Card Payment Solutions incorporating:
PURCHASING CARD
NEWS
The Information Exchange for Electronic Transactions & Card Payment Solutions www.cardpaymentsolutions.co.uk
issue 42 2008
Established in 1992, Adflex provide cutting-edge, innovative software and general IT services for a diverse range of industries and clients including many blue chip organisations. We specialise in the development of Card Processing software and Payment Processing Systems which are approved by all the main acquiring banks. We consider ourselves leaders in this field and offer merchants the ultimate flexibility in Credit and Purchase Card processing. Our solutions support Level 1 credit/debit cards through to Level 3 Purchase cards (Visa Global Invoice Specification and Line Item Detail) and also support 3D secure in an e-commerce environment. Adflex Products Adflex Virtual Terminal (AVT) Adflex Virtual Terminal is a simple yet powerful windows application that can be run on a standard Windows PC, allowing all card types to be processed quickly and easily. Adflex Integrated Solution (AIS) Adflex specialise in providing integrated solutions which allows seamless communication between your current computer systems and our payment gateway removing the need to re-key transaction information. Adflex Bureau Service (ABS) For those who do not want to use a software solution to accept purchase cards, take advantage of our Bureau Service. Simple send us your invoices in electronic format and we’ll do the rest for you. The people we employ are highly trained, plain speaking and experienced in the field of Payment Card Processing. Whether you are a small owner operated company or a part of a large multinational, our people will listen carefully to your requirements and deliver a solution that fits.
HSBC Commercial cards are strongly positioned to be the solution of choice for B2B payments over the next 10 years, for all businesses ranging from the local newsagent to the large multi-national. As consumers, we have shifted our spend away from cheques to card payments at a rapid rate. This shift is being similarly reflected in the business world. Cards provide convenience, flexibility, access to credit, security and control of work-force spend.
Cards also represent an extremely efficient mode ofe-payment. As the use of e-commerce expands, this will undoubtedly accelerate the growth of B2B card payments. HSBC are committed to meeting the evolving payment needs of businesses in all market sectors and by all channels. This mirrors our philosophy of being a global, but local bank, understanding fully the requirements of our complete range of business clients.
Mike Skelcher, Head of Commercial Cards HSBC Bank plc, Level 37, 8 Canada Square, London E14 5HQ Tel : 0207 992 5281
Adflex Ltd, 284 Warley Hill, Brentwood, Essex CM13 3AB Tel: 01277 268 755 e-mail: info@adflex.co.uk www.adflex.co.uk
Integrating vs. Interfacing your P-Card Technology Solution: Is there a Difference? P-cards are recognised as a best-practice for reducing the cost of processing high-volume, low-value transactions. Because the process is so much better than using petty cash or processing the paper invoice, many organisations fail to recognise the inefficiencies that exist with their existing technology solution. This session will discuss inefficiencies that might exist in technology solutions that merely interface with the ERP and how a truly integrated solution can not only address those issues but provide additional value to your program. Contact: Kathleen Nugent Email: knugent@paymetric.com
Servebase Global Card Solutions – combining expertise with a flexible approach to deliver card processing solutions for Purchase Cards. Servebase, one of the world’s leading card payment technology providers, has over 20 years experience in credit card processing and a wealth of expertise in implementing a range of Purchase Card programmes. Servebase’s core PC-EFT processing software package has a proven and established track record. The latest software release, PC-EFT Version 3 offers a range of optional functionality and enhanced features in line with the recent card payment industry initiatives. Businesses no matter what size can keep up-to-date with the latest technology including:• Chip and Pin, the latest anti-fraud measure intended to replace magnetic swipe readers. PC-EFT Version 3 handles all additional messaging requirements for Chip and Pin transactions through the merchant’s payment interface to their chosen card readers.
• Visa Global Invoice Specification (VGIS), the new data format specified by Visa International to replace Level 3 Line Item Detail for Purchase Card transactions and collect auxiliary data. PC-EFT Version 3 supports VGIS in both Stand Alone Data Entry and Integrated systems. • Address Verification (AVS) and Cardholder Verification (CV2), increasingly important security initiatives to help combat fraud in customer not present environments such as for mail order/ telephone and internet card transactions. PC-EFT enables card transactions to be authorised and delivered from a PC server. It can be interfaced with POS systems or via the Servebase ELLIPSE suite of products, which are designed to cater for the growing demand in Internet accessed hosted applications. Recent Purchase Card programmes include London Borough of Barnet and Manchester City Council.
Contact; Andrew Brooks Tel: +44 (0) 870 333 6363 E-mail: sales@servebase.com Or visit: www.servebase.com
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Contents
Editorial: You can e-mail all your news, views, features & events for publication to: info@purchasingcardnews.co.uk
The Solution of choice for Wales
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ITS is a leading industry expert in Transaction Solutions for all business sizes sectors and technologies
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“Why Purchasing Cards?”
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MasterCard’s UK Public Sector Proposition Regional Presentations
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‘Search...’ Purchasing Card Capable Suppliers Search Engine & Directory
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Irish Companies to Benefit from Simplified VAT Recovery Process.
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New MasterCard Benchmarking Tool helps organisations Optimise their T & E and Purchasing Spend
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Lloyds TSB Corporate Markets launch NetService online card management
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‘Interchange’ an Austrailian perspective
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MasterCard Cautions Consumers Not to Expect Lower Prices at Shops as a Result of EC Decision on Interchange Fees
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Advertising: For advertising, feature sales and sponsorship contact Peter Gittins on +44 (0) 161 928 0485 or info@purchasingcardnews.co.uk or www.purchasingcardnews.co.uk and click on ‘The Publication’ link
Full contact details: Card Payment Solutions, Castle Hill Farm, Castle Mill Lane, Ashley, Altrincham, Cheshire, WA15 0RB Tel: +44 (0)161 928 0485 Tel: +44 (0)161 928 3502 Fax: +44 (0)161 928 1713 Mobile: 07793 584166 www.purchasingcardnews.co.uk www.cardpaymentsolutions.co.uk email: info@purchasingcardnews.co.uk No article may be reproduced in part or in whole without permission of the publisher Purchasing Card News is published and printed by Caxton House Marketing Ltd. © Copyright: Caxton House Marketing Ltd 2007 The publishers are not liable for the statements made and opinions expressed in this publication.
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The Solution of The Welsh Purchasing Card (WPC) was introduced for Wales by Value Wales Procurement four years ago as a means of allowing all public sector organisations to have access to procurement cards under GPC terms. WPC has now reached a point where more than 60% of the 100+ organisations originally identified as potential adopters now have a programme in being. Indeed in some sectors such as Local Authority and Higher Education uptake is over 75% and growing. Alan Oram, card programme manager at Value Wales Procurement, explains how the WPC programme has developed and looks at the reasons why the Royal Bank of Scotland (RBS) ‘onecard’ purchasing card solution and the MasterCard ‘Smart Data OnLine’ system, in particular, is proving so popular with Welsh local authorities. Born out of the Welsh Assembly Government’s vision for improving the delivery of public services, Value Wales Procurement was created to help the Welsh public sector improve the efficiency of procurement and tasked with helping them to achieve cost savings of £120 million per annum by 2008.
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To achieve this target, Value Wales Procurement works in four major programme areas; Collaborative Procurement, Operational Procurement Policy, e-Procurement and Sustainable Procurement. One of the key initiatives implemented, as part of the e-Procurement activity is the WPC programme. This purchasing card scheme was
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introduced four years ago to help all public sector bodies in Wales streamline and improve the efficiency of the procurement process for low risk goods and services with the potential to achieve significant cost savings. An added benefit often provided with card usage is the speeding up of the acquisition process, especially for those who are responsible for the delivery of front line services such as maintenance operatives who are able to procure the materials they need in far quicker timescales with WPC.
Streamlining Procurement Value Wales Procurement recognised that the time and processes required to pay each invoice under the conventional pay-to-purchase system was generating a huge expense for public sector organisations in Wales. Value Wales Procurement launched the WPC programme to provide the Welsh public sector with an alternative to the purchase-to-pay process, which was designed to deliver significant cost savings by removing the need for purchase orders and processing of invoices from procurement, wherever possible. Central to the success of the WPC has been Value Wales Procurement’s uniquely strong dual focus on growing both the user and supplier acceptance sides of the card equation, which has increasingly enhanced its appeal with organisations. For example, whilst the programme was initially only used for low-value, high-volume transactions, such as purchasing consumables or office supplies, as the supplier network has grown, the card is now used to procure higher value items over a diverse range of commodities and services, such as tarmac and stone for highways maintenance and even vehicles. In addition to working with the acquiring banks to expand the number of suppliers involved in the WPC initiative, Value Wales Procurement also continually works closely with users to ensure they are familiar with the full capabilities of purchasing cards and are utilising the card efficiently and maximising its benefits. Local supplier recruitment plays and important part in the drive for greater card acceptance; indeed it is key to the expansion of card programmes for many WPC users as the relative remoteness of many parts of Wales limits the choice of suppliers readily to hand. Value Wales Procurement’s strong focus on driving the WPC programme forward and promoting throughout Wales this approach to procurement has ensured the success of the initiative to date. For example 17 out of 22 top tier Local Authorities and 8 out of 12 Higher Education establishments have chosen the Welsh Purchasing Card. Indeed, there are very few areas of the Welsh public sector that WPC
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Choice for Wales has yet to reach now that most of the Welsh Assembly Government Sponsored Bodies (the equivalent of UK NDPBs) run a card programme.
