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MP65167

MAPS PLASTIC CARDS IN EUROPE - WHAT NEXT? DECEMBER 1997

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Table of Contents

Executive Summary

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EXECUTIVE SUMMARY

Within Europe, France and the UK have adopted plastic cards with the greatest enthusiasm. Bank cards in the UK are still based on the magnetic stripe, but in France all bank cards issued since November 1992 have been smart cards.

In Germany, credit transfers and direct debits are the favoured forms of cashless payment. Card transactions have been slow to develop. In Spain, card transactions are growing rapidly and there are twice as many per head as in Germany. Italy’s plastic cards market is the least developed in Western Europe.

Over Europe as a whole, the American-owned international Visa and MasterCard brands are vying with each other for dominance. In Europe, MasterCard is allied to the Europay organisation. American Express and Diners Club the charge card brands, which launched the concept of using plastic to pay bills, face an uphill struggle.

The current annual value of smart card sales worldwide is about £630 million. By the end of the year 2000, it is likely to have grown more than 10-fold, and some analysts reckon a 15-fold rise is possible, to about £9 billion. The smart card industry is expanding so rapidly in all directions that companies differ substantially on the likely rate of growth.

The main areas of growth between 1994 and 2000, expected for the microchip smart card are examined and forecast in the report. Worldwide market shares for sectors in 1994 and forecast values for 2000 are also given.

Around 30 percent of sales are expected to be in the Far East, and 30 percent in Europe. Estimates of the numbers of smart cards to be in use in Europe by 2001 fall within the range 1.2 billion to 3 billion. Experts cannot seem to agree on the rate at which the market will grow, or on the degree to which prices will fall.

Cards could have an important role in the introduction of the single European currency. Card issuers see enormous potential in the advent of the Euro. They believe that the public will be more comfortable with card payments than with handling the new currency. They also believe that in the proposed three-year transition period from 1999 to 2002, when the Euro will co-exist in phantom form alongside traditional currencies, card transactions recorded in ‘Euros’ and in national currencies will help educate people and prepare them for real cash ‘Euros’. For the banks, the more that card payments can replace cash, the better. Cash handling is the largest single banking cost, costing over £2 billion a year in the UK alone.

Smart cards offer greater security against fraud and theft, and will help open up the Internet to mass shopping. Cards add security to electronic transactions. Cardless systems such as DigiCash’s ecash for Internet payments are on trial, but there are still worries about the security of cardless systems.

Smart cards will help business organisations cut and control costs. Banks will benefit from lower cash handling costs, and from the replacement of branches with ATMs and electronic transactions. Conventional magnetic stripe cards will continue to be economical for single-purpose ‘yes’‘no’ functions, for as long as the infrastructure for reading magnetic stripe cards remains installed.

Visa and MasterCard of the USA dominate card payments worldwide. Visa was formed in 1974 by the Bank of America’s card organisation IBANCO. European cardholders account for nearly 35 percent of card spending but for fewer than 20 percent of cardholders. At the end of 1996, 102.2 million Visa cards were in issue in Europe.

Within Europe, MasterCard works primarily through Europay, which had 149.9 million cards in issue by the start of 1997.

The two global groups are preparing for the widespread introduction of smart card payment schemes, notably electronic purses or wallets. Visa’s scheme is Visa Cash and MasterCard’s is Mondex. Europay issues an electronic purse called CLIP.

Europay and Visa are the two leading card groups in Europe. At the start of 1997 they had a combined total of more than 250 million cards in issue on the continent. Cards promote cross-border transactions by individuals; in 1996 cross-border ATM transactions rose 27 percent to £4.45 billion ($7.12 billion).

Europay, linked with MasterCard, is more dominant than Visa in European card payments, and is extremely strong in Germany. Europay’s position should be strengthened by the arrival of the single currency, which will facilitate cross-border transactions.

Visa’s role in a financially united Europe is less secure. Visa works with many partner banks, but they are not united in an organisation similar to Europay.

The main charge card issuers are American Express and Diner’s Club. The advent of bank cards with added services, such as ‘gold’ cards, is eating into the traditional charge card market, and forcing the charge card issuers to diversify into additional financial services. In addition, both Visa and MasterCard do their best to prevent their member banks from offering American Express products.

The British and French are enthusiastic card users. In 1995, they made more than 32 card payments per head, compared with ten in Spain, five in Germany and under two in Italy.

UK

In the UK, massive growth in smart bank cards is predicted. Numbers are likely to reach 50 million by 2001, an annual increase of more than 500 percent between 1996 and 2001. Smart telephone cards are forecast to grow to 20 million, an annual increase of nearly 400 percent between 1996 and 2001. By 2001 there could be 144 million smart cards, of all types, in use in the UK.

