HansHagen

UK SME Card Usage Remains Strong (Source: CPI)

2011-10-26T09:57:00.002+02:00

UK SME Card Usage Stays Strong

Publication Date: August 2011
UK SME demand for credit may have eased in recent months, helped by recovering economic fortunes; nevertheless, business credit card usage in the UK remains one of the primary ways of obtaining financing, as Victoria Conroy reports.
With around two million corporate credit and charge cards in the UK and a market well-served by several of the world's leading banks, UK SMEs have no shortage of options when it comes to payment cards. In fact, the UK small business credit card market is one of the strongest in Europe. While the recession severely restricted the availability of credit, which hampered SMEs' expansion plans, economic recovery also means that SMEs' demand for credit has dissipated in the last few months, if recent surveys are anything to go by.

UK Business Lending Trends
As of the end of 2010 there were around four million SMEs in the UK, defined as having fewer than 250 employees. Data from the British Bankers Association (BBA) shows that as of February 2011, there were an estimated 510,000 term loans (within some 3.9 million small business banking relationships), with a total outstanding value of £42.2 billion (US$69.3 billion) and overdraft borrowing standing at £7.6 billion (US$12.4 billion).
The level of total borrowing as of February 2011 (£49.8 billion, or US$81.8 billion) reflects a return to pre-financial crisis levels in 2008, as businesses have paid down debt and built up reserves in response to the financial crisis. The aggregate value of small business current and deposit accounts, restated on the basis of refreshed data from banks up to February 2011, is strong at £56.8 billion (US$93.3 billion), and the first two months of the year saw a continued monthly rate of around 50,000 small businesses establishing new banking relationships by opening their first account from a business product range. The BBA's data shows that lending trends appear stable, although it noted credit demand from small businesses fell sharply in the first quarter of 2011.
In its July 2011 Trends in Lending report, the Bank of England noted that the amount of lending to UK businesses contracted by around £4 billion (US$6.5 billion) in the three months prior to May, although this was partially offset by an increase in April, the first positive monthly figure for net lending since November 2010. However, credit availability remained broadly unchanged for businesses, according to lenders in the Bank of England's 2011 Q2 Credit Conditions survey. As is often the case, larger firms were generally able to access bank lending if required, but opportunities for smaller firms remained more variable.

Card Usage Trends
Despite demand for credit easing off, UK SMEs are still enthusiastic users of business credit cards. Recent surveys about SME business card usage indicate that on the whole, business credit cards are the most widely used financing tool for small and medium-sized businesses. A 2010 study, updated from data published in 2004 and 2008, by Warwick Business School found that UK SMEs spend in excess of £1.8 billion (US$2.9 billion) on business credit cards. The study, which was based on a sample of 2,500 companies, found that 55% of SMEs used business credit cards, 53% had overdrafts, 24% used term loans, and only 3% used equity finance during the period 2001-2004.

Source: Warwick Business School

According to the study, small businesses were generally able to find the financing they needed but often failed to secure the best possible terms for their borrowing. There is also a need for SMEs to have a safety net against short-term problems, reflected by the £4 billion (US$6.5 billion) net positive cash position of SMEs, who were holding £92 billion (US$151.2 billion) in total deposits, compared with £88 billion (US$144.6 billion) that they owed in loans.
Most of the business credit card spending by SMEs is for day-to-day bills, such as travel expenses and raw materials, although 12% of the study's respondents said they used their corporate cards to buy equipment and vehicles. Only a small proportion of the money spent on business credit cards is left outstanding at the end of the month. Businesses using personal credit cards pay off an average of 79% of these debts in full each month. For business credit cards, the proportion is 95%.
Although the UK small business lending market is dominated by the big four banks – HSBC, Lloyds TSB, Barclays and Royal Bank of Scotland, which serve a total of 82% of all SME banking customers in England and Wales – UK SMEs are not averse to shopping around for a better deal. Only 2% of SMEs change banks each year, but one in three expressed some dissatisfaction with their bank charges, which are on average £51 (US$83) per month. The average SME has been with their main bank for 15 years. Around 7% were considering changing banks, and 29% said they would move if approached by another financial services provider.
Another survey from Hilton-Baird Financial Solutions, which was published in February 2011 and drew responses from 700 UK SMEs, found that 44% of respondents use credit cards as working capital, despite the relatively high interest rates charged. However, this received a mixed reaction in small business circles, with insolvency practitioners Business Rescue Service describing the finding as "concerning at a time when we are seeing so many cases of company insolvency." According to Business Rescue Service, the problem is not that businesses should never use any form of credit – it's more the consequences of doing so either habitually or on a larger scale as a form of primary funding.
The newly launched SME Finance Monitor from BDRC Continental, published in July 2011, found that around 51% of surveyed SMEs are using external financing and that 19% of SMEs have had a "borrowing event" involving an overdraft and/or loan in the past 12 months. Almost all SMEs said they held some credit balances, either in deposit or current accounts. Based on those giving an answer, two-thirds held small balances of £5,000 (US$8,219) or less (63%), but this was because of the lower credit balances held by smaller SMEs. Among the largest SMEs, half had credit balances in excess of £100,000, or US$164,389.
Overall, 30% of SMEs had used external finance in the past five years and were using something now. Around 2% had used something in the past, but not now, and 21% had not used external finance in the past but were using it now. Almost half (47%) had neither used external finance in the past nor were they using it now, and this ranged from half of one-man bands to just 15% of the largest SMEs.
In relation to financing methods, credit cards ranked behind overdrafts, which were the most popular method of financing, and this was applicable across SMEs of varying sizes.

