the wallet wars, with more expected. Google Wallet has seen poor take-up and numerous iterations since it was first launched in 2011. Visa Europe’s digital wallet V.me by Visa has been withdrawn two years after launch and the investment of around €300 million.

“There are a lot of digital wallets out there — some of the local schemes are looking at this — but we are starting to see some consolidation,” said Berns. “The revised EU Directive on payment services (PSD2) may well lower the entry barriers even further to new entrants in the space, which could interest the internet giants. After all, iTunes is a stored value mechanism, so it’ll be interesting to see how Apple, Google and Amazon compete in the wallet wars.” 

Handset manufacturers and alternative payment providers were judged the most likely innovators in the wallet space across all regions, according to the survey respondents. Mobile operators faired the worst. Yet when it came to trust, payment networks and banks were most trusted to deliver wallets, and merchants and mobile operators the least trusted across all regions.

Unsurprisingly, acceptance and convenience were the factors most likely to drive wallet usage, according to survey respondents. Ubiquitous coverage, or allowing the consumer to use the wallet wherever they want to use it at the very least, preferably via a simple, one-click checkout are the fundaments of a winning proposition.

Technology should be regarded as an enabler to the success of digital wallets, rather than the starting point for a solution. Due to the investment in EMV, the payments industry has favoured NFC for point-of-sale mobile payments, and has perhaps been somewhat standoffish about QR codes. Consumers, however, appreciate the speed and convenience of scanning such codes to make retail or bill payments in-store. Tencent’s WeChat wallet and Alibaba’s Alipay have capitalised on this insight in incorporating choice as well as speed and convenience into their propositions. Their respective wallets have been available to users in China for some time and both companies are looking to expand into other markets and regions.

There is no single use case or one-size-fits-all for digital wallets. As with so much in the payments industry, winning propositions must address both acceptance and usage in a compelling way. They build scale quickly by piggy-backing existing acceptance infrastructure, rather than trying to re-invent it. As few consumers go out of their way to pay in a different way, winning propositions offer incremental value to consumers in addressing an un-met or unacknowledged need or pain point compared with existing alternatives.

Security and trust

When it comes to security and trust in digital payment methods, the present is the baseline for the future. “Security is first and foremost for American Express. When we make new technology available to our customers, we do so in a way that provides the same level of security they are used to receiving from us when using traditional charge and credit cards,” says Koo. 

Opportunities and risks exist in the same future. They are inherent to one another. As Koo explains: “While advancements in online and mobile payment options have widened the scope of fraud, they have also created new opportunities to fight fraud.”

Koo cites the American Express Token Service launched in November 2014. With tokenisation, real card account numbers are replaced with tokens, eliminating the need for merchants to store account numbers in the clear, and limiting the potential damage if their systems are compromised. Tokenisation also enables issuers to deploy new digital payment services, such as Apple Pay and Android Pay, in more secure ways.

“Digital technology has also enabled American Express to communicate with and service our card members in more ways. They can sign up to receive alerts about suspicious activity on their accounts through e-mail, SMS and mobile app push notifications,” adds Koo.

The future of digital payments

What does the future of digital payments look like? The future will be more omni-channel, namely using all sales channels interchangeably to serve the customer. More ‘click-and-collect’ and ‘endless aisles’ propositions are expected as merchants consolidate their back-end systems. However, just as service will become more channel agnostic, it will also become more device agnostic as customers expect to transact from any device, any time, anywhere. The future is increasingly digital, which means a greater take-up of digital payment methods.

These methods include automated clearing house (ACH) payments, which are expected to rise in prominence, particularly with the global movement towards immediate or real-time payments. Real-time settlement on the back-end is key to this because it minimises risk for everyone. The merchant receives faster settlement. The consumer sees the transaction immediately and is able to support, approve and challenge it as appropriate.

“Immediate payments is great fit with what is happening in the digital space and the perfect storm I mentioned earlier. So the short answer about the future of digital payments is: there is going to be more of it,” according to Berns.

