The e-Payments and e-Banking Market Outlook

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FINANCE

THE EUROPEAN EBANKING AND EPAYMENTS MARKET OUTLOOK

Barbara Kubis-Labiak Barbara has a BA (Hons) in Business and Management and is currently at the end of her MSc in International Finance degree. Barbara started her career working as an intern for the European Commission in Brussels, and then in 1999 she joined Datamonitor Financial Services department as an analyst. Barbara's work at Datamonitor involved various projects and reports, including the FinTab project, where she helped to develop an online data resource covering the insurance, banking, investments and payment cards sectors. Barbara also authored a number of reports: Retirement Provision in Germany 2001-2008, Retirement Provision in Germany 2002, European Mutual Funds 2001, UK Wealth Management, Distribution of life insurance and pensions in Europe 2002 and Central and Eastern European Life and Pensions 2002, as well as consultancy projects, for example Motor insurance distribution in central Europe, Competitors in occupational pensions in Germany, Bausparkassen in Germany and many others.

Copyright © 2004 Business Insights Ltd This Management Report is published by Business Insights Ltd. All rights reserved. Reproduction or redistribution of this Management Report in any form for any purpose is expressly prohibited without the prior consent of Business Insights Ltd. The views expressed in this Management Report are those of the publisher, not of Business Insights. Business Insights Ltd accepts no liability for the accuracy or completeness of the information, advice or comment contained in this Management Report nor for any actions taken in reliance thereon. While information, advice or comment is believed to be correct at the time of publication, no responsibility can be accepted by Business Insights Ltd for its completeness or accuracy. Printed and bound in Great Britain by MBA Group Limited, MBA House, Garman Road, London N17 0HW. www.mba-group.com

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Table of Contents The ePayments and eBanking Market Outlook

Competitive advantage and new profit opportunities in a rapidly developing European market

Executive Summary

10

European eBanking overview

10

Online consumer payments

11

Electronic Bill Presentment and Payment

12

Prepaid cards

13

Online security

14

Chapter 1

Report Introduction

Report structure European eBanking overview Online consumer payments EBPP Prepaid cards Online security

Chapter 2

18 18 18 18 18 18 19

The European eBanking Overview

22

Summary

22

Introduction

23

Analysis by channel The Internet The innovation curve Internet as a banking channel The bank branch The future of the bank branch Other channels

23 23 24 26 27 30 30

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Call centres ATMs iDTV and mobile banking Functionality enhancements

30 31 31 32

Conclusions Account aggregation Animated online agents

32 33 35

Attitudes and behaviour of customers who bank online Is the Internet reaching maturity? Time spent online per week by European consumers banking online Internet usage “I am in a better financial position than most people my age” “I am very worried about the state of my personal finances”

36 38 39 40 42 43

Actionable recommendations

45

Competition

46 Customers banking online with major Internet banks and banks providing Internet banking services

47

Egg: case study

47

Forecasts to 2007

50

Money transfers Money transfer facilitators Conventional banking money transfer systems

52 52 54

Emerging consumer money transfer instruments Online wallets: PayPal ATM withdrawal Yahoo! PayDirect International

56 56 58 59

Chapter 3

Online Consumer Payments Overview

62

Summary

62

Introduction

63

Consumer online behaviour

63

Payment solutions Credit and debit cards Security initiatives Visa Mastercard Prepaid online payment methods P2P payment solutions eWallets mPayments

67 67 68 68 69 70 71 72 73

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Chapter 4

EBPP – Electronic Bill Presentment and Payment

76

Summary

76

Introduction

77

EBPP – electronic bill presentment and payment The biller-direct approach The biller-direct process The consolidator process What does the future hold for EBPP? The market context Advantages arising from EBPP Proportion of customers paying their bills online

77 77 78 79 81 82 84 85

Chapter 5

Prepaid Cards Analysis

88

Summary

88

Introduction

89

Prepaid products Overview of prepaid cards The teen population Unbanked customers Customers who do not possess credit cards Customers with bad or no credit history Extra advantages from prepaid cards Types of prepaid cards