Source: SME Finance Monitor
na = not available

Only a minority of SMEs had applied for other forms of finance during this time, but most of those that had applied had been successful, with business credit cards receiving a 92% success rate in approvals.

Liquidity and Working Capital Trends
UK SMEs are generally in a healthy state as far as finances are concerned. In their 2010 SME credit and finance survey, the Association of Chartered Certified Accountants (ACCA) and the Confederation of British Industry (CBI) found that although the refrain "cash is king" was common throughout the recession, it is even more true in the recovery, with cash, liquidity and working capital needs now the main drivers of SMEs' demands for finance. Those with strong cash positions are less likely to need finance and more likely to obtain it if they apply.
The ACCA/CBI survey also found that in line with previous research findings, half of all SMEs surveyed (50%) reported that they had sought new credit or loans on commercial terms, and a larger share (62%) reported they had sought some form of additional finance, trade credit or funds over the last 12 months. Bank overdrafts were the most commonly applied-for type of credit, followed by credit from suppliers and bank term loans.
If anything, these trends mean business credit cards in the UK will face more competition from other forms of financing, including a shift towards trade credit (within agreed terms) and term loans, and away from overdrafts, a move which is already underway. It appears that larger SMEs are more likely to make this shift, which implies a lower amount of working capital, a higher amount of cash, or both.
But UK banks are certainly not being complacent about serving the UK SME market. In April 2011, Barclays announced the acquisition of MBNA Europe 's UK small business credit card portfolio, consisting of approximately 60,000 accounts and £130 million (US$213 million) of outstanding balances as of February 2011. And with this large segment still vastly underpenetrated by payment cards in general, banks in the UK will be ramping up their efforts to recruit more SMEs as card customers in the months to come.

Die Hard: Homegrown Banking Software

2011-09-21T15:08:00.001+02:00

Die Hard: Homegrown Banking Software
Banks That Rely On Homegrown Software Are Often More Satisfied With Their Technology Capabilities Than Are Vendor-Dependent Banks.

Boston, September 20, 2011 – A new report from Aite Group examines the current penetration of homegrown technology at banks, globally by region. Based on a Q1 2011 Aite Group survey of 80 large financial institutions across North America, the Asia-Pacific, and Europe and the Middle East, the report provides comparative satisfaction levels with homegrown technology solutions, and explains why homegrown solutions garner such high levels of satisfaction in certain areas while vendor solutions are preferred in others.
Some industry observers might find it difficult to believe, but homegrown software continues to be a favored technology option for some banks. In fact, about 16% of banks around the world continue to prefer building software in-house when they have the chance, and homegrown software receives a 65% net satisfaction balance compared with vendor software's 55%. Aite Group attributes this high rate of satisfaction at least in part to custom tailoring. Although homegrown solutions can be more difficult to maintain and upgrade, they may better fit the specific needs of the organization than an off-the-shelf vendor solution. Of course, satisfaction varies by solution type, and vendor solutions receive higher satisfaction marks in certain areas, such as anti-money laundering.
"The expansion of the IT services industry is one of the factors behind the resilience of homegrown software development," says Gwenn Bézard, research director with Aite Group and co-author of this report. "The development of a low-cost IT services industry over the past decade, in particular in India and some former Soviet Union countries, has made it easier for institutions to custom-build software at a competitive price."
This 22-page Impact Note contains 15 figures. Clients of Aite Group's Retail Banking and Wholesale Banking services can download the report by clicking on the icon to the right.

Trivia from travel: Can someone please...

2010-07-27T22:33:00.000+02:00

...tell me why Lufthansa equipped it's planes with ASHtrays in the lavatory of you are not allowed to SMOKE?