Succeeding in the digital future

The digital future is about scale, partnerships and speed-to-market. According to Koo at American Express, advancements in digital technology have opened up opportunities for companies of all sizes to get into the payment business, and to grow scale almost overnight.

“We believe that scale wins and partnership is key to achieving success. Given the complexities of the payments industry, companies that can find ways to partner and break into the ecosystem have a much better chance of succeeding.”

“If you look at the amount of funding going into FinTech at the moment and the rate at which technology and innovation are moving, I think that the salvation of traditional players is partnerships and abandoning the build-it-yourself mentality,” says Berns.

“Payment industry incumbents and traditional players definitely have a role to play in making good lending decisions and managing deposits. Beyond these core functions, the technology innovators also have a role to play. Fortunately the industry is big enough for everyone to have a role.”

The Digital Payments Report 2016 provides views and projections on the state of payments based on research and a survey of industry executives, observers and analysts.

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Life in the digital age is resetting our notions of speed and time. The average attention span in 2015 was 8.25 seconds, down from 12 seconds in 2000, according to Statistic Brain. This is now less than the nine-second attention span of a goldfish. In a world that seems to be on permanent fast-forward, waiting five-to-six days for a cheque to clear, or three days for a bank transfer to reach the beneficiary’s account, is like being stuck in reverse. It seems like banking from a bygone era.

The payments industry is at the confluence of many trends, some behavioural, some technological and others regulatory. Momentum behind real-time payments is building globally. We examine the drivers, the implications for end-users and those who serve them, and what the future may hold for payments in real-time.

The real deal 

Real-time payments systems are not new. The first domestic real-time payments system was launched in Japan in April 1973, and there are currently 18 real-time systems live worldwide. But what are real-time payments exactly?

Definitions vary and not all systems worldwide currently conform to the one that follows. Generally real-time payments are where funds transferred are available on the beneficiary’s account instantaneously, immediately or in real-time. A real-time payment system must be able to send and receive payments 24x7x365. Once they are processed, payments cannot be recalled. There is a finality to payment, but also a certainty as payments sent to a beneficiary’s account are either confirmedto both the payer and payee or rejected.

“In most countries, you tend to have a couple of payment systems: automated clearing house (ACH) and real-time gross settlement (RTGS),” explains Barry Kislingbury, director, solution consulting, immediate payments, ACI Worldwide.

“ACH tends to be for low-value, high-volume payments, such as paying the gas bill. It takes about three days to settle. With RTGS, the payment is settled on the same day. This system was intended for high-value, low-volume payments, such as buying a house or for corporate or interbank payments.”

“Real-time payments sit in the middle. They are an ACH-type payment over an RTGS-infrastructure, so they are performed in real-time but at the sort of price an ACH would charge for a payment — so much lower than RTGS.”

The drivers for real-time payments 

The speed, certainty, coverage and cost of real-time payments is driving increasing interest in the mechanism. Consumers do not necessarily understand bank back-office clearing and settlement processes, and nor should they. When they can browse, buy and download digital goods in real-time, any time of the day or night, they cannot understand why the digital movement of money is not instantaneous. They expect to be able to make and receive payments faster.

Advancements in technology are also making real-time payments possible. There were around 4.7 billion unique mobile subscribers worldwide in 2015 (a 63 percent penetration rate), according to the GSMA, a body that represents the interests of mobile operators worldwide. When the smartphone is the device of choice for accessing the internet — and is the only means a consumer has of getting online in some countries — this cannot but change the way consumers, businesses and governments interact and transact. Mobile phone ownership and access to high-speed broadband are also pre-requisites for mobile-initiated push and pull payments.

Enterprise technology has also advanced significantly since the first real-time payments systems were launched 40 years ago. “The banking community has ambitions to improve and modernise the payments infrastructure,” says George Evers, immediate payments services director, VocaLink. “This allows innovation and defends against FinTech activity that is starting to bite into every element of a bank’s product portfolio.” The infrastructure investments made now will power the products and services of the future.