Popular Choice The purchasing card provided by Value Wales Procurement’s WPC initiative is provided under agreement from the Royal Bank of Scotland, and allows for both purchasing and travel transactions with the one card. Organisations in Wales looking to adopt the scheme have the option of the VISA or MasterCard product. Notably, all the new programmes in Wales that have adopted the WPC over the past three years have specifically chosen the RBS MasterCard onecard solution and most of the original programmes that commenced on the Visa platform have now switched over to the MasterCard one. Undoubtedly the key reason for the popularity of the MasterCard option is its Smart Data OnLine service, which provides the users with 24/7 on-line access to all transactions for complete security, as well as an efficient and effective means of managing all aspects of card usage outside of a paper-chase process! This provides detailed transaction information that can be delivered through both standard and customised reporting. The system also has the capability to process independent expense claims should this be required. A distinct advantage of Smart Data OnLine is that it is specifically configured to the requirements of each user organisation thus allowing them to create their own review/authorisation workflow, account coding capability and data file exports suitable for loading into local accounting systems. Management of cards, eg, changing limits or MCG blocking, can also be easily undertaken through Smart Data OnLine. In addition, the RBS MasterCard onecard solution is able to report any additional electronic information that is provided by suppliers when processing purchasing card transactions, which may by as Summary (Level 2) or Line Item Detail (Level 3) and replaces a paper invoice for VAT purposes. The system is accredited to HM Revenue & Customs for VAT recording/reporting and contains a suit of standard reports for this purpose. Importantly, the RBS Mastercard onecard system and the Smart Data OnLine service enables users in Wales to streamline and modernise purchasing by not only reducing the number of invoices to be processed, but by also enabling transactions to be visible, easily monitored and verified at any time. As a result, organisations have added protection from misuse of the card by staff, are safeguarded against over-charging by suppliers and are able to ensure that, where
applicable, only contracted goods are purchased using the system. In addition to the added value benefits offered by the WPC scheme, in terms of tangible cost savings, the National Audit Office support an average saving figure for card use of £28 per transaction over the cost of conventional purchase-to-pay processes.
Significant Savings Since the WPC system was introduced in 2003, it has generated an estimated overall process cost saving of £8 million (based on NAO figure) for public sector organisations in Wales and the Welsh Assembly Government recognises that the more it is used, the more savings this efficient procurement method will deliver. In 2006/2007, purchasing cards were used to make £21 million worth of transactions. In 20072008, Value Wales Procurement predicts that this figure is set to rise to over £30 million. This growth not only demonstrates the popularity of the system for all public sectors in Wales and their suppliers, but, importantly, represents a considerable overall cost saving for the public sector in Wales. Value Wales Procurement is committed to facilitating the increased use of the WPC through a dedicated, on-going campaign to grow the supplier network and increase the benefits of the card purchasing programme. Promotion in new target areas, such as District and Rural Councils, are underway and initiatives to aid expansion of existing programmes are being set up. As a result, Value Wales Procurement is working to achieve a year on year doubling of both the number of programmes and the turnover on card spend for the immediate future This will not only deliver considerable cost savings, but, ultimately, improve the efficiency of public services across the country. For further information please contact : alan.oram@wales.gsi.gov.uk
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ITS is a leading industry expert in Transaction Solutions for all business sizes sectors and technologies Specialists in developing supplying and supporting software & services for any form of transaction handling like B2B addendum EFT Loyalty & Citizen Cards e are pioneers in the fast expanding Purchasing Card market providing a range of bespoke and off the shelf transaction solutions for Mastercard, Visa and AMEX Purchasing Cards. Our independence of scheme, issuer, acquirer and manufacturer enables us to support all major debit, credit and purchasing cards, and provide multi-acquirer solutions.
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ITS can provide solutions for low volume B2B transactions through to fully integrated, multi-merchant, multi-currency systems enabled for Levels 1, 2, 3 and VGIS data. Terminal polling Both magnetic stripe and chip & pin capability to process all cards up to level 3 purchasing cards. ITS dials in and collects a file containing your transactions at a specified time.
Procurer Online (POL) Ideal solution for customers who want to be Level 1,2 & 3 capable and are looking for the flexibility and freedom to access their own transaction data. Approved by all the major UK acquiring banks and HM Revenue and Customs, POL is a secure internet based card processing system for credit, debit and purchasing card transactions that can be accessed from any PC with web connection. Transactions are processed in real time via a secure web page provided by ITS, so customers can cut out the time consuming paperwork or purchase order and invoice preparation.
submit to the acquiring bank in one single file. This allows you to benefit from the security of chip & pin whilst being able to provide full addendum data to your customers.
ITS customers can benefit by subscribing to our easy to use online e-Statements service; This contains simple yet effective tools for analysing and searching the transaction database. The service is updated early each morning to show transactions from the previous day that have been processed and submitted to the acquiring bank(s) for settlement.
Management Information (MI) reporting ITS is able to provide bespoke reports detailing any type or level of information captured during the transaction handling process. MI reports are particularly useful for customers that utilise our specialist, Level 4 data handling service. Additional data outside the usual financial routines can be captured and reported.
Supplier Recruitment As leading industry experts, with thousands of suppliers using our solutions, we can assist organisations with supplier recruitment through seminars and meetings, to outline the benefits and growth of the Purchasing Card Industry. We determine ‘best fit’ solutions and provide ongoing product support through online demos documentation and training.
Consultancy ITS is able to provide a full consultancy service and can arrange to meet a prospective client and discuss their particular requirements and Service Level Agreements. This can be for any part of a project or a whole end to end solution. Whatever the requirements, major or minor, ITS has a wealth of knowledge and skills in providing solutions for credit/debit card systems, Purchasing Card systems and Loyalty systems.
We have created an animated demonstration which you can view at www.procurer-online.com/demo
We have strategic relationships with a number of suppliers, banks and scheme providers, so it is possible that we may be able to achieve significant savings on a client's behalf.
Procurer ERP
Contact Centre
Interfaced solution for processing credit, debit and purchasing card transactions (level 2 summary, level 3 LID & VGIS). It enables companies to integrate existing order processing or mail order systems with a UK APACS compliant credit/debit and purchasing card processing system. The Procurer ERP solution is provided in several variants, depending on how a specific merchant wishes to operate. Transaction details can be processed online, in batch, or a combination of both.
Our contact centre staff specialise in Purchasing Card expertise and managing clients’ expectations. We provide full business hours support for all customers as standard and are able to facilitate additional 1st, 2nd and 3rd line support depending on customers needs. If required, clients can talk specifically to the Account Managers who are experts where their particular products or customers are concerned.
Invoice matching service (IMS) IMS is a service that can be used to associate and match level 3 invoice data with level 1 financial information processed through EMV POS terminals. ITS will simply match the addendum data together with the terminal data, and page 6
To find out more details, please contact our Sales team on 01243 434 500, visit our website at www.interactiveTS.com or email sales@interactivets.com
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“Why Purchasing Cards? ” What is a Purchasing Card?
Supplier’s considerations
A credit card that is used to purchase goods or services. When used, the gross, net and vat values are captured which negates the need for invoices and provides evidence for vat.
Before embarking on becoming purchasing card capable, the supplier needs to consider 3 key factors.
Why Purchasing Card? Purchasing card is the most cost effective process for purchase to payment that currently exists. The supplier needs to understand why their customer wants to use it, and the benefits available to both parties. We know that traditional procurement methods can be cumbersome, inefficient and expensive to manage. It has been estimated that to purchase an item valued at £5 can cost some organisations over £50 because of the time and people involved to raise an order, get it approved, get it signed off, be purchased and taken through the accounts process. The item bought with a purchasing card makes a huge saving in time, process and people involved. The person making the purchase, the cardholder, has a direct relationship with the supplier. They can discuss the item, size, colour, quantity, delivery date etc. rather than just the impersonal purchase order which does not allow for variation in size, colour, quantity. Large organisations could have numerous buyers, several of them buying stationery from several stationery suppliers. Through management information, they can select a single preferred supplier and put all their orders through just one. Probably earning bigger discounts, certainly reducing the administrative and accounting issues. The organisation, public or private, introduces a purchasing card scheme using either the Mastercard ‘onecard’, Visa or American Express cards. Cards are issued to the very people who need to buy or pay for things. The company can introduce strict budget control by card, cardholder, category of goods, by week or by month. It also gives very valuable management information on how their business is running. To have a successful purchasing card scheme, it is essential that they recruit suppliers who are purchasing card capable.
What does it mean to the supplier? There are now so many local authorities, health authorities, schools, hospitals and private corporates using purchasing card, that any supplier not capable is risking losing business opportunities to their competitors. Often one of the first questions asked on a tender is ‘Are you Purchasing Card capable’? It is true that the supplier will have to invest in a system to become capable. There are benefits, not just to the buyer, but to the supplier as well. Every transaction is authorised.
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No more waiting for 30 or more days to get paid for goods or services. Payment is made automatically in 3 to 4 working days. No more chasing payment, a real saving in admin and accounts HMRC approved providing evidence of VAT Direct relationship between end user (buyer) and supplier. Potential to attract new business through purchasing card capability.