There are more than 96 million financial cards in issue. They include 20 million Visa credit cards, over 16 million Visa debit cards, over 16.5 million Switch debit cards, almost 13 million Eurocard-MasterCards, and about 10.5 million proprietary bank cards issued by Europay members, which include NatWest, Midland and Barclays. The advance of debit cards which can also withdraw cash from ATMs is enabling banks to cut branch networks.

Plastic cards have become important in retailing as ‘loyalty’ cards. More than 8.5 million people hold Tesco’s loyalty card. Loyalty schemes have become springboards into full-scale financial services. Tesco, Sainsbury and Safeway have introduced financial cards.

Affinity cards are a fast-growing segment of the credit card market. There are more than 300 co-branded Visa card schemes, for example.

The traditional charge card issuers, American Express and Diners Club have been hit by the advent of added-value bank cards but are fighting back with new products such as American Express’ credit cards, and services designed to remove stress from business travel.

The corporate market is of growing significance to banks, which are taking over business functions such as purchase accounting with products like the NatWest Purchasing Card.

Read-and-write smart cards are not yet in widespread use, but the Chelmsford Star Co-operative’s loyalty and banking scheme has attracted wide attention. Boots has launched a smart loyalty card. A trial of specially-issued smart bank cards began on October 1^st 1997 in Northampton and Dunfermline.

France

Smart cards are far more common in France than in the UK. In France, annual growth in smart bank card numbers is likely to be less than 7 percent. This represents market expansion; there is no element of substitution because all bank cards are already smart.

At the start of 1997 there were 27.2 million bank cards in issue, of which more than three-quarters were badged Visa (43 percent) or Europay (34 percent). The majority of cards are deferred debit, meaning that the holder’s bank account is debited at regular intervals with the outstanding card balance, and not immediately after every transaction. Demand for revolving credit is met mainly through Cetelem’s Carte Aurore, widely accepted by retailers, and held by more than 5 million people.

Fraud losses are only 0.023 percent of turnover, mainly because 80 percent of card transactions require the holder to key in his or her PIN number. A major Internet payment trial, using Eurocard-MasterCards, is in progress.

Germany

In Germany cash still accounts for nearly 80 percent of retail payments, but almost 71 million Europay and Visa-badged cards had been issued by the start of 1997. Germans carry cards but they use them very sparingly.

This is changing. An electronic purse scheme was launched at the end of 1996. Germans’ familiarity with plastic cards is being increased by the advent of microchip health cards for all citizens, and by smart cards for the national lottery. These two developments, which will make all Germans aware of the potential of smart cards, are likely to boost the take-up of smart bank cards, and electronic purses to replace cash payments. Rapid growth in electronic purse usage is likely.

Germany is Europay’s heartland. There were more than 66.5 million Europay cards in Germany, out of Europay’s European total of just on 150 million, at January 1997. Almost 40 million of these cards were eurocheque debit.

Few cards in Germany are used for revolving credit. For example, most of the 3.4 million Visa ‘credit’ cards require balances to be paid in full.

Spain

Card payments are growing rapidly in Spain. Of the total 31 million payment cards in issue, 55 percent i.e. 17 million are badged Visa. Europay issued fewer than 1.4 million cards in 1996, but the organisation’s influence is growing rapidly, and its target of 50 percent of the card market by 2000 appears achievable.

Almost a quarter of all payment cards are Visa Electron direct debit. Adoption of new technology in the banking (ATMs) and retail (EpoS, EFTPoS) sectors promotes card usage. The Spanish are already familiar with smart cards, which hold their social security records.

Italy

Italy is a difficult country for card payments. The banking structure does not help as there are hundreds of small independent banks. The scale of the black economy also restricts card usage, because card payments are easily traceable, while cash is anonymous. There were, at the start of 1997, approaching 18.5 million payment cards in Italy, of which 37 percent were for use only in the domestic Bancomat network, 32 percent were Europay and 31 percent were Visa. The great majority of cards are instant or deferred debit or charge-type credit. Italians made fewer than two card payments per head in 1995.

Other Countries

Among other European countries, particularly interesting developments are taking place in Turkey, which uses satellite technology for electronic payments, and in Russia, where smart cards are being used to help combat both organised and random crime.

French companies Gemplus and Schlumberger are at the forefront of card technology innovation. Other leading companies include Siemens (Germany) and Motorola (USA), ICL (JapanUK) and NCR (USA). The dynamism of the industry is indicated by the substantial membership of the Cambridge (UK)-based Smart Card Club. There are 270 members of which 120 are in the UK.

Prospects for companies serving the smart card industry are extremely bright. They have substantial opportunities to benefit from the dynamism of the market, provided they can keep costs in check. The continuing substitution of card payments for cash, to be given added impetus in Europe by the advent of the new, unfamiliar single currency, and the expanding applications for smart cards, are key factors.

Text © 1997 MAPS

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