A combination of factors is driving the change [towards real-time payments] and these differ from country to country. George Evers, immediate payments services director, VocaLink 

Policy makers and regulators are clearly interested in making payments more efficient, interoperable and cost-effective, with a view to driving economic growth, innovation and financial and social inclusion. The lower costs of real-time payments versus traditional card-based or RTGS payment is also an attractive feature for regulators, as well as other participants in the payments system.

This time the revolution is for real(-time) 

‘Revolutionary’ is a somewhat over-used and de-valued term in the age of PR and hype. However to what extent is the term justified in the context of real-time payments?

“Real-time payment is revolutionary because it’s game-changing,” says Kislingbury. “If you take any bank payment process, what would happen if that could be done in real time?”

Businesses and corporates have huge scope to use real-time payments to improve their cashflow, supply chain management, stock control and reconciliation. This could lead to productivity and efficiency gains but also to direct bottom-line benefits.

For example, a company with a global supply chain could offer to pay suppliers ten percent of the fee in real time when goods were loaded onto a ship. They would then pay the next ten percent when the ship arrived at its first port and so on until the ship arrived at the final destination whereupon the payer would settle the outstanding amount in full. In this way, real-time payments could enable businesses to offer improved invoicing terms to suppliers that could help increase working capital.

For retailers, real-time payments could enable just-in-time stock management with the associated operational and cost efficiencies. This obviates the need to carry an inventory, and could lead to fulfilment efficiencies. When a customer ordered an item, the retailer would in turn place an order with their supplier and pay in real time. The supplier would then dispatch the item either to the retailer or to the customer directly. The retailer would not have to pre-pay or store stock. They would also increase fulfilment options to the customer, and cut the costs of wastage due to unsold goods. Just-in-time stock management also has implications for the retail store of the future in terms of the purpose, design and number of stores.

For consumers, a number of possible propositions draw on the speed of real-time settlement. For example, emergency funding propositions where the transferred funds are available immediately to the beneficiary (e.g. social benefit claimant or child). With the rise of of part-time work, mini jobs and zero-hours contracts, employers could also pay workers quickly and easily via real-time payments. Gambling operators could accept wagers and pay winnings in real time, avoiding customer disgruntlement at the traditional two day wait for payment card credits to settle.

For banks, real-time payments will be no less significant. They will be the catalyst — and perhaps the imperative — for them to devise new business cases and revenue streams. “The banks actually have to change their business models. It’s no longer about making money from the payment. It’s about making the payment invisible and offering value-added services around it,” comments Kislingbury.

There is an obvious parallel with merchant acquiring, which is becoming an increasingly commoditised business at the transaction processing level. Acquirers are already revising their business models to secure their futures. They are exploring how they add more value to customers, and devising innovative, chargeable services for which merchants would be willing to pay. “It’s exactly the same argument across correspondent and retail banking. Moving money is what banks do, but there’s no real value in that these days because everyone can do it. It will be about what value you bring to your customer,” says Kislingbury.

The revised EU Directive on payment services (PSD2) is intensifying the pressure on European banks. Improving access to payment accounts and increasing transparency around payments and charges are two of the main themes running throughout the Directive. This is not a peculiarly European phenomenon. Banking executives worldwide are currently grappling with how they can create and maintain value. And how they can capitalise on the move to a more open banking environment.

Faster, richer data 

Value is increasingly bound up with data. Thanks to the ISO 20022 standard, real-time payments come with speed but also with richer data. Kislingbury explains the background and differences between ISO 8583 and ISO 20022.

“ISO 8583 is a small, lightweight message, designed to move the value of a payment quickly across systems built on the technology of 40 years ago. It’s quite a complicated, heavily modified standard because there is such a small amount of data. All the schemes use the standard differently to achieve what they need to. Although it’s a standard, it’s a type of non-standard as well.”

ISO 20022 is not actually a messaging standard. It is a standard to develop standards. Or a standard that helps define a business process. ISO 20022 comes with a large data dictionary, defining a wide range of business processes and the data required to support them. “It’s a much bigger message, but technology has moved on and can cope with that. You can describe the entire transaction: remittance information, purchase order numbers, invoice numbers. There’s a whole raft of things you can do, if you’ve got that data,” explains Kislingbury.