89 89 90 91 91 92 92 93

ePurses

93 94 94 94 96 97 98 99 99

Why have some ePurses failed where others have succeeded? Examples of ePurse schemes Examining teen prepaid cards Smartcreds and Splash Plastic Gift cards Travel cards Virtual prepaid cards Conclusions

Chapter 6

Online Security: Combating Fraud 102

Summary

102

Introduction

102

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Card scheme security initiatives The UK: the largest eCommerce market in Europe Growth of eCommerce Online card fraud Card not present fraud Fraud related costs EMV standard

103 105 105 106 107 108 109

Conclusions

110

Chapter 7

Appendix

112

Definitions

112

List of Figures Figure 1.1: Figure 2.2: Figure 2.3: Figure 2.4: Figure 4.5: Figure 4.6:

Number of people per bank branch in the big five European markets, 2002 10 Positioning the Internet on the diffusion of innovation curve 25 Potential of channels to deliver sales, service, advice and transactions 27 Number of people per bank branch in European markets, 2002 28 The biller-direct model requires customers to view and pay their bills directly through their service provider’s website 78 The ‘consolidator’ model relies on central aggregator to present bills and provide payment capabilities for customers through its website 79

List of Tables Table 2.1: Table 2.2: Table 2.3: Table 2.4: Table 2.5: Table 2.6: Table 2.7: Table 2.8: Table 2.9: Table 2.10: Table 2.11:

European Internet banking customer numbers, 2000—2002 24 European Internet banking customers per capita, 2002 24 Number of branches in Europe, 2002e-2005f, by country 28 Number of people per bank branch in European markets, 2002 29 Penetration of Internet access devices in surveyed European markets, 2002 36 Internet access points in surveyed European markets, 2002 37 Time spent online per week by European consumers banking online 39 Time spent online per week by European consumers who do not bank online 40 Use of the Internet for financial services and leisure purposes by European consumers 41 European consumers who bank online who state that the Internet is their preferred channel over which to purchase specified product or service 42 The opinions on their financial position of European consumers who do bank online: ‘I am in a better financial position than most people my age’ 43

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Table 2.12: Table 2.13: Table 2.14: Table 2.15: Table 2.16: Table 2.17: Table 2.18: Table 2.19: Table 2.20: Table 2.21: Table 2.22: Table 2.23: Table 2.24: Table 3.25: Table 3.26: Table 3.27: Table 3.28: Table 3.29: Table 4.30: Table 5.31: Table 5.32: Table 5.33: Table 6.34: Table 6.35:

The opinions on their financial position of European consumers who do not bank online: ‘I am in a better financial position than most people my age’ 43 The opinions on the state of their personal finances of European consumers who do bank online: ‘I am very worried about the state of my personal finances’ 44 The opinions on the state of their personal finances of European consumers who do not bank online: ‘I am very worried about the state of my personal finances’ 44 European consumers who do not bank online who state that the Internet is their preferred channel over which to purchase specified product or service 45 Customers banking online with major Internet banks and banks providing Internet banking services 47 Egg’s customer numbers, December 1999 to December 2002, UK only 48 Targets and assumptions: La Carte Egg 49 European Internet banking customer forecasts, 2003f-2007f 51 European Internet banking technology spend, 2001-2005f 51 Examples of cash collection money transfer providers 54 Examples of providers of international drafts and money services, other than banks55 Examples of providers of wire money transfer services, other than banks 56 Examples of international online account-based money transfer providers 57 Percentage of consumers that have accessed the Internet from specified locations during the last 12 months 63 Percentage of consumers engaging in specified activity online during the last 12 months 64 Percentage of consumers that have engaged in specified online activity during the last 12 months 65 Percentage of consumers stating that the Internet is their preferred channel for purchasing specified product or service 66 Percentage of consumers that made online purchases via specified means 66 Proportion of customers paying their bills online 86 Teen population in Europe, 2002 91 Examples of ePurse schemes in Europe and the United States 94 Examples of issuers of travel cards in the United States 98 Visa EU eCommerce sales volumes year-on-year growth, Q4 2001-Q4 2002 and Q1 2002 and Q1 2003 104 Percentage of consumers who have researched and ordered products and services online in surveyed European markets, 2002 106

