Report on Prepaid Cards: A Critical Market Foundation for Europe's SEPA Plans

18 September 2006

The TowerGroup conducted a new research that examines the trends for new products and predicts major growth through 2010 to achieve a market worth EUR75 billion. The report also finds that one SEPA-related regulation has thrown the European debit card business into turmoil.

As an initial lever to move European banks toward implementation of SEPA, the EU instituted Regulation 2560/2001. It mandated that cross-border cash withdrawals or card payments below EUR 12,500 cannot cost more than in-country cash withdrawals or card payments of the same amount. At the start of 2006, that threshold shifts upward to EUR 50,000.

'Whatever it may have done for large- and small-value bank-to-bank payments, this seemingly innocuous regulation has caused havoc in the European debit card business,' said Theodore Iacobuzio, vice president of the European Banking & Payments research practice at TowerGroup and author of the report. 'It essentially rendered obsolete, or at least highly problematic, the in-country debit networks in each of the countries accepting the euro.'

TowerGroup estimates that cross-border debit card transactions cost 4% in fees, while the cost of debit card transactions domestically within eurozone countries tends to fall below 4% of transaction value. 'Because of this gap in costs, Regulation 2560/2001 has effectively mandated the creation of a cross-border debit network to replace in-country debit networks currently in existence across the eurozone, and in fact across the whole EU. This raises the issue of who will own that Pan-European Debit Network, and how it will relate to the Pan-European Direct Debit System (PEDD) and the Pan-European Automated Clearing House (PEACH) -- other key changes yet to be resolved under SEPA,' said Iacobuzio.

Highlights of the research include:

The recommendations by the European Payments Council (EPC) for a pan-European debit framework will move along a continuum between establishing a new debit brand for the eurozone and going with international payment marques (Visa International and MasterCard International).

In-country consortia of European bankers will oppose ceding debit business to Visa International and MasterCard International. In turn, the international payments marques themselves will oppose a new debit marque for the eurozone.

TowerGroup believes that any permanent arrangement for a pan-European debit framework is likely to be a compromise, leaving room for both international online debit brands, such as Visa's new V Pay or MasterCard's Maestro, as well as in-country and cross-border bilateral debit arrangements.

Failure to achieve cross-border consumer payment functionality could keep in-country credit-granting institutions isolated in their 'silos' for the foreseeable future, keeping liquidity low and hobbling growth.

'The menu of choices facing European banks as they struggle to integrate the European debit business has implications far beyond the world of debit,' said Iacobuzio. 'Cross-border consumer payments are important, yet less so than cross-border banking and, especially in this context, credit and debit card issuance. No doubt a period of uncertainty and some disorder will follow any recommendations from the EPC.

The report can be purchased from the TowerGroup website here

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