The banks actually have to change their business models. It’s no longer about making money from the payment. It’s about making the payment invisible and offering value-added services around it.

Barry Kislingbury, director, solution consulting, immediate payments, ACI Worldwide

There is huge potential for banks in terms of innovative, chargeable services they can overlay on a real-time payments infrastructure based on ISO 20022. Unsurprisingly, many countries with live real-time payments systems are actively looking to upgrade to ISO 20022. This includes China, South Africa and Switzerland. Meanwhile, countries such as Australia, the Eurozone countries and the US are building real-time payments systems on ISO 20022 from the outset.

However to enable cross-border payments regionally, if not globally, requires interoperability. This came a step closer in August 2015 with the publication of the first draft of ISO 20022 messages. The draft was the result of work by the ISO real-time payments group (RTPG), made up of over 50 international experts.

“There are a lot of countries designing and building real-time payments on ISO 20022. Historically those countries, which have already built systems on the standard have used it slightly differently. We wanted to put together a best practice guide to ensure interoperability,” explains Kislingbury, who participated in the ISO RTPG.

Keeping it real 

Besides interoperability to facilitate cross-border payments, what needs to be in place at a domestic level to implement a real-time payments system? According to George Evers at VocaLink, alignment across a broad community within the country is critical.

“Real-time payments delivers benefits to banks, consumers, government and businesses of all shapes and sizes,” he says. “To ensure ubiquitous adoption, it is best to engage widely to agree a common approach to solving problems and ensure the needs of these different communities are met through the solution.”

As with the implementation of many payment technologies — everything from EMV chip and PIN, to contactless, to mobile payments — critical mass on the consumer and merchant side together is key. Achieving this is partly a matter of ensuring that the system supports end-user requirements from a technical and operational point-of-view. However it is also a question of coverage (or reach) and access.

Faster Payments Scheme Limited (FPSL), the company behind various UK payments systems, is looking to open up the infrastructure to a broader base of banks and PSPs to provide easier and more cost-effective access. Consequently it is having to address challenges germane to real-time payment schemes generally, namely balancing access with security and the integrity of the system, particularly around 24×7 operation, payments delivered in seconds, high availability and certainty of funds.

FPSL is introducing aggregator models plus a new settlement model between participants to encourage direct access. “This creates a much easier environment for small banks, who are currently restricted to being secondary suppliers through a major bank, as they will have direct access,” explains Bob Mackman, director, Mackman Associates, a vendor participating in the Access to Payment Systems programme run by FPSL.

“At the moment, the smaller banks are dependent on the facilities of the major bank. This way, they’ll get much closer to 24×7 at a much more realistic price, so they’ll be able to offer these sorts of services,” says Mackman.

I believe that real-time payments will be the new normal for payment. And that real-time payment infrastructures will allow convergence of batch multi-day or same-day systems through to card clearing infrastructures. 

George Evers, immediate payments services director, VocaLink

Real-time payments is not the panacea to cure all payment ills. Real-time payments are fast, but how much speed does the end-user need, and when? Real-time payments based on ISO 20022 can pass richer data, but how much more data does the end-user need, and when?

The future is happening in real-time 

Unless there is a compelling reason to change, payers are not usually looking for a new way to pay. Thus, devising compelling use cases and propositions at the right price will be critical to the take-up of real-time payments. As will getting more participants to use the system, thereby generating more value for everyone who participates.

However, the momentum and excitement around real-time payment is justified. Real-time payment has the potential to be game-changing for all participants in the payments system. So far, the majority of real-time payments systems are based on push payments. But pull-based real-time payments in the retail and government sectors will have an even greater impact on incumbents’ business models and revenue streams. The risk of disintermediation, particularly for card schemes, of future innovation based on real-time rails is very real.