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Does the potential level of business merit investment in a system Which Purchasing card scheme is their customer going to use. What level of information does the customer require.
It is critical to find these things out in advance of making any decisions. The answers will shape all future decisions. There are 3 typical levels of card information. Level 1 – standard credit debit card. Captures minimal information. Level 2 – Summary Vat. Captures, gross, net, vat, commodity codes. Level 3 – Full line item detail. If the cardholder only requires level 2 purchasing card, then it is possible to conduct the transaction on a modified credit card terminal. However, if the cardholder requires level 3, then a PC, Web based or integrated solution is required. The supplier should note that if they can do level 3, they can automatically do level 2 and 1, but not the reverse. Those suppliers who carry out a high volume of transactions may want a system that is directly linked to their sales order processing system. Purchasing cards are almost 95% cardholder not present with the transaction being carried out via telephone, fax or email. Yet in some cases, there will be a cardholder present, at a trade counter for example, so the supplier needs to consider chip and pin technology. There are costs in systems and time associated with any choice. The supplier must work with the customer to determine what information is needed, and what it means to the suppliers business process by introducing new methods. If the supplier already accepts credit/debit cards, then it should only be a case of discussing the new requirement with his bank. If the supplier is new to credit/debit cards, then they need one of the main UK acquiring banks to sign them up. The good news is that most banks are now working closely with major customers to assist with supplier recruitment. There are excellent forums, workshops, and industry opportunities which can provide unbiased information in helping the supplier determine the right decision for their business.
Steve Wilkins HEAD OF OPERATIONS, ITS
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MasterCard UK Public Sector Proposition Regional Presentations The Solution of Choice ‘MasterCard’s portfolio of products deliver purchase-to-pay efficiencies’
To provide Public Sector organisations with a greater understanding of the cost saving benefits of MasterCard’s new product portfolio, a series of regional presentations have been arranged at convenient venues throughout the country. At each days venue the presentations will be hosted by industry leaders and professionals with significant public sector procurement, finance and e-commerce experience t h a t h a v e d e l i v e re d m a j o r s u c c e s s f u l n a t i o n a l programmes reducing administrative process costs and eliminating paper invoices. Payment cards are an innovative product and there has been a step change in the application of P-Cards that allows for greater coverage over additional areas of purchase spend. MasterCard’s development of new products provides greater transparency, audit ability, security and flexibility with a range of products that can be aligned to various commodity categories to provide optimal purchase-topay solutions.
Smart Data OnLine & ‘onecard’ The Solution of Choice MasterCard Smart Data OnLine solution provides on-line management information, including detailed transaction data through standard and customised reporting, with expense claim processing capability. Smart Data's ability to report the additional electronic ‘Level 3’ information where available, captured with each ‘one card’ purchasing card transaction. page 8
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MasterCard Smart Data OnLine global web-based reporting application helps you organise, consolidate, analyse and manage financial data from Purchasing & Corporate Cards and other MasterCard programs via the Internet. Smart Data Online with ‘onecard’ is successfully established across the Welsh Public Sector ‘The Solution of Choice’
Pre-Paid Cards There will be major growth in the area of prepaid cards across the UK public sector. Prepaid cards can be used for emergency and distress purchases across social care within local government. Housing associations are also benefiting from prepaid cards to alleviate reactive repairs. Prepaid cards are loaded with funds before they are used for payments. Their prepaid nature makes them ideal for social care, distress purchases and emergency requirements. Loading prepaid cards with the amount allowed can strictly control payment to anyone.
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Purchase Optimiser provides the capability to take your organisation towards best in class purchase-to-pay For further information of how to register for MasterCard’s Public Sector regional presentations or to find out more about MasterCard’s portfolio of products that can deliver purchaseto-pay efficiencies please contact: www.cardpaymentsolutions.co.uk/mastercard/ or info@cardpaymentsolutions.co.uk
Lodge Cards Lodge cards can be lodged physically with suppliers or alternatively lodged within an e-procurement solution and assigned to a particular supplier.
inControl MasterCard inControl is s new platform that enforces your preferred payment controls based on: • enhanced authorisation controls
PRESENTATIONS WILL BE HELD AT: Edinburgh
Basingstoke
Royal Terrace Hotel 18 Royal Terrace, Edinburgh EH7 5AQ Wednesday 12 March 2008
The Ark Conference Centre Dinwoodie Drive, Basingstoke RG24 9NN Thursday 10 April 2008
Cardiff
Gaydon Warwickshire
• flexible approval routing • a secure virtual card number Workflows, hierarchies and routings can be set specifically for your public sector organisations requirement through inControl. inControl reduces maverick purchasing and increases compliance to preferred suppliers and contracts. This drive to greater contract compliance facilitated by inControl results in further costs savings and increased business for your organisation’s preferred or approved suppliers.
Purchase Optimiser In any organisation an understanding of the relative performance of purchase-to-pay process costs is interesting as it can provide the stimulus for positive action. Comparative benchmarking and best practice is required in the Transformation of Government Procurement. The Purchase Optimiser is a web based diagnostic tool that helps evaluate card programmes and delivers practical, comprehensive and customised recommendations to improve performance. The customised report, built on Aberdeen Group benchmark data, highlights current status versus peers and identifies where and how existing programmes can be improved to exceed industry benchmarks.
Wales Millennium Centre Bute Place, Cardiff Bay, Cardiff CF10 5AL Thursday 20 March 2008
Heritage Motor Centre Banbury Road, Gaydon CV35 0BJ (Junction 12, M40) Tuesday 15 April 2008
Central London HMS Belfast Tooley St, between London Bridge & Tower Bridge, London Wednesday 09 April 2008
Leeds Royal Armouries Armouries Drive, Leeds LS10 1LT Tuesday 22 April 2008
Ireland Date and location to be confirmed April 2008
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‘Search...’ Purchasing Card Capable Suppliers Search Engine & Directory Making connections between Suppliers and Buyers Log on to: www.purchasingcardnews.co.uk and click on P-Card Capable Suppliers Directory
earch... The Purchasing Card Capable Suppliers Search Engine and Directory presently contains over 7000 MasterCard and Visa Purchasing Card Capable Suppliers at Level 1, 2 & 3.
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This represents the vast majority of the UK Purchasing Card Capable Suppliers. Multiple supplier outlets are not listed unless otherwise detailed within the suppliers own Profile Pages of the Search Engine. Further Purchasing Card Capable Suppliers will be added to the Search Engine & Directory with the business categories updated enabling detailed searches by products and services. Search A password protected online directory and search engine, designed to assist both Private & Public Sector buying, purchasing and contracting personnel recruit from the Purchasing Card Capable Suppliers listed. Search Has been developed to offer a solution to supplier recruitment, by providing an on-line directory and search engine that profiles your business activities, products and services to thousands of industry buying, purchasing and contracting personnel on a regular basis.
Buyers can search quickly and easily at a glance all the information by: -
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Business Categories Products & Services Merchant Category Codes Purchasing Card Level 2 & 3 Capable Suppliers All Level 3 Capable Suppliers Suppliers Name Region
Search... Purchasing Card Capable Suppliers Search Engine & Directory will be promoted regularly in:
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Purchasing Card NewsLink twice monthly email broadcast to 22,000 industry contacts from both the Public and PrivateSectors.
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Purchasing Card News publication issues circulated up to 10,000 Purchasing Card industry professionals.