(not that I smoke in the first place, but the conflicting messages intrigue me!)

lol

The 26 million Underserved Bank Customers

2009-12-29T11:14:00.003+01:00

According to a recent report and an article in the American Banker, the bulk of 26 million small companies in the US are overlooked and underserved by American banks. A lot of them do not have business banking packages, but rather use consumer banking products and services.

This is the primary reason why we have developed a service to identify these customers by scoring consumer card spending patterns to identify typical business spend. The Business Spend Indicator enables banks to identify "hidden" small business customers, target them, and propose more adapted products and services.

Contact me should you wish more information about this opportunity.

Encouraging 3Q09 results for a number of large banks

2009-11-23T08:59:00.002+01:00

The following article in the latest edition of the Retail Banker International is worth reading:

While total third-quarter net earnings at 20 selected banking groups rose by almost $2.5 billion to $30 billion year-on-year, there was a marked geographic bias – with the strongest performing banks based in the US, France and China.

Strip out JPMorgan Chase’s sixfold rise of more than $3 billion in net earnings for the quarter to $3.56 billion – driven by strong investment banking and asset management figures but hammered by underperforming retail and card units – and net earnings at 20 of the biggest banks to report third-quarter results actually fell (some banks, including HSBC, Lloyds and Standard Chartered, do not publish earnings for the Q3 period).

A rise in net profits of around 20 percent was seen at Bank of China, Industrial and Commercial Bank of China and China Construction Bank, boosted by a lending boom in the first half – although the rate of increase slowed slightly in the third quarter.

In a generally positive assessment, China’s banks said that net interest margins had stabilised and, looking ahead, forecast that lending would remain buoyant into 2010.

Among banks in Europe, Société Générale more than doubled its quarterly earnings, easily beating analyst forecasts, boosted by strong French retail banking revenue growth, declining provisions and a sharper than expected cut in expenses. Though analysts said there remained some pockets of concern, such as future loan losses in its consumer finance arm and further deterioration of credit risk in its operations in Russia and Romania, the cost of risk at group level has stabilised at 120 basis points.

Santander’s quarterly earnings of €2.2 billion ($3.3 billion) was down by only 3 percent year-on-year, and in an upbeat assessment, the bank reiterated its full year earnings target of €9 billion. At Barclays, although third-quarter net earnings fell by more than 50 percent, largely on losses on the value of its own debt and other one-off items, underlying earnings for the first nine months of the year more than doubled.

In common with HSBC, which said only that its underlying third-quarter profits were “significantly ahead” of a year ago, Barclays indicated that bad debts may have peaked.

Among the more positive developments of the reporting season was a sharper than forecast increase in underlying banking earnings at ING (net earnings of €499 million compared with a loss of €477 million in the year ago period), boosted by lower-than-feared loan-loss charges, strong fees and commission income, and lower costs, notably at ING Direct.

Credit losses peaked?

As for the fourth quarter, Bank of America, which reported a net loss of $1 billion, indicated that credit losses may have peaked, though its outgoing CEO, Kenneth Lewis, told analysts results going forward “are expected to continue to be challenging as we close the year”.

But the most marked uplift in sentiment for the remainder of the year was expressed by HSBC’s chief executive, Michael Geoghegan, who had expressed fears of a W-shaped double dip recession earlier in the year.

Boosted by an improvement at its troubled US consumer finance business, where bad debts fell for the first time since 2006, he said: “the biggest jolt has now passed through the global economy” and predicted a two-speed recovery, driven by emerging markets.

RESULTS
Q3 group net earnings at 20 selected banks, ranked by year-on-year change
	Q309 ($bn)	% change
JPMorgan Chase	3.56	571.6
Société Générale	0.64	137.0
PNC	0.56	115.3
Wells Fargo	3.23	96.9
BNP Paribas	1.95	44.4
Bank of China	3.21	22.5
ICBC	4.95	19.9
China Construction Bank	4.44	18.7
US Bank	0.61	3.4
Intesa Sanpaolo	1.01	0.0
BBVA	2.23	0.0
Santander	3.23	-2.1
Crédit Agricole	0.58	-7.9
UniCredit	0.84	-19.2
Barclays	1.80	-53.7
Erste	0.34	-72.5
ING	0.75	n/m
Citigroup	0.10	n/m
Bank of America	-1.00	n/m
Royal Bank of Scotland	-3.01	n/m
n/m = not meaningful Source: RBI

Merry Christmas

2009-10-27T20:07:00.007+01:00

Les Echos, the French business newspaper, announced today that champagne wine makers have more than 1,3 billion bottles in storage. Yes, billions!