How long will it take for real-time payments to become a reality in more and more countries, and internationally? When will then be now? Soon. While there is no such thing as a simple payments system, the future is happening soon. However it may yet be happening sooner than soon. It may be happening in real-time.

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In an interview with RTL Nieuws broadcast on Monday, ECB executive board member Yves Mersch said the

ECB plans new system for bank transfers

system would let a consumer link, for instance, her telephone number to her International Bank Account Number, or IBAN.

Under the system, “to send payment over your telephone from one country to another, you go onto your contact list, you take the name of a person, and you would immediately also get his IBAN”, Mersch said.

The chief obstacles to the idea are legal, not technical, he added.

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While the main goal is to create a harmonised Europe-wide payments market, this Regulation also aims to help

The impact of the interchange fee regulation: a Processor view

cardholders make informed decisions when it comes to their payment methods. Additionally, it will contribute to cost reductions for consumers and retailers, and encourage competition for a broader availability of payment methods.

This also means that acquirers and issuers will take this opportunity to develop or modify their customer offers by adding attractive value added services. This will, therefore, impact processing as it will need to adapt and support the new fee models and associated business rules and to provide extended offerings with innovative services. Hence all stakeholders and, in particular, the processors will be challenged on their capacities and capabilities to operate with pan-European reach.

In this article, which first appeared in the EPC news letter, Ulrich Engelhart, Worldline’s Head of Payment and Industry Analyst Relations, outlines Worldline’s vision on the long term implications of the IFR for processors.

Impact of the Regulation on processing

Processors provide solutions that are compliant with the supported brands’ scheme rules and that answer their customers’ needs.

The Interchange Fee Regulation (IFR) has an impact on processing, as it will need to adapt and support the fee models and associated business rules. It is expected that some acquirers/issuers will take this opportunity to develop/modify their customer offers by adding attractive value added services, for example.

Schemes will publish adapted scheme rules with updated interchanges according to articles 3 and 4 of the Regulation. Additionally, possible domestic interchanges could add a level of complexity as it is still unclear which Member States will apply them and when that decision will be taken.

Acquirers will probably adapt their commercial offers to their merchant customers; which could also require some adaptation/reconfiguration of the billing components.

Article 8 of the Regulation on co-badging and choice of payment application mainly impacts acceptance processing (e.g. physical point of sale (POS), card not present environment), but not acquiring processing.

The new concept of product type identification (pre-paid, debit, credit, commercial), introduced by article 10, has to be integrated in the card management chain on the issuing processing side (e.g. preparation of card personalisation data), amongst others, in order to ensure information is encoded in new cards. Product identification in environments where the chip on the card is not used (i.e. physical POS not accepting chip cards, card not present environment) could require use of Bank Identification Number (BIN) tables with possible interaction between acceptance environment and acquiring processor.

The requirement, expressed in article 12 of the Regulation, for acquirers to provide merchant customers with detailed transaction information (or aggregated if agreed upon by merchants) on interchange fees may also have an impact on reporting solutions provided by acquiring processors.

Article 7, on the separation of schemes and processing activities, is beneficial to processors as it reinforces principles allowing processors to use alternatives to schemes’ default authorisation, clearing and settlement solutions (e.g. bilateral or intra-processor solutions) and also should prevent schemes from selectively offering better services to parties using their processing infrastructures.

We look forward to the more detailed regulatory standards that the European Banking Authority should publish in the near future on this matter. In this context, as a processor, we also welcome the business principles and requirements defined by the Cards Stakeholders Group (CSG) in Book 7 – Card Processing Framework – applying to all actors of the value chain (e.g. schemes, acquirer/issuers and their processors, specification providers) aiming to further facilitate an open and transparent market, which maintains competition, improves efficiency and fosters interoperability.

The other part of article 7, requiring processors to interconnect with other processors through the use of standards, is more ambiguous. In order to ensure full reachability – acceptance of any card from any issuers – acquirer processors are already connected to solutions ensuring transactions can be exchanged with any issuers of the supported brands.