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Site prominence on: • Purchasing Card News web site • Card Payment Solutions web site
For further information please contact:Purchasing Card News, Castle Hill Farm, Castle Mill Lane , Ashley, Altrincham, Cheshire WA15 0RB Tel: +44(0) 161 928 0485 Fax: +44(0) 161 928 1713 Email: info@purchasingcardnews.co.uk www.cardpaymentsolutions.co.uk www.purchasingcardnews.co.uk
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Irish Companies to Benefit from Simplified VAT Recovery Process. MasterCard obtains VAT certification for Purchasing Card programme. MasterCard Worldwide has been certified by the Irish Tax Authorities to offer simplified Value Added Tax (VAT) invoice reporting through its Purchasing Card programme. This agreement will enable Irish companies of all sizes to streamline their VAT reclamation process using MasterCard Smart Data OnLineTM (SDOL) or MasterCard smartdata.gen2™, the latest advancement in MasterCard’s portfolio of web-based expense and information management solutions. When making purchases at a merchant with a MasterCard Purchasing Card, invoice data flows electronically to a company with the data automatically including VAT information. To recover VAT from the tax authorities, a company using Smart Data reporting solution can view and print-out a detailed and comprehensive report containing all invoice data, thereby significantly simplifying their VAT reclamation process compared with having to manually track and maintain all purchasing records. The certification by the Irish Tax authorities enables MasterCard issuing banks to seamlessly provide a simplified VAT recovery solution to their customers. Financial institutions benefit from an easier workflow in addition to increased efficiencies. When using invoice reporting via Smart Data reporting solutions, financial institutions no longer have to exchange individual files with customers or print paper forms, resulting in the elimination of inefficient processes and freeing up valuable resources. “Today, it costs companies on average up to around 10 1 to process and settle a single supplier invoice. By enabling simplified VAT recovery for Purchasing Card purchases made in Ireland, MasterCard once again demonstrates its commitment to help optimise commercial programmes by providing integrated information and reporting solutions in a manner that drives efficiency and transparency. With our best-in-class Smart Data reporting solutions, companies and public organisations gain the insights needed to not only negotiate better deals with suppliers but also save time and money”, said Brian Lang, Vice President, Commercial Products, MasterCard Europe. MasterCard Smart Data reporting solutions are the industry standards for commercial card reporting across all segments and products, facilitating the information management strategy of over 140,000 customers worldwide. Flexible and robust, companies use the web-based reporting application to consolidate, analyse, and manage financial data from MasterCard commercial card programmes. It offers both local and centralised reporting and is compatible with widely used expense management and ERP systems such as Oracle, SAP and Concur. Its unsurpassed reporting capabilities enable simplified VAT recovery to become a reality for corporations across Europe.To date, MasterCard has received VAT certification of its Purchasing Card product in nine European countries, besides Ireland also in the United Kingdom, The Netherlands, France, Belgium, Denmark, Germany, Sweden and Norway. Contacts: Doyel Maitra, +44 (0) 207 557 5033, doyel_maitra@mastercard.com Bernhard Mors, +32 (0) 2 352 50 57, bernhard_mors@mastercard.com
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New MasterCard Benchmarking Tool helps organisations Optimise their T & E and Purchasing Spend MasterCard Worldwide today announced the launch of the MasterCard Optimiser for Travel & Entertainment and Purchasing. This interactive online tool enables companies of all sizes, including multinational and public sector organisations, to improve their travel and entertainment (T&E) and Purchasing programmes and identify savings opportunities by benchmarking and analysing them against best-in-class industry practices. The European launch follows the roll-out of the MasterCard Optimiser in North America and the Asia-Pacific-Middle-East region, where the tool has helped companies improve their T & E and Purchasing programmes. Besides salaries and data processing, T& E and Purchasing spend represent a significant portion of companies’ controllable expenses. According to latest research by Aberdeen Group1, T& E spend per company is expected to see an increase of 24 % in 2008 compared to the previous year, while spending on Purchasing cards will grow by 27 % at the same time. Research also shows that spend reduction and control are the top priorities for businesses across all segments. By leveraging the MasterCard Optimiser, companies can increase the effectiveness of their T & E and Purchasing card programmes and improve their performance. “The MasterCard Optimiser for Travel & Entertainment and Purchasing is an intuitive and powerful solution for organisations across the Europe region. This launch demonstrates our commitment to support organisations of all kind in realising savings and optimising opportunities in their spending programmes. The optimiser tool ideally complements our portfolio of payment and reporting solutions providing efficiency and control for businesses and public sector organisations”, said Brian Lang, Vice President, Commercial Products, MasterCard Europe.
How it works: To access the MasterCard Optimiser, a company representative, whether a Card Program Administrator, C-Level Executive, Business Manager or Travel and Procurement Manager, logs on to the application website and answers a series of quantitative and qualitative questions. Users can choose to analyse T&E spend, indirect spend, or both and can complete the interactive survey regardless of whether or not they currently have a corporate or Purchasing card programme. The country-specific survey includes benchmarks and currencies from 14 countries in Europe and takes about 20 minutes to complete. The MasterCard Optimiser then analyzes the information against best practices from hundreds of companies to generate a downloadable report which offers a tailored roadmap, industry insights and recommendations on how an organisation can:
• Improve overall T&E and Purchasing process efficiency • Benchmark against best in class organisations in the region • Identify and quantify potential savings “With increasing outbound travel and corporate purchases, European businesses need to continuously monitor and streamline both types of expenses,” added Lang. “The MasterCard Optimiser for Travel & Entertainment and Purchasing can help them customise their programmes to be in line with the company’s operational and financial requirements while providing employees with efficient and transparent guidelines on spending and expense management.” Companies that wish to use the MasterCard Optimiser for Travel & Entertainment and Purchasing can access it online at no cost from www.mastercard.com/eur/optimiser. Interested program administrators seeking additional information should forward their inquiries via email to optimiser@mastercard.com. 1 - Aberdeen Global Commercial Payments Cards 2007
Lloyds TSB Corporate Markets launch NetService online card management
Lloyds TSB Corporate Markets have launched NetService – a web-based online account management tool for Corporate and Purchasing Cards, which provides cardholders and programme administrators a convenient way to track spend and manage their card accounts. NetService is available free of charge to all Lloyds TSB’s Corporate, Purchasing and Government Procurement card schemes.
Netservice allows cardholders to • Check available spending limits and current balances • Check payment status • View and update cardholder information, such as address and contact details • Review transactions in real time, as soon as they are posted • Track unbilled and pending transactions • View, print and download statement data for the last 12 months
Programme Administrators can also • View all cardholder accounts online • Add messages for other Netservice users • Enrol other cardholders as Netservice users Netservice is available 24/7and users can log on using secure industrystandard 128-bit SSL encryption.
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‘Interchange’ an Austrailian perspective The regulation of payment cards in Australia: Recent changes and their implications This paper describes why and how the regulator of the Australian payments systems, the Reserve Bank of Australia, has intervened in the economics of the plastic payment card and the effect that this has had on Australian participants in this value chain and their immediate responses. Following a brief review of the regulatory environment, the paper examines, first, the interventions in the credit card market and then the interventions in both the domestic EFTPOS debit card market and in the so-called ‘scheme debit’ cards issued with MasterCard or Visa acceptance marques. Finally, the paper considers why and how major Australian retailers have sought to become ‘on-us’ acquirers of their customers’ card payments. Some conclusions are then offered as to what can be learnt from the Australian experience and why it is being observed so closely by others around the world. THE REGULATORS Australia has two key regulators in the banking and payments system area: the Reserve Bank of Australia (RBA), which is the country’s central bank, and the Australian Consumer and Competition Commission (ACCC). In effect, the ACCC retains responsibility for competition and access in the Australian payment system, unless the RBA designates some aspects of the system and then imposes an access regime and/or sets standards for it. If the RBA does ‘designate’ in this way, its requirements are then paramount. The RBA’s Payments Systems Board, established in 1998, is responsible for determining the RBA’s payments systems policy, and it is charged with promoting both efficiency and competition in the market for payment services. Australia is thus among the first countries in the world to make efficiency and competition in payment systems a statutory objective of the central bank. Using these powers, in April 2001 the RBA formally ‘designated’ the credit card schemes in Australia as the first step in establishing standards and access regimes for this payment system, to deal with public interest issues and to fulfil its obligation ‘to achieve a payments system which is to the greatest advantage of the people of Australia’. A third regulator which has an impact upon the Australian payments system, page 12
Steve Worthington Steve Worthington is Professor of Marketing at Monash University in the Faculty of Business and Economics. He specialises in the issues surrounding the distribution of financial services, particularly via plastic cards and in the organisation and control of the payment systems through which these cards are used. Steve has published widely, both in academic journals such as Journal of Marketing Management, Journal of Retailing and Consumer Services and the International Journal of Bank Marketing, and in more practitionerfocused publications such as The Financial Times, European Card Review and Cards International. He has also written a number of case studies concerning both bank and retailer provision of financial services. A frequent presenter/chairman at industry conferences, Steve has also been used by the media as an independent commentator on the delivery of financial services by plastic cards.
is the Australian Prudential Regulation Authority (APRA). This is the prudential regulator, which oversees banks, credit unions, building societies, general insurance and reinsurance companies. Established in 1998, it is funded largely by the institutions that it supervises and, in relation to the payments system, it created standards to encourage the access into the market of specialist credit card issuers and acquirers.
CREDIT CARDS The market for credit cards has grown hugely since the first such cards were introduced into the USA in the 1950s.1 There are now over 16 million credit and charge cards on issue in Australia, and these are accepted in an ever increasing number of merchant outlets. As a consequence, Australia is now the eighth largest credit and charge card market in the world, with RBA data showing that transactions to the value of A$191bn, were made using all credit and charge cards in Australia, over the year to March 2007. In August 2002, the RBA, in its role as the de facto regulator of the Australian payments system, announced the results of its investigation into the reform of the four-party credit card schemes in Australia, namely the domestic-only Bankcard and the international acceptance marques of MasterCard and Visa. The four parties involved here are the cardholders; the financial institution that issues the credit card (the card issuer); the financial institution which acquires the transactions from the merchants and then clears them through the settlement system (the merchant acquirer), and the merchant who accepts the card as a payment mechanism. Previous literature on the theory
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of credit card networks can be found in Chakravorti,2 and a discussion of the various relationships in the four-party credit card networks in Chakravorti and Shah.3 The reforms that the RBA introduced were essentially threefold. First, from October 2003 the interchange element of the Merchant Service Charge (MSC) paid by the merchant to the card issuer, through the merchant acquirer, was effectively halved and, by July 2004, the reforms had seen the interchange fee on MasterCard and Visa credit card transactions fall to an average of 0.55 per cent. This represented an estimated saving to Australian retailers of over A$700m per annum, based on the then levels of credit card spending. With the cooperation of all the credit and charge card schemes, the RBA now publishes a quarterly average of the merchant fees charged by each scheme, and this is reproduced in Table 1. The merchant fees include the interchange element and the other costs of the ‘acquirer’ organisation. The publication of these merchant fees by the RBA means that both American Express and Diners Club are under pressure from the large merchants to reduce their MSCs, given the large disparity between them and the four-party schemes. Most smaller retailers, however, are still paying higher merchant fees to these three-party schemes, of between 3 per cent Table 1: Average
Month Dec 2003 Dec 2004 Dec 2005 Dec 2006 Mar 2007 June 2007
Australian merchant fees by scheme: % of purchase value Bankcard, MasterCard and Visa 1.19 1.04 0.98 0.92 0.91 0.88
American Express 2.49 2.41 2.32 2.19 2.19 2.17
Diners Club 2.37 2.34 2.33 2.17 2.16 2.17
Source: RBA.