In other words, more than 5 years worth of sales, up from 3,6 years worth of stock only a year ago.

Cash flow problems due to recession have tempted some of the champagne houses to reduce prices significantly to increase sales, and for the first time this year you can find champagne for less than €10 per bottle.

My guess is that we are heading for a magnificent, less expensive festive season for lovers of sparkling, wonderful champagne. For consumers, that is, and not for the wine makers having to discount their precious, bubbly wine.

Customers' trust in banks rock-bottom

2009-10-23T10:57:00.004+02:00

Aite recently published a survey of US, UK and French customers' trust in banks, and the results should receive top attention in banks' boardrooms.

The results show that trust is dramatically low, and that financial turmoil, banks being bailed out by governments, while others still insist on paying huge bonuses to employees of mis-managed banks, have contributed to customers loosing faith in banks.

When only 6-7% of customers, or 1 in 20 customers, give or take a few, in France and the UK express very much trust in their primary bank provider, I would be worried if I were a board director. Even more so if you look at the data for general banking trust, where hardly anyone has very much trust in banks, and only one in three (US) to one in eight (UK) customers somewhat trust banks.

Banks have a long way to go in re-building trust with their customers to get up to decent levels again. A first step would be to avoid negative press by ensuring that salaries are kept at decent levels, and that bonuses are paid only when achieving objectives that contribute to build shareholder value and customer satisfaction.

The Amex Paradox as US Credit Card Issuers Crash Land

2009-05-11T11:10:00.007+02:00

In a recent article in the New York Times, the major US credit card issuers have put on their safety belts and crash helmets, as they prepare for a major crash landing with their credit card portfolios. Credit card losses are soaring to unprecedented levels as unemployment rises, and cardholders struggle to make ends meet.

From credit card write offs in the region of 5,5% in 2008, write-offs have shot up to 8,5% in Q1 of this year, well above the previous credit card loss peak of 7,9% experienced after the technology bubble burst in 2001.

Banks are doing their best to limit losses by tightening application approval criteria, cancelling unused card accounts, and reducing available credit limits. At the current rate, credit lines will probably be reduced by a staggering $2,7 trillion by next year, or - to put it in perspective - cut in half compared to the available card credits only two years ago.

Credit card losses have historically correlated quite well with unemployment rates, which indicate that banks are heading for more trouble as the US unemloyment rate threatens to break the 10% barrier. Even more so when Citigroup recently reported that its 10,2% charge-off rate in Q1 for the first time had broken the "historic correlation with unemployment".

American Express is one of the banks trying to limit its exposure, as stress tests of the portfolio indicate that it may face losses of up to 20% of card balances over the next year or two.

So why are they sending out direct mail to recruit new cardholders in France for its Optima credit card? A paradox, to say the least.

New, Innovative News Bulletin on the Nordic Card Market

2009-05-06T19:00:00.004+02:00

When information is abundant, and time is scarce, news bulletins that take a fresh and innovative approach to providing insight are most welcome. MACAW research has recently launch a Card Bulletin focused on the Nordic card markets, and the first two issues are promising.

The bi-weekly newsletter aims at giving card professionals in the Nordic region, and others interested in that part of the world, "ideas, inspiration and timely insights" on the industry.

Judge for yourself. There are a couple of free bulletins available on MACAW's web site here. Most interesting.

Leveraging the bank's ATM network for cardless money transfer

2009-04-30T14:03:00.002+02:00

For some time I have been intrigued by banks' lack of interest in, or inability to leverage their ATM networks to gain a competitive edge. Traditionally used for cash advances and balance enquiries, ATMs have turned into more of a multimedia kiosk capable of providing a wide range of services. One area of particular interest, in my mind, is money transfer, a high-margin banking service largely dominated by two non-banks, notably Western Union and MoneyGram.

I was therefore pleasantly surprised to discover a solution at the recent Cartes Afrique conference in Tunis that exploits a bank's ATM network for such purposes. A Tunisian bank proposes a simple, innovative, cost-effective service for local money transfer. In simple terms, it works as follows:

The sender initiates the transaction in the bank branch, in the online bank, or at the ATM. In the branch, the sender may pay by cash or card, in the two other channels the sender uses a card (any bank card) to pay for the transfer.
At the point of interaction, the sender selects a unique PIN code for the transaction, and registers the recipient's mobile phone number as part of the money transfer transaction.
The sender then contacts the recipient (typically by phone) to communicate that a money transfer has been initiated, and the PIN code for the transaction.
To receive the money, the receiver simply goes to one of the bank's ATM, and keys in his mobile phone number and the PIN code for the transaction. The information is then verified by the bank system, and if correct, initiates a call to the mobile phone. The customer is asked to accept the call and place the phone in proximity of the ATM's loud speaker. The ATM then sends an encrypted signal to the mobile phone to authenticate the mobile phone.
Upon verification, the cash is dispensed to the receiver as a regular cash advance.