Long term impact of ongoing self-regulatory activities

Regarding the Single Euro Payments Area (SEPA), important initiatives related to standardisation of SEPA Credit Transfer (SCT) and SEPA Direct Debit (SDD) have taken place. The focus is now more on SEPA for cards. The CSG initiative is focusing on standardisation of card payment transactions. The proposed standardisation and compliance ecosystem will aim at easing the deployment, by specification providers, of generic implementation specifications (e.g. specifications of the protocol between POS and acquirer processor) open to any SEPA scheme (and thus not specific to a certain card brand).

The principle being that the Volume produced by the CSG contains functional and security requirements, that the implementation specifications produced by the specification providers must be compliant with the requirements of the Volume and that the products (terminals, processing solution) developed by vendors (terminal vendors, processors) are compliant with implementation standards. The active involvement of representatives from the entire value chain, such as schemes, payment service providers, processors, vendors and retailers, and the relationship established with the regulatory bodies (European Commission, European Central Bank, Euro Retail Payments Board) should ease the development of more standardised solutions. Convergence towards a reduced set of implementation specifications in the various domains of the value chain will mainly be market driven.

It is already the case, for instance, in the card-terminal domain with the EMV contact specification. It is expected that convergence will also apply in the field of the POS-acquirer domain with initiatives like Nexo (Electronic Protocols Application Software – EPAS protocol) and Acquiris (Common Terminal Acquiring Protocol – CTAP protocol). On the acquirer-issuer side, changes may occur, taking into consideration the evolution of ISO 20022 standard and related initiatives (Acquirer to Issuer Card Messages – ATICA). This evolution will require schemes to adapt their default authorisation, clearing and settlement solutions. This exercise would only make sense if a real alignment happens, rather than the deployment of new ISO 20022 based solutions, each with their own specificities, similar to what happened with ISO 8583. Finally, it is not yet clear if there will be, in the short term, a positive business case for schemes and processors to migrate existing solutions to new ones.

Innovation in payment cards remains important mainly to ensure new user experiences via mobile or remote payments (Host Card Emulation (HCE), wallet, tokenisation…). Of course, innovation cannot be subjected to, or constrained by, standardisation objectives and should be able to be based on new specific technical solutions. Nevertheless, it is expected that, once an innovation becomes mature or has been adopted by several schemes, some standardisation should take place in order to achieve an open and competitive market.

To summarise, processors may expect, in the coming years, some move to a limited set of standard implementation specifications in some domains of the value chain (e.g. POS-acquirer, acquirer-issuer). Nevertheless, processors will continue to support specific implementation specifications, as new innovative services are being introduced and because the above-mentioned evolution is expected to be market driven.

Last but not least, besides the solutions provided by processors, which are aligned to scheme rules for payment card processing, there are also several solutions, independent from scheme rules, which aim to provide additional services to customers (e.g. contract management, invoicing, reporting, servicing, …), therefore, leaving room for differentiation and new specific developments in a competitive environment.

Market evolution

Harmonised fees and, more importantly, the separation between schemes and processing will open the market for issuers and acquirers to select the most suitable processing suppliers in terms of market coverage, functional scope and competitive pricing.

New interparty transaction processing

Processors will offer services to promote European interconnection of different schemes using their knowledge of European standards and their intermediation software as an extension of their functional scopes. This new interparty transaction processing (enriched Automated Clearing House) service will become a true alternative to single branded transaction processing by schemes. It will also empower issuers with loyalty programs and card-linked offers, with high-end data analytics as well as advanced fraud detection services.

Scale matters

At Worldline, we anticipate that profitability from standard card processing services will continue to decrease. This trend can be compensated by increasing transaction volumes, thanks to higher card acceptance and pan-European reach. To stay price competitive in commodity processing, economy of scale is crucial. Processors are forced to operate scalable IT platforms, that can support multiple languages out-of-the-box at a low cost, and to manage fixed operational costs efficiently.