and 4 per cent of the value of each transaction. Diners Club has about 420,000 charge cards in issue in Australia, compared with about 1.3 million American Express charge and credit cards. The RBA is keen to publicise these figures to improve transparency and hence assist merchants in their negotiations with all card issuers. Also as part of its reform process, the RBA has encouraged American Express to remove the ‘nosteering’ rule, which used to limit those merchants who accepted American Express cards in their ability to use persuasion or other non-price methods to influence consumers’ choice of payment method. As a result, Australian merchants can now ‘steer’ their customers to lower-cost methods of payment. Bankcard, as a domestic-only marque, was by 2006 only held by a small minority of credit card holders in Australia, and it was subsequently withdrawn in 2007, and hence all future commentary will refer to only Master-Card and Visa as the four-party schemes. Their MSCs have now been lowered (as of June 2007, see Table 1) to an average of 0.88 per cent, with the interchange rate making up 0.55 per cent of that total. This is in direct contrast to the USA where, according to Morgan Stanley estimates, the average US interchange went up from 1.58 per cent in 1998, to 1.75 per cent in 2004, and they project a further increase to 1.86 per cent in 2010, driven by both MasterCard and Visa using these revenues to compete for market share and encourage issuer product development, particularly as regards rewards schemes based on the value of spending on credit cards.
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Indeed, Visa USA announced its latest range of credit card interchange reimbursement fees in April 2007, which average out at 1.77 per cent. The RBA also now publicises an aggregate of the market share of the value of purchases between the three-party and four-party schemes in Australia (see Table 2). The three-party schemes made considerable market share gains in the year from December 2003, immediately following the RBA’s intervention into the market in 2002 and the subsequent reduction in credit card interchange in 2003. The situation appears now to have stabilised somewhat, but the threeparty schemes are still marginally gaining share, and it should be noted that the American Express figures include both their charge and credit card offerings.
Table 2: Scheme
market shares by value of purchases (A$)
Year ended Dec 2003 Dec 2004 Dec 2005 Dec 2006 Mar 2007 June 2007
MasterCard/Visa 85.2 83.3 83.5 83.4 83.1 83.0
Amex/Diners Club 14.8 16.7 16.5 16.6 16.9 17.0
Source: RBA.
Going forward, the RBA was concerned that even small differences in interchange rates between the four-party credit card schemes might be disadvantaging some issuers. Table 3 shows the interchange fees, as reported by the card schemes in August 2005. The interchange fees in the MasterCard system were two basis points higher than those in the Visa system. This, it was argued, could be giving MasterCard a competitive advantage in attracting issuers, particularly if this is not offset by higher costs. The RBA therefore considered whether to establish a common interchange benchmark that would then apply across the two schemes. At the meeting of the Payments System Board on 22nd November, 2005, the RBA decided to impose an interchange standard on all the designated credit card schemes. Consequently, on 25th November, 2005, the RBA gazetted a revised standard, which has applied from 1st November, 2006. Under the revised standard, the weighted average interchange fee of each of the two schemes (see Table 3) must be no greater than a common benchmark. The common benchmark, which will apply for three years from November 2006, is 0.50 per cent. This is in contrast to the previous standard, where separate benchmarks apply to each scheme (see Table 3). Table 3: Interchange
fees by scheme (August 2005) (A$)
Standard Electronic
MasterCard 0.62 0.46
Visa 0.60 0.44
Source: RBA.
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The weighted average of each scheme’s credit card interchange fees must not exceed the common benchmark on 1st November, 2006, or on any date in the subsequent three years on which any scheme introduces, varies or removes a credit card interchange fee. A Goods and Services Tax (GST) is applied to the common benchmarks, which makes its actual cost to the merchant 0.55 per cent, although the merchants can reclaim the GST element of the interchange fee. (See the Appendix for a chronological review of the RBA’s interventions.)
THE REPERCUSSIONS FOR MASTERCARD AND VISA ISSUERS The information in Tables 1–3 gives some indication of the impact of the RBA’s intervention in interchange. To add flesh to the bones of the statistics, one needs to consider the reactions of the key players to this fundamental change to the economics of the payment card industry in Australia. First, issuers had plenty of warning that this reduction in interchange would occur, and they knew by how much. The legal challenge to the RBA’s decisions in 2002 by MasterCard and Visa merely delayed the inevitable. For a more detailed discussion of this, see Worthington.4 Consequently, some MasterCard and Visa issuers sought to transfer their cardholders (particularly their transactors) to existing or new co-branded cards with American Express and Diners Club, thus to try to preserve their MSC income stream via the three-party schemes. The Australia and New Zealand Bank (ANZ) has a co-branded charge card with Diners Club, Westpac has a co-branded charge card with American Express, while the National Australia Bank (NAB) has a co-branded credit card with American Express. Not all ‘targeted’ cardholders succumbed to the incentives to transfer (no annual fees for year one, etc.), and whether they will remain with the threeparty card schemes when the incentives run out is a matter of conjecture. Nevertheless, there was some growth in American Express/Diners Club card numbers and spending, but this needs to be offset by the continued growth in MasterCard/Visa card numbers and spending. Indeed, there were nearly 850,000 applications for new credit cards and credit limit increases in the second quarter of 2007, and total spend on credit and charge cards was A$17,061m in December 2006, a 5.5 per cent increase on December 2005. The total value of credit and charge card spending in the year to December 2006 was A$186,234m, an increase of A$16,627 over the previous year to December 2005, with A$155,523m being on personal credit cards and A$30,711m on charge and commercial card accounts. Indeed, in the first quarter of 2006, Visa passed the ‘milestone’ of over $A100bn in annual retail sales with its range of payment card products. Visa payments, measured as a proportion of personal consumption expenditure in Australia, exceeded 18 per cent, the majority of which is credit, and Visa’s Australian General Manager was quoted as saying that ‘we have weathered the impact of regulatory change in Australia as credit purchases have increased by 2 per cent; debit by 12 per cent and commercial by 20 per cent during 2005’. Visa debit cards accounted for 30 per cent of total sales volumes, compared with 70 per cent for Visa credit cards. Card issuers also responded to the RBA’s interchange intervention by issuing no/low annual fee, no/low interest days and no rewards scheme cards with low interest rates, aimed at the price-sensitive revolvers. Many of these lowrate card products have been launched since 2005, and their numbers continue to increase, through marketing strategies such as low or even zero interest rates on balances transferred from existing credit card accounts. Hence the market, as in the UK, has now polarised between these ‘no-frills’ cards which should appeal to the ‘revolvers’ and the annual fee, interest free day cards, with reward schemes that still appeal to the ‘transactors’. The reduction in interchange has proved to be another impediment to new page 14
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entrants into the Australian market, particularly the so-called ‘monolines’ such as MBNA and Capital One, although perceptually there have been ‘new’ entrants such as Virgin Money and GE Money. In reality, however, the former is actually issued by Westpac, while the latter is a MasterCard conversion of an existing store card programme, now branded as the Coles Source card. Both these cards have achieved a presence in the credit card market, with Virgin Money balances thought to be one-fifth of the total of Westpac’s balances by September 2005 with three-quarters of a million cards in issue, and the GE Money card reaching a million cards in issue at the same milestone, one year after entering the market. The Australian market continues to evolve under this new interchange regime. From annual fees being the norm, there are now an increasing number of fee-free cards (Virgin Money; BankWest — an HBOS subsidiary) as issuers seek to gain switchers from other issuers. The loss of interchange income to the issuers means an increased reliance on interest rate income, additional fees (over credit limit/late payment, etc.) and, where applicable, overseas transaction foreign currency fees. Consumers are faced with more choice of cards, but alleged low levels of financial literacy in Australia and sheer inertia mean that below 5 per cent of credit cardholders ‘switch’ provider in any given year.