The advantages of this solution are several:

The bank may leverage its existing infrastructure to propose a new service, and generate additional income.
The service may be proposed to non-bank customers, as even customers without a card or bank account may utilize the service. All you need is cash and a mobile phone. It can even be leveraged as an acquisition channel for new customers, and you already know their phone number, so it is easy to make contact.
The service is secured using two factor authentication at point of reception. The receiver can only access the money if (s)he is in possession of something(s)he knows (the PIN), and something (s)he owns (the mobile phone).

One area to look into in more detail is how the model stacks up against the relevant market's anti-money laundering (AML) regulations. However, I personally don't see too many barriers in this regard. The sender is known, as the transfer will have been paid using a card (online or in ATM), and thus traceable, or over the counter in the bank branch, with the possibility to ask the sender to provide identification. On the receiver side, the receiver's phone number is known, and the user may thus be known. However, there are of course ways to obtain an anonymous, prepaid mobile phone number. Some additional measures should however mitigate the risk of large scale money laundering.

Such measures would include setting transaction limits on each money transfer transaction, monitoring velocity, and track abnormal transaction activity on both the sending and receiving side of the transaction. Excessive use of the service by a sender or a receiver may subsequently be suspended or blocked. Limiting the service to small amounts –the average money transfer transaction from France to African destinations is in the €200-300 range, as an example – combined with the need to be physically present at the ATM with a mobile phone to receive the funds, would make the service unpractical for money laundering of large sums of money.

But the service would still be highly attractive for customers in the target segments wishing to transfer funds to friends and family.

Card conference in Tunisia

2009-04-22T15:53:00.009+02:00

I recently decided to take a look at what's going on in the cards industry in some of the French speaking countries of Western Africa. The Cartes Afrique conference, which takes place in Tunis over the next two days, is thus a good opportunity to meet people, and find out what's on the local banks' mind and to-do list.

In preparing for the trip, I had a look at card statistics in both Morocco and Tunisia, and I found at least a couple of issues that should be on their minds (and on the conference agenda as well, for that matter). One is card issuing, full stop, and the other is card usage.

The card industry in both countries seem to be suffering from the same problem as quite a few markets in the world, namely consumers' preference for cash and checks. Not only is card payments a minuscule part of the overall use of payment tools (0,2% of total payments in Morocco, for example), but even when a card is used, 9 out of 10 times it is to withdraw cash.

It leads me to believe that the local banks probably should focus even harder on getting more cards out in the market in the first place, and secondly, driving cardholders to pay with cards for purchases instead of using cash. And there is probably also opportunities to increase card acceptance significantly as well, although I haven't gotten to that piece of the puzzle yet.

And what about the corporate market? I would guess that there is a large number of companies that would need a card solution to pay for travel and other business expenses, similar to what we see in other markets across the world? I would not be the least surprised.

There is work to be done in this part of the world as well, in other words.

I will keep you posted!

New Report on the Nordic Card Market

2009-04-03T15:17:00.003+02:00

MACAW research recently launched a new report on the Nordic Card market, and the trends and forces that will shape the dynamic markets in 2009 and 2010 in the wake of the global economic recession.

Besides estimating the impact on the global economic downturn on the size of the payment card markets in Norway, Sweden, Denmark and Finland, it also explores 20 card trends and opportunities in the Nordic region. Key concepts are card innovation, optimization and risk management. Card products that stimulate cross-selling of savings products, redesigned card loyalty programs, new constellations in telecom and banking, the challenges of open loop prepaid cards, and new card pricing models are only a few of the topics explored in this report.

For more information, visit www.macawresearch.com.

A Unique Setting to Build a Performing Management Team

2009-03-31T09:00:00.004+02:00

Organize your next team building event on a sail boat in the most astonishing fjords and coastal areas of Norway.

A company’s success is largely dependent on talented individuals and their ability to build effective, performing teams. Successful teams can accomplish results far beyond a group of people working on their own. In our daily routine it may however be difficult to get the sufficient distance from day-to-day activities, and review what we do, and how we work together as a team.

This is the reason why we wanted to give companies an opportunity to take a “time-out” with their key people, and spend two or three days in a unique setting—as a member of the crew on a sail boat—to work on team related issues.