Omni-channel processing

In addition to their traditional card business, processors will have to support alternative and innovative payment instruments, such as Online Banking ePayments or payment wallets, to provide omni-channel ecosystems. With the integration of a global payment platform, clients will benefit from synergies, such as fraud management, authentication, data monetisation, etc. Therefore those processors operating a global infrastructure, which includes a wide range of payment instruments and innovative services for the entire European territory, will be more attractive business partners as they allow their clients to differentiate in the market and to create new revenue streams.

Outsourcing trend  

Today, we face a high level of insourcing, with 29 out of the top 40 commercial acquirers¹ and around 50 percent of issuing processing still insourced by banks². Analysing the business case in light of IFR, the financial institutions will be under more and more pressure to divest their payments portfolio processing and outsource it to a well-positioned business partner in Europe.

Consolidation

As the payment market is highly fragmented with more than 50 payment providers and processors, we expect that the current ongoing consolidation trend will be reinforced. Continuous investments in advanced and scalable end-to-end infrastructures, managing fixed operating costs and being present with pan-European reach will lead to new business models and ecosystems resulting in mergers and acquisitions, joint ventures and new partnership models. It can also be expected that some big emerging players, entering the market, may look for cooperation models with established ones to allow smooth transition of the consumer experience. The European processor landscape will change accordingly.

Conclusion

Given the changes described in this article, we believe that this Regulation will not impose important changes in functionalities and services offered by processors, but will impact revenues of most issuers; this will, in return, increase cost pressure on processors. Furthermore, the CSG’s ongoing initiatives should ease the deployment of a certain number of technical standards (e.g. POS to acquirer protocol) opened to several schemes. The adoption of these new standards will be market driven and adopted accordingly by processors. Additionally, the separation of scheme and processing activities will aim to reinforce a fair and competitive market for processors even if competition from schemes will remain challenging. Finally, in this competitive environment and independently of the Regulation, processors will continue to follow market evolutions such as the deployment of new innovative solutions and services, and cost improvements through the increase of operational volumes and consolidation.

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¹ As measured by number of bank transactions. Source: The Nilson report (2013)

² As measured by revenue. Source: First Annapolis (2013)

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The ways in which we pay and are paid are changing. Apple Pay has been launched in the UK, Barclays has announced that it will launch Android-based mobile payments later this year, and we expect Samsung and Android ‘Pays’ soon.

‘Omnichannel’ has moved from being a buzzword to a reality, as people buy using not just

The impact of the interchange fee regulation: a Bank view

one but a variety of channels. These changes have been enabled by the rapid evolution in shopping behaviour, and the widespread adoption of smart mobile devices.

While these changes have been going on, the European Union has substantially altered the regulatory environment for payments. At the heart of this has been a significant drop in the debit and credit card interchange fee.

In this article, which first appeared in the EPC newsletter, Alan Ainsworth, Director of Government Relations for Barclays, outlines two reasons why these regulatory changes could speed up, rather than de-rail, these emerging payments trends. First, regulatory certainty helps the industry move forward and second, there is no longer a clear financial distinction between cards and other forms of payment that could drive investment decisions.

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European payments are being hit by several disruptive forces, including heightened levels of innovation, competition and regulation.

One of the more significant changes is the European Union Regulation on the Interchange

The impact of the interchange fee regulation – a card scheme view

Fee for card based transactions, also known as the IFR. This article will not describe what is in the Regulation as plenty of literature on the topic is widely available. Instead, it will focus on the commercial implications as well as pointing out some critical issues that it creates.

In this article, which first appeared in the EPC newsletter, Marc Temmerman, Director European Affairs at Visa Europe, outlines the impact the IFR will have on card issuers (who will need to re-assess their card portfolios) and acquirers (the IFR will lead to a broader acceptance of credit cards, especially in areas where acceptance had been limited so far). He also focuses on the issues card schemes will need to deal with, raised for instance by the IFR definitions of ‘commercial cards’ and ‘cross-border payment’.

The Interchange Fee Regulation (IFR) is much more than a few articles capping interchange fees for debit and credit cards. The regulators have included a series of ‘business rules’ dealing with a variety of issues.

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