THE REPERCUSSIONS FOR MERCHANTS AND CONSUMERS Merchant acceptors of credit cards have adapted to the new interchange levels by, broadly speaking, ‘pocketing’ the reduction in MSCs and using the new transparent MSCs (and the RBA’s publication of them) to force down the MSCs they pay to their card transaction acquirers. The RBA is satisfied, however, that the retailing sector in Australia is so competitive that the reductions in interchange fees have been passed through to consumers, as lower costs to retailers should result in lower prices. Merchants in Australia have also reacted to the second element of the RBA’s reforms, which from January 2003 has allowed merchants to surcharge for payments made by credit and charge cards, to offset the MSCs that they pay on such transactions. As in the UK, where such surcharging has been allowed since the Monopolies and Mergers Commission report of 1989 into Credit Card Services, far from all merchants have introduced surcharges, but there have been some prominent adopters of this practice. For example, both Qantas and Virgin Blue, the current duopoly in domestic air travel, add a surcharge to all bookings paid for by credit and charge cards (including online bookings), while Telstra, the dominant telecommunications provider, surcharges at 0.69 per cent for Master-Card, Visa and American Express, and 1.68 per cent for Diners Club. This is described by Telstra as ‘a payment processing fee applies, reflecting bank fees charged to Telstra for card payments’. By June 2007, the RBA estimated that 17 per cent of very large merchants imposed a surcharge on credit card transactions, compared with only 7 per cent two years earlier. Surcharging by smaller merchants is less common, but the number of merchants that do surcharge continues to rise. Thus, by an ironic twist, the two RBA reforms which were meant to help the credit cardholders have in fact largely disadvantaged them. First, the reduction in interchange/MSCs has not produced any discernible reduction in prices charged to cardholders, while the introduction of surcharging has actually increased some prices for those who choose to pay by credit and/or charge cards. Issuers have also sought to increase annual fees, introduce/increase fees for belonging to rewards programmes and simultaneously ‘water-down’ the value of those reward programmes, so once again cardholders are the losers, and the cost/benefit ratio of holding credit cards has moved against them. Table 4 shows the reduction that has taken place in the value of reward points since the RBA’s intervention. To some extent, American Express and Diners Club have benefited from these reforms via their co-branded programmes and with their revitalised
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reward schemes, and they have been able to attract, in the first instance, more cardholders and achieve a higher spend on their cards. Table 4: Value
2003 2004 2005 2006 2007
of credit card rewards in Australia
Average spending required for A$100 voucher (A$) 12,400 14,400 15,100 16,000 16,300
Benefit to cardholder as a proportion of spending (%) 0.81 0.69 0.66 0.63 0.61
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subsequently passed on (in whole or in part) to the merchant by the acquirer. The major Australian retailers therefore sought to question the legality of the RBA’s ‘designation’ of the EFTPOS card payment system in Australia. This ironically mirrors the legal challenge by the card schemes (MasterCard and Visa) to the RBA’s ‘designation’ of the credit card system. Both challenges proved to be unsuccessful, although they did achieve a considerable delay to the regulatory impacts. The Australian retailers claimed that the proposed changes to the debit card payment system would cost them around A$170m in annual income, while the Australian banks claimed that the previous credit card reforms cost them around A$700m per annum in lost revenue, which flowed directly to the retailers. The stakes were then high in both challenges to the RBA’s ‘designations’, and more so if these regulatory interventions were to be replicated elsewhere in the plastic card payments world.
Source: RBA.
Both these three-party schemes, however, need to bear in mind that the RBA has reserved the right to ‘designate’ them for investigation and is keeping a watchful eye on the trends within the market. The four-party schemes are, of course, always reminding the RBA of what they see as the need for a ‘level playing field’ and will continue to seek to contain American Express and Diners Club.
The Australian Federal Court gave its decision on 28th November, 2005, that the RBA was allowed to designate the debit card systems in Australia. The RBA then announced that it would complete its consultation on the draft interchange standard for debit cards that it had already released in February 2005, and that it would also consider access arrangements to the debit card system. At the end of the consultation process, the Payments System Board released on 27th April, 2006, a package of reforms to the EFTPOS and the so-called ‘scheme debit’ cards of MasterCard and Visa. These were as follows:
THE REPERCUSSIONS FOR THE ACQUIRERS
•
The third element of the RBA’s reforms was aimed at opening up the Australian market, not only to new issuers, but also to new acquirers. Changes were therefore made to the criteria for issuers and acquirers, and while there have been relatively few applications to the APRA for a licence to issue credit cards, there have been some new ‘players’ looking to enter the acquiring market. In implementing the RBA’s agenda of lowering the restrictions on access into the credit card payment industry, the APRA has created a new class of Authorised Deposit-taking Institution (ADI), known as a Specialist Credit Card Institution (SCCI). These can only perform activities associated with credit card issuing and/or acquiring. APRA has also indicated that it has no objections to SCCI’s undertaking debit card acquiring.
The adoption of both a cap and a floor on interchange fees in the EFTPOS system, with the result that these fees, which are paid by the financial institutions that issue EFTPOS cards, are likely to fall to around 4–5 cents per transaction, from an average of 20 cents previously. The variation is because EFTPOS fees are bilaterally negotiated between issuer and acquirer.
•
The adoption of a cap on the weightedaverage interchange fee in the Visa Debit system, with the result that interchange fees in the Visa Debit system (and any equivalent MasterCard Debit system), which are paid to financial institutions that issue such cards, are likely to fall to an average of 15 cents per transaction, from around 40 cents previously. Subsequently in September 2006, the RBA reduced this interchange fee even further to 12 cents. This has been applied from 1st November, 2006, and is to apply for three years from this date. See Appendix for a chronological review of the RBA’s interventions.
•
Requiring the Visa system to remove the restrictions on merchants that require them to accept Visa Debit cards if they accept Visa credit cards and that prohibit merchants from imposing a surcharge on Visa Debit transactions. This removal of the ‘honour all cards’ and ‘no surcharge’ standards would also apply to any MasterCard Debit card products. The ability for retailers to surcharge on such transactions will now be the same as for charge and credit cards in Australia.
Since this new access regime came into force in February 2004, the APRA has authorised four SCCIs, three of which (including GE Money) already issued credit cards in Australia through an overseas affiliate. The fourth SCCI has gained membership of the credit card schemes in order to provide credit card services (ie acquiring) to merchants. This SCCI is Money Switch, which was authorised by the APRA in March 2005, the first new member of the Australian acquiring system since the early 1990s and is now seeking to specialise in the provision of both credit and debit acquiring services, although its success in the marketplace is so far unproven. At present Money Switch, which trades as Tyro Payments, is limiting its acquiring business to very low-risk merchants, and it began processing payments in 2006.
THE DEBIT/EFTPOS CARD The RBA has also sought to ‘designate’ the debit card payment system in Australia, with a view to intervening in the interchange arrangements and fees that apply in these schemes. Historically in Australia, these interchange fees for the domestic-only electronic funds transfer at point of sale (EFTPOS) system, which are a ‘flat-fee’ averaging around A$0.20 (with a range of A$0.18 to over A$0.30) per EFTPOS transaction, are paid by the issuer to the acquirer, as with automated teller machine (ATM) transaction interchange. This, of course, is in direct contrast to most other countries, where the interchange fee flow, as with the credit card systems, is from acquirer to issuer. This has produced a substantial income stream to the large Australian retailers, particularly those that were able to negotiate good deals with their acquirers or who began to self-acquire. These acquirer fees were under threat if the RBA intervened to eliminate or reduce the EFTPOS interchange fee paid by the issuing banks to the acquirer banks and then
The reforms that the RBA announced in April 2006, and subsequently applied in November 2006, narrow the difference in interchange fees between EFTPOS transactions and scheme debit transactions to around 17 cents. That is, an EFTPOS issuer will now pay around 5 cents to the retailer’s acquirer, while a scheme debit issuer will now receive 12 cents from the retailer’s acquirer. In the RBA’s view, without this fundamental change in the economics of the debit card systems, it was highly likely that the scheme debit systems would grow at the expense of the EFTPOS system, simply because of the structure of the interchange fees. By significantly narrowing the difference in these fees, the RBA anticipates that these reforms will promote competition between the two debit card schemes, based on their benefits to cardholders and merchants, rather than, as hitherto, on interchange fees, that were not subject to normal competitive pressures. The new lower EFTPOS interchange fees applied from 1st November, 2006, and both MasterCard and Visa were given the opportunity to comply voluntarily with the new standards, as they apply to their debit card page 15
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products. The same 1st November, 2006, deadline applied to both the MasterCard and Visa Debit card interchange fees. MasterCard and Visa also have to have a clear identifier on their scheme debit cards, so that merchant acceptors can differentiate between scheme debit cards and bank-issued EFTPOS debit cards. This enables merchants to refuse to accept the scheme debit cards if they so wish by identifying them at the point of sale (POS). In June 2007, in an attempt to circumvent the abolition of the ‘honour all cards’ rule, MasterCard published new credit card interchange rules that cut the lowest rate for large merchants, utilities and government agencies to around 0.30 per cent, excluding GST. This is only available to those merchants who commit to accepting all MasterCard products, in other words, to return to the ‘honour all cards’ regime. Also following representations by the merchants, any transaction at the POS that involves cash back/cash out is excluded from the cap and floor of the new EFTPOS interchange fees and, instead, reverts to the ‘old’ interchange level of around 20 cents per transaction. As such, cash backs/cash outs are believed to occur in a third of all transactions at the POS of the major retailers. This still represents a substantial income stream for the retailers, plus it enables them to get rid of cash and the associated costs that go with notes and coins, and it can be presented as an additional customer service. The RBA’s reforms of April 2006 also addressed the issue of the EFTPOS access regime by the adoption of a cap on the price that existing participants in the EFTPOS system can charge new and existing participants for establishing a connection. It is expected that this will significantly improve access to Australia’s EFTPOS system. As well as the cap, the new access code provides new and existing participants with the right to establish direct connections with participants in the EFTPOS system and sets a time frame under which connections must be established. This new access regime came into force on 31st May, 2006, and it represents a successful example of the RBA and the payments industry working together to achieve a mutually satisfactory resolution of the access issues which had previously divided them. This example of cooperation between the RBA and the payments industry will hopefully be replicated when the RBA turns its attention to Governance and Technology issues, in particular the heavy reliance in Australia on bilateral rather than multilateral contracts and the sometimes lack of strong central entities that can develop and promote particular payment methods. These issues are arguably best dealt with on an industry-wide basis, rather than by regulation, and the RBA appears content to raise these issues, rather than directly intervene. The RBA’s considerations about access have highlighted the complications that can arise in payments systems built around physical bilateral linkages and bilateral business arrangements. This is the case in Australia for both the EFTPOS and ATM systems. Two issues in particular concern the RBA. The first is the potential for existing players to block the entry of a new participant by not allowing them to establish direct physical connections or business relationships with existing direct participants. The RBA’s reforms of April 2006 directly addressed this concern. The second concern relates to the additional costs that can arise when new participants wish to establish bilateral connections. On the one hand, new participants need to be encouraged to stimulate competition and innovation but, on the other hand, a proliferation of bilateral linkages would be at a considerable cost to the incumbents. In many other countries, there is a single point of physical access (a hub and spoke system), as opposed to the situation in Australia, which requires new participants to establish multiple physical connections. The Australian Bankers Association (ABA) announced in August 2007 that it and the Australian Payments Clearing Association (APCA) are ‘currently considering options for establishing a centralised commercial governance structure, responsible for the promotion and development of the EFTPOS page 16
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system’. The origins of the current EFTPOS system go back to the early 1980s, and the Australian banks then progressively negotiated bilateral links (including interchange fees) to foster the growth of what has subsequently evolved into a ubiquitous domestic payments system. Technical standards for EFTPOS were transferred to APCA in the early 1990s, though APCA never had any kind of marketing or strategic role. The emergence of MasterCard Debit and Visa Debit in Australia has been seen as a potential threat to the Australian EFTPOS system and its brand, in much the same way as the emergence of MasterCard and Visa branded credit cards has led to the demise of the domestic Australian credit card Bankcard, referred to earlier. The RBA is concerned that the lack of investment in the EFTPOS system is in part due to the bilateral structure of the scheme, and the RBA would prefer a central switch, where there is no need for each participant to negotiate links with every other participant.