The sailboats, a German Frers 44 feet ketch and a Swan 51, are situated in Ålesund on the Western coast of Norway, in the heart of the Norwegian fjords. The tours take place in late May, June, late August and early September, and is organized by Thorleif Thorleifsson (Storm & Stille AS). Thorleif an avid sailor with more than 20 years experience as a consultant in organiza-tional management.

See http://smallchange.fr/Events.aspx for more details and reservation.

Will WooGroup Succeed in Taking on Western Union?

2009-02-26T08:37:00.003+01:00

A new challenger to Western Union recently emerged in the money transfer area.

The WooGroup, based in Paris, was recently listed on the Paris stock exchange (Nyse Euronext, ticker MLWOO). After a somewhat chaotic start – the listing was postponed a week following liquidity problems by Europe Finance et Industry, tasked to manage the introduction – the company came into play on January 28^th. By proposing low cost money transfer services, it aims to compete with the industry heavy weights, and most notably Western Union, by proposing self-service money transfer kiosks (a sort of an advanced ATM) in combination with prepaid cards, e-wallets and mobile phone services. It plans to develop its first money transfer corridor between the US and Mexico, followed by other high-traffic corridors such as Europe – Morocco.

Philippe Erb, the WooGroup’s CEO, made his fame as a professional day trader under the nick-name “The Player”. So far trading in the new stock has been virtually non-existent, and it will be interesting to see if The Player will succeed in changing the game in the money transfer industry. More to follow on the WooGroup and this industry in future blog posts.

Contactless PayPass Cards at Carrefour in France - a Transaction Limit Enigma

2009-01-28T10:10:00.006+01:00

To my great satisfaction I read recently that Carrefour will issue it's PASS card with contactless technology in collaboration with MasterCard.

The new card will be on the cutting edge of current card technology,including multiple accounts on the same chip, giving consumers the choice to pay with their own money (debit) or funds made available by their bank (credit). It also includes extended purchasing guarantees for electrical/electronical goods, and Carrefour's loyalty scheme.

I was all in all quite pleased about the prospect of paying using the contactless card, and benefit from increased speed and convenience when checkouting out of Carrefour stores. That is, until I realized that someone had decided to out a max limit of €25 for contactless transactions, which means that I will have another factor to consider when paying my groceries: tap&go or dip&PIN?

Why complicate the process?
Honestly, I am not sure. Security? Could be. Someone in the card organization or the issuer might believe that it is inherently more risky to let me use the convience of a contactless interface.

I don't. Prove me wrong, but I am willing to take the risk. The card issuer should, as well, in my view.

War on cash, then? Well, maybe. MasterCard and Visa have always wanted to replace cash, and they are doing a decent job at it as well. However, the war will not be won by complicating the cardholders' lives.

The limit of €25 has apparently been set based on research indicating that 80% of all cash transactions are below this threshold.

Really? I actually checked out my grocery shopping transactions over the last 6 months, and here is what I found:
- I did 85 supermarket transactions, at an average of €58 per transaction.
- 80% of the transactions were above €25.
- My card payments ranged from a low €10 up to a solid €163.

So what did I miss re. Contactless payments and the imposed €25 limit?
At least not that most of my transactions are above the limit. Neither that I would be less than enthusiastic about contactless if someone imposes usage barriers and complicates my life. Not even the potential confusion at the "moment of truth" when cardholders must choose between tap&go or dip&PIN depending on the amount.

Now, maybe the press release about the new card did not tell the whole story. Maybe the limit only refers to the need for PIN verification of the transaction depending on amount, ie. Allows for contacless transactions without a PIN below €25, and contactless with a PIN code above the limit.

I certainly hope so. Otherwise Carrefour can look forward to some interesting times soon, with confused customers and frustrated employees at the check-out.

Guerrilla Warfare in Business - Armed with New Technology and Business Models

2009-01-14T10:00:00.001+01:00

When the founders of PayPal and Skype appeared, they were heavily armed with new ideas, technology and business models. They established new paradigms by challenging existing companies and conventional banking and telecoms strategies. All the time with their customers' needs in mind. And the story continues.

The idea behind PayPal (www.paypal.com) when it started in year 2000 was to provide its customers with a simple and inexpensive method of sending and receiving money using an electronic wallet. Eight years later the company has in excess of 164 million accounts (of which 65 million are active), reaching customers in over 190 countries. It processes transactions in 19 different currencies, totalling US$15 billion in 3Q08.

To put PayPal's growth in perspective: American Express spent over 50 years to build a customer base of 80 million cardholders!

Skype has enjoyed similar exponential growth for its internet based phone service(www.skype.com) In five years, Skype has reached 370 million users who enjoy free phone calls, instant messages and video conferences via the web. The company is as such a serious threat to existing telecoms suppliers.