RETAILERS AS ‘ON-US’ ACQUIRERS With the changes to the economics of both the credit card and the scheme debit/EFTPOS systems in Australia, some of the larger merchants are considering whether they should establish bilateral linkages and relationships with their major ‘issuers’, while using a ‘third-party’ gateway to deal with all the minor issuer’s transactions that they accept. These gateways are the eight ‘direct connector’ institutions that currently have these bilateral linkages and relationships.These are the four major national banks (ANZ, Commonwealth, NAB and Westpac); two regional banks (Bank of Western Australia and St George); First Data International (a payment processor that caters in Australia to credit unions, building societies, other regional and foreign bank card issuers) and Coles Myer (the only ‘merchant principal’ in the payments system). The now separated Australian retailers Coles and Myer have, since the early 1980s, operated their own ‘switch’ into the Australian payments reconciliation system. They are now ‘on-us acquirers’ in that they have bilateral links with all four of the major Australian banks, American Express, Diners Club and plus they have an acquirer which collectively handles their transactions for the credit unions and other card issuing financial institutions. By this means, most payment cards swiped through Coles terminals are ‘acquired’ by Coles and switched directly to the issuers, becoming therefore ‘on-us’ transactions. The exceptions would be international cards used to make payments in Australia, which are switched via the MasterCard and Visa processing systems. Under the new economics of the RBA imposed credit and debit interchange fees and with the new access arrangements, it would be no surprise to find other Australian retailers examining the ‘on-us’ option. To make this a worthwhile exercise, they will need the economies of scale that could justify the investment and the management time in both establishing and maintaining the ‘on-us’ status. Time alone will tell who will follow the Coles lead here and within what time period. For a further discussion of how retailers around the world have tried to move into financial services, see Worthington5 and Worthington and Welch.6
CONCLUSIONS The intervention of the RBA as the payments system regulator in Australia has had profound implications for the participants in the Australian plastic payment card value chain. Furthermore, if the RBA’s approach were to be replicated by other regulators in other countries, participants there would also be dramatically affected. The RBA has both given Australian merchants a ‘windfall’ via the reduction in credit card interchange rates and also taken from them a useful income stream by reducing EFTPOS debit card interchange rates. On balance, however, Australian merchants have come out ahead, and they can now, if they so choose, surcharge for any credit, charge card or debit card payments that they take at their POS.
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The RBA’s intervention in the debit card market, while disadvantaging Australian retailers to some extent, has, with the removal of the ‘honour all cards’ obligation, allowed them to choose which payment cards they will accept at the POS from the variety offered by MasterCard and Visa. Finally, with the opening up by the RBA of the access arrangements for acquiring payment card transactions, there may well be more Australian retailers who seek to become ‘on-us’ acquirers of their payment card transactions and thereby seek to gain more from the ‘value chain’ that relates to the processing of card payments. While certain aspects of the Australian payment cards market are peculiar to Australia, for example the reverse flow of interchange from the issuer to the acquirer in the case of large merchants and their EFTPOS transactions, nevertheless many payment systems participants from around the world are closely watching the outcomes of the regulators’ intervention in this market. One reason for this is that regulators elsewhere may wish to follow, in part or in whole, the actions of the Australian regulator. The evidence so far, as reported in this paper, is that, despite the protestations of the card schemes, their issuers and acquirers, as well as the merchants themselves, the RBA imposed changes to both the economics of the credit and debit cards do not appear to have reduced the popularity of either type of payment card with cardholders. Australians continue to increase their spending on payment cards and decrease their use of paper cheques and, thus, the large Australian merchant acceptors of card payments are increasingly aware of the costs of acceptance and will continue to seek to reduce these, either by surcharging or by self-acquiring to recoup some of these costs. The RBA’s most recent interventions came into force on 1st November, 2006, and, given the possible worldwide ramifications of these regulatory decisions, this paper has attempted to explore the repercussions so far for a number of the participants in the payment card value chain. In early 2007, the RBA commenced a review of its interventions in the market, which is expected to take a full two years to complete. Continued analysis and interpretation of the results of the regulator’s actions will therefore be necessary.
REFERENCES (1) Durkin, T. A. and Price, N. (2000), ‘Credit Cards: Use and Consumer Attitudes, 1970–2000’, Federal Reserve Bulletin, September. (2) Chakravorti, S. (2003), ‘Theory of Credit Card Networks: A Survey of the Literature’, Review of Network Economics, Vol. 2, No. 2, pp. 50–68. (3) Chakravorti, S. and Shah, A. (2003), ‘Underlying Incentives in Credit Card Networks’, Antitrust Bulletin, Spring, pp. 53–75. (4) Worthington, S. (2005), ‘Down Under’, European Card Review, Vol. 12, No. 1, pp. 16–18. (5) Worthington, S. (2006), ‘Retailers Miss Banking Goals’, European Card Review, Vol. 13, No. 3, pp. 10–15. (6) Worthington, S. and Welch, P. (2006), ‘Banking at the Checkout’, ECR Publishing LLP.
For further information please contact:Professor Steve Worthington Department of Marketing, Monash University, Melbourne, Australia. steve.worthington@buseco.monash.edu.au Faculty of Business and Economics PO Box 197,Caulfield East, Victoria 3145, Australia Tel: + 613 9903 2754 Fax: + 613 9903 1558
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APPENDIX: THE REGULATORS TIMETABLE August 2002 RBA sets interchange standards for credit cards. A benchmark capping the weighted average interchange fee in the Bankcard, MasterCard and Visa credit card systems. RBA requires removal of the ‘no surcharge’ rules from MasterCard, Visa, American Express and Diners Club. January 2003 Merchants allowed to surcharge on payments made with credit and charge cards. October 2003 Credit card interchange fees first reduced following the RBA’s intervention. February 2004 RBA requires credit card schemes to consider applications for participation by SCCIs, on the same basis as applications from other ADIs. Also requires removal of the rules that discriminated against members who focused on acquiring rather than issuing. October 2004 RBA designates the Australian EFTPOS (debit card) system. August 2005 RBA imposes an access regime on the Visa Debit system similar to that imposed on the Visa credit card system. November 2005 A revised standard is issued for interchange in the designated credit card schemes, MasterCard and Visa. Now the weighted average interchange for each of the two schemes must be no greater than a common benchmark. To apply from November 2006. April 2006 RBA sets interchange standard for the EFTPOS system. A benchmark which will place a cap and a floor on interchange fees. RBA sets a benchmark capping weighted average interchange fees for both the MasterCard and Visa scheme debit cards. RBA requires both MasterCard and Visa to remove their requirement that merchants wishing to accept their credit cards, must also accept their debit cards. RBA places a cap on the amount that can be charged by existing participants in the EFTPOS system for establishing a new direct connection. September 2006 RBA determines a common benchmark for interchange fees in the MasterCard and Visa credit card schemes. This is 0.50 per cent, to apply for three years from 1st November, 2006. RBA determines the interchange fee benchmark for the MasterCard and Visa Debit systems. This is 12 cents, to apply for three years from 1st November, 2006. December 2006 RBA announces a review of its Payment System Reforms, to be conducted over 2007/08. As a background to the review, the RBA is conducting a comprehensive study of the resource costs involved in the different methods of payment, including cash. The RBA is also studying how various payment methods are used in different circumstances, including the potential for substitutability between the various forms of payment. page 17
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MasterCard Cautions Consumers Not to Expect Lower Prices at Shops as a Result of EC Decision on Interchange Fees MasterCard Europe cautioned consumers todaynot to expect to see lower prices when they shop as a result of the European Commissiondecision on MasterCard’s intraEEA cross-border interchange fees. Instead, if this decision were adopted across the EU, they will more likely see the benefits they have come to expect when they use their credit and debit cards fade away, as happened to consumers in Australia when the government there imposed regulations on what had been a successful free market.