Disruptive Innovation Creates Business Earthquakes
Years before PayPal and Skype, Mr. Clayton M. Christensen launched the term ”disruptive technology” and ”disruptive innovation” to describe these types of business earthquakes. However, the phenomenon is by no means new. We could for instance have gone back to the introduction of the first automobile, and how transport has evolved since then.

Look at digital technology, and how it almost drove Kodak out of business. Our behaviour as consumers have changed dramatically since Kodak (!) introduced the first digital camera 17 years ago. We now take lots more pictures (lots!), we frequently "develop" them ourselves by printing them on our own printer, and the old-fashioned photo album is replaces by a giant flat-screen TV in the living room.

The similarity between these disruptive innovations is frequently the wish to offer simple, user friendly, inexpensive or even free services to the mass market. Niklas Zennstrom, one of Skype's founders, has more than once touted Skype's user friendliness - "if you know how to use a web browser, you know how to use Skype."

The Next Earthquake in Media
The competitors do whatever they can to retaliate and retain its customers. All resources are deployed to remain competitive, including technology, marketing, and price dumping. Other stakeholders also engage in the battle, such as the Indian government who announced that it would ban internet telephony for security reasons and loss of revenue.

Skype and PayPal have since joined forces under eBay's protective wings, and PayPal's e-wallet is widely used to pay for eBay purchases or top-up Skype for SkypeOut calls.

The founders of Skype have since launched Joost (www.joost.com), an interactive internet service for distribution of TV and video on the web. It's highly likely that Joost will contribute to another business earthquake, this time in the media industry. The guerrilla war is by no means ended.

Not an Even Playing Field in European Consumer Lending

2009-01-12T10:00:00.000+01:00

The European financial services industry should be pleased that the European Parliament finally passed the Consumer Lending Directive earlier this year, after more than six years of mulling, negotiating, and digestion.

Or should it? Does the directive really bring about a single market for consumer lending, and level the playing field for consumers and credit institutions alike?

The directive’s objective is to harmonize the consumer credit market for non-mortgage loans between €200 and €75.000, a market worth at least €900 billion annually, according to the European Credit Research Institute in Brussels. It touches the daily lives of two out of three Europeans – more than 330 million people – who have subscribed to such loans to pay for furniture, buy a new car, or replace that leaking washing machine.

The revised directive aims at making it easier for millions of European consumers to solicit loans from lenders across Europe, facilitating the comparison of loan costs through a uniform way of calculating the annual percentage rate of charge (APR), providing standards for contractual information to be provided to the borrowers, and specifying (almost!) homogenous conditions for early loan repayment, among others.

Undoubtedly, the directive is a step in the right direction to strengthen consumer rights. Face value, it should also stimulate competition among credit institutions, with all it brings in terms of increased offer, more efficient markets, and better rates to consumers. All in all not negligible advantages these days, with financial markets in turmoil and consumers facing a serious credit crunch.

So banks looking to expand to new markets and tap into the €900 billion opportunity should joyfully be jumping up and down as a consequence, then? No entirely so. Important barriers are still forcefully in place, making the European market for consumer lending far from a level playing field. A look at just a few of these obstacles should display the magnitude of the issues outstanding.

No Pan-European Central Registry for Credit Information
In this information-intensive, computerized age, no central registry for consumer credit information exists in the EU. Registries are mostly national, and the information contained in these databases varies widely in terms of information collected about the borrowers and their credit worthiness, and the formats in which such information is stored. It is not uncommon, even within national borders, to find such information scattered across several databases or registries. If such registries exist at all. In certain markets, consumer credit information is only available in paper format, even today…

The lack of information sharing among credit institutions concerning customers credit history, delinquency rates, and other risk mitigating information – be it for legal or competitive reasons – further contributes to a less than perfect market for new market entrants. Data protection laws, which are largely governed by national laws and institutions, also represent a severe entry barrier for financial institutions in terms getting cross-border access to consumer credit information.

No Possibility to Provide a Fully Electronic Lending Process
Another constraints facing European credit institutions is the lack of infrastructure to provide a fully electronic lending process. If there is a striking lack of national infrastructure across the EU for verifying a person’s digital identity and providing citizens with a tool to digitally sign documents in cyberspace, the gap becomes glaring at a pan-European level. Although the directive for digital certificates was adopted in 2001, we still seem to be years away from a common, European-wide infrastructure for using digital certificates.

The result is a process which still relies on traditional mail (yes, we are talking “snail mail”) to provide the potential borrower with a contract, to be signed and returned, please. Needless to say, this process is less instant and more costly – not only the postage, but also in terms of follow-up and customer defection – than a fully electronic process.

The effects of the above constraints are tangible for consumer credit providers. Entry barriers for providing loans cross-border are still significant, both from a risk and a cost perspective. The lack of reliable information about customers’ credit history forces lenders wishing to enter new markets to accept higher risks and loss provisions, which may be reflected in higher interest rates on consumer loans.

More likely, however, is a scenario where new entrants, in order to remain competitive, will align their interest rates with local players by reducing their margins, thus making the business case for cross-border lending less attractive. Additionally, credit based marketing tools and automated assessment tools will have to be adapted to individual market needs, resulting in additional cost and complexity. Not to mention the cost and hassle of paper based processes…

Distorted Competition
The European consumer lending landscape depicted above certainly distorts competition, at the expense of a more efficient consumer lending market, and more favorable interest rates to consumers in need of credit. It also leads me to believe that the picture is not likely to change rapidly. The European Central Bank logged significant spreads in average rates charged for consumer credit in the Euro area in 2007, from a low 6% in the cheapest country (Finland) to 12%+ in Portugal, the country with the highest interest rate.

Although there are obvious benefits of harmonizing the market and allowing consumers to subscribe to loans at more favorable rates from lenders abroad, my guess is that there will be a significant inertia in the market. If the EU really wants to accelerate cross-border lending, which today stands at a meager 1% of total consumer lending, it would need to stimulate the construction of pan-European infrastructures for exchanging consumer credit information and using digital certificates.

The Never-Ending Battle

2009-01-10T14:24:00.000+01:00

No industry observer is surprised by the reported rise in fraud committed abroad on UK cards.

The perverse effect of harder-to-crack chip card technology is that fraud increases where chip cannot be used, by using cards with information obtained by skimming or other ways obtaining the information located on the mag-stripe on the back of the very same chip-card. Fraudsters, seeking the path of least resistance, gradually move to next safe haven to exploit the opportunities where chip has little or no impact.

One of them is the internet, leaving ample space for fraudsters to conduct their lucrative business. Although card issuers and acquirers deploy ever more sophisticated verification methods, there is still room for business growth, unfortunately, for fraudsters.

The other alternative is to move abroad. Although the card industry is finally gaining momentum in implementing chip technology, there are still large white spots on the map of chip-reading POS-terminals. Mag-stripe only POS terminals in combination with collusive merchants or below-the-floor-limit transactions are still among the simple but effective ways of fradulent activity.

Some may think that I am pessimistic on behalf of the card industry regarding its ability to curb fraud. I am by no means pessimistic, just vigilant. Card fraud is like squeezing a balloon. Squeezing one part of it will automatically result in the balloon bulging out elsewhere.
Which is why the industry needs to be in the frontline of this never-ending battle. But I am afraid we will receive numerous reports of the sort for years to come.

Dinosaur Revival

2009-01-08T12:30:00.000+01:00

Not too long ago, ATMs were predicted to suffer the same fate as dinosaurs.

With the invention of payment cards of all sorts, increasing usage of cards as a cash substitute, and the introduction of cash back at point of sale, ATMs were predicted to suffer a slow death. Those predictions, however, failed to consider two key aspects of ATMs.

First of all, the incredible utility of cash, which means that cash will never go out of fashion. Lots of people still prefer cash for certain purchases. Some because they do not have other alternative, but most because they have a cash preference. Cash is convenient, full stop. (Ever heard a retailer say “sorry, we don’t accept cash?” Me neither.)

And despite several decades of strong growth in cards, POS terminals and card usage, there are still quite a few purchasing situations where cash is king. Interestingly enough, cash withdrawals have continued to grow in parallel with card usage at point of sale, although growth is showing signs to slow down as markets mature.

Secondly, the predictions failed to appreciate that ATMs are part of an industry. A large number of stakeholders had lots to lose unless they manage to redefine ATMs. Which is exactly what has happened. Distributing prepaid cards through ATMs is a brilliant example of an industry’s survival strategy and ability to extend the life expectancy of ATMs.

Furthermore, given the reduction of bank branches in certain markets, I would argue that ATMs are still quite a cost effective way to provide basic banking services to clients, build brand presence and awareness on the high-street, and gain additional income from new products and services.

And serve those customers who still prefer to pay for many purchases in cash.

HansHagen

UK SME Card Usage Remains Strong (Source: CPI)

UK SME Card Usage Stays Strong

Publication Date: August 2011

UK Business Lending Trends

Card Usage Trends

Source: Warwick Business School

Source: SME Finance Monitorna = not available

Liquidity and Working Capital Trends