Interchange and the Payments Industry Every business establishes a price for the goods and services it provides, and the electronic payments business is no exception. As one element of the cost of acceptance, interchange is a small fee in relation to the enormous value merchants receive for accepting MasterCard payment cards. For almost 40 years, MasterCard has established default interchange fees that have proven to be the most efficient way to balance costs in the system and promote a strong, competitive payments industry that benefits cardholders, merchants and financial institutions. Today, some 25,000 financial institutions provide the cards and services that allow hundreds of millions of consumers and 25 million merchants around the world to benefit from the convenience and security of electronic payments.
Interchange and the Payments Industry
The Commission and some merchant groups, who heralded the decision as a Christmas gift for consumers, turned a number of facts on their head in concluding that consumers would benefit from lower interchange fees.
Every business establishes a price for the goods and services it provides, and the electronic payments business is no exception. As one element of the cost of acceptance, interchange is a small fee in relation to the enormous value merchants receive for accepting MasterCard payment cards.
First, interchange fees do not hurt consumers, as the Commission claimed, or cause consumers to pay twice for using their payment cards. In reality, interchange fees benefit consumers by fairly sharing the cost of an electronic payment system among the two key beneficiaries of that system – cardholders and merchants. By asking merchants to pay a fair price for the significant benefits they receive, interchange keeps costs low for cardholders.
For almost 40 years, MasterCard has established default interchange fees that have proven to be the most efficient way to balance costs in the system and promote a strong, competitive payments industry that benefits cardholders, merchants and financial institutions. Today, some 25,000 financial institutions provide the cards and services that allow hundreds of millions of consumers and 25 million merchants around the world to benefit from the convenience and security of electronic payments.
On a typical credit card transaction of 50 Euros, a merchant pays about 50 cents. For a debit transaction, the cost is half that rate. In return, merchants receive enormous benefits – more sales, guaranteed payment, protection from theft and fraud, and highly satisfied customers. But now, if the Commission gets its way, those costs will be shifted to consumers.
What is Interchange?
Merchants say that MasterCard prohibits them from disclosing to customers how much they pay for accepting payment cards. They know this is untrue. Merchants are free to disclose merchant discount fees, interchange fees, or any other costs they incur. But they choose not to disclose these costs to consumers just as they choose not to disclose any other cost of doing business, or how much they “mark up” their merchandise. Commissioner Kroes claims that Australia’s regulation of interchange should be viewed as a success for consumers. But only merchants benefited from those regulations. There’s indisputable evidence that five years after those regulations were imposed, Australian consumers have suffered. Today, Australian cardholders are paying almost AUS$1 billion more as a result of increased fees, such as a resurgence of annual fees, and decreased features and benefits, like airline mileage programs. There’s no evidence that merchants lowered prices to reflect the lower interchange payments – and there’s little reason European consumers should expect them to do so here.
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Interchange is established to incent banks to issue payment cards and merchants to accept those cards. It is a small fee paid by a merchant’s bank (also known as the acquiring bank) to the cardholder’s bank (the issuing bank) and serves to compensate the issuing bank for a portion of the risks and costs it incurs to maintain cardholder accounts. These costs include finance costs for the interestfree period between the time a consumer makes a purchase and pays his/her bill, credit losses, fraud protection and processing costs. By shifting some of the cost of the payment system from issuers and their cardholders to acquirers and their merchants, a system operator like MasterCard can encourage greater utilization of its cards. Often referred to as “balancing the system” this makes the system more efficient and valuable to cardholders and merchants. When a purchase is made with a payment card, the acquiring bank pays the issuing bank an interchange fee to help offset a portion of these costs. The acquiring bank eventually collects this fee from the merchant as a component of the merchant discount fee.
Merchant Discount Fee The merchant discount fee is generally a small percentage of the price of the goods or services the merchant pays its bank when a payment card is used.
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The merchant discount fee is negotiated between the merchant and its bank. MasterCard is not a party to this contract nor does it have a role in the negotiation between the merchant and its bank.
The FourParty System MasterCard operates a “fourparty payment system” that processes transactions and routes information between cardholders’ and merchants’ financial institutions in fractions of a second. This system, enabled by interchange, allows hundreds of more millions of cardholders and 25 million merchants around the world to benefit from the convenience and security of electronic payments. The MasterCard network links together the four parties involved in each transaction (hence the name “fourparty system”) as described below: • The cardholder’s issuing bank markets and issues MasterCard payment cards to consumers and extends credit to cardholders from the time a purchase is made until payment is due. Broad issuance of MasterCard cards benefits merchants through increased sales. • The cardholder uses a MasterCard payment card to purchase goods and services at more than 25 million acceptance locations around the world. • The merchant accepts MasterCard payment cards in exchange for goods and services and receives guaranteed payment as well as increased sales. • The acquiring bank contracts with merchants and provides them with MasterCard acceptance and processing services. Cardholders benefit from widespread acceptance, giving them more places to shop conveniently and safely. Threeparty systems, like American Express, charge merchants discount fees which are often higher than the cost of accepting MasterCard cards. Because threeparty system operators act as both issuer and acquirer, they do not have to establish interchange fees because they can balance their systems through internal accounting transfers. They can use funds collected directly from merchants to cover some of the costs on the issuing side of their businesses.
How Interchange Rates Are Established By balancing the costs, risks and rewards within the fourparty system, interchange promotes a strong, competitive and efficient payments industry. In the absence of interchange, this system could not exist. MasterCard establishes default interchange rates to provide incentives to merchants to accept cards and to card issuers to provide innovative card products that meet consumer demand. These rates apply in the absence of a bilateral fee agreement between an issuing and an acquiring bank. Importantly, while MasterCard sets default interchange fees to enable efficient interaction among thousands of financial institutions, it receives no revenue from those fees. Setting interchange requires a careful balance. If interchange rates are set too high, merchants’ desire and demand for accepting MasterCard cards will drop. If interchange rates are set too low, card issuers’ willingness to continue to create innovative products and issue cards will drop, and as a result so will consumer demand for, and use of, cards. MasterCard periodically reviews interchange rates to ensure the rates continue to maximize the benefits of the MasterCard system for merchants, financial institutions and cardholders. MasterCard has more than 100 different interchange rates that recognize differences between card programs and that incent new acceptance categories, like fast food or taxicabs. In addition, MasterCard incents the use of new system technologies, for example, by offering reduced rates for online merchants who implement Secure Code to protect cardholder data.
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Interchange Transparency and Merchant Communication MasterCard is leading the industry in bringing transparency to the interchange system. MasterCard posts all of its U.S. interchange rates and operating rules that apply to merchants on its merchant Web site, www.mastercardmerchant.com, along with comprehensive information to help merchants understand the rates and how they apply. These steps are intended to help foster an ongoing dialogue with merchants, acquirers and others about interchange rates and disclosure. MasterCard also has established the MasterCard Merchant Advisory Group which meets regularly to give merchants a forum to share with MasterCard what they need to engage in the payments system in the most efficient and beneficial manner possible.
Merchants Benefit from Interchange Payment cards help merchants operate more successfully. Electronic payment transactions are faster at checkout and merchants who comply with issuers’ security guidelines are guaranteed to receive payment for these transactions. With less cash on hand, merchants are less vulnerable to theft and can provide safer workplaces for their employees. Electronic payments also save time and money by easing payment reconciliation. Accepting payment cards provides merchants with incredible benefits at a fair price. The benefits to merchants of accepting MasterCard are significant and include increased sales, as more people are attracted to stores that accept their card of choice? management of lending losses, fraud and the costs of complying with regulations. Interchange enables merchants to participate in a payment system that is far more costeffective for them than issuing their own proprietary card or some other form of credit.
Consumers Benefit from Interchange Interchange helps foster choice, innovation and security – all vitally important to today’s consumer. By providing incentives for card issuers, interchange encourages banks to innovate and develop new payment options, broaden the range of card programs available to consumers and invest in cuttingedge security and fraud prevention measures. Interchange helps to spur new types of card programs to meet different consumer needs and a wide variety of payment card reward and incentive programs that help people get more out of every dollar they spend. Moreover, these programs incent card usage, which ultimately benefits merchants.
Interchange Promotes a Competitive Payments Industry For almost 40 years, the default interchange rates MasterCard has established have proven to be the most efficient way to balance costs in the system and promote a strong, competitive payments industry. Moreover, the courts and regulators in the U.S. have found interchange to be legal, efficient and an essential component to the operation of a payment system like MasterCard. Some countries have rejected a freemarket approach toward interchange and have regulated interchange levels. In those countries, including Australia, where the level of interchange has been reduced as a result of regulatory intervention, cardholders have seen their fees rise and their card benefits reduced. In essence, interchange promotes competition and more cards in circulation, thus benefiting every participant in the system – cardholders, merchants and financial institutions. Contact:, sgamsin@mastercard.com
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