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8

Executive Summary

9

Executive Summary European eBanking overview The number of European consumers banking online continued to increase dramatically in 2002, reaching 48.5 million across Europe. This increase reflects a compound annual growth rate of 41.2% over the period 2000 to 2002. The highest number of online bankers can be found in the UK where 10.0 million consumers were banking online in 2002. Considered in per capita terms, France, Germany, Italy and Spain are the least developed Internet banking markets. In these markets there are only 0.1 Internet banking customers per capita, making the UK as the most developed market in per capita terms with 0.2.

Number of people per bank branch, 2002

Figure 1.1: Number of people per bank branch in the big five European markets, 2002

4,500.00 4,000.00 3,500.00 3,000.00 2,500.00 2,000.00 1,500.00 1,000.00 500.00 0.00 France

Germany

Italy

Spain

UK

Source: Business Insights

As a banking channel the Internet has certainly experienced strong growth in customer uptake in recent years. Yet, despite this the Internet remains secondary to 10

both branches and call centres as a business generator and in terms of customer usage. Ultimately branches remain good generators of business for banks because they are popular with consumers who are either insufficiently familiar with the Internet to bank online or who are reluctant to purchase high-value products online without first taking the advice of a branch based advisor. As a business generator the call centre is the second most important channel to European banks. Indeed, within the financial services sector, comprising retail banking, insurance and financial markets, uptake of call centres has been most pronounced in retail banking in recent years. The revival at the branch level, the growing importance of call centres and the evolving role of the Internet means that banks now recognise that they cannot ignore any of the major banking channels. Equally the fact that consumers do not use particular channels in isolation means that banks now also recognise that it is no longer efficient to adopt a singular view of the channels they offer. There are several ways through which individuals can transfer money internationally. These include typical money transfer providers such as Western Union and MoneyGram, online providers such as PayPal and Yahoo Direct and the traditional bank transfers, among others.

Online consumer payments In the UK and Germany more than 50% of consumers accessed the Internet from home during 2002. Spanish consumers are the least likely to access the Internet from home, with only 31.9% of consumers doing so in 2002. Results from a consumer survey conducted in Europe in 2002 indicated that while many consumers are happy to research products and services online far fewer are happy to actually purchase them online. For example, in France, Italy and Spain

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more than 50% of consumers accessing the Internet during the last 12 months of 2002 have researched products and services online. Despite the extensive penetration of the Internet, making payments online remains an activity in which relatively few consumers engage. Germany and the UK were the only surveyed markets in which more than 25% of consumers accessing the Internet during the last 12 months of 2002 made payments online. Despite the unsuitability of credit cards to the online environment they are still the dominant payment mechanism in this area in the majority of markets. In the UK and the United States, for example, more than 80% of consumers who purchased goods and services online have paid with a credit card in 2002. In Germany more than two-thirds of consumers who purchased from an online merchant paid by mail on receipt of invoice. This is significantly more than the percentage that have paid this way in any other European market as well as in the United States. Credit cards remain a safe way to purchase goods and services: less than eight cents in every $100 spent on Visa cards in the Visa EU region is fraudulent. However, fraud and Card Not Present (CNP) fraud in particular is on the increase.

Electronic Bill Presentment and Payment The biller-direct model is the most widespread method of EBPP (electronic bill presentment and payment). A billing company, such as a telecommunication, utility, insurance or a credit card provider, establishes electronic billing capabilities on its own website, where consumers are provided with their billing information and the means for bill payment. The consolidator model of EBPP relies on a central consolidator to present charges from multiple billers and provide customers with a single site for viewing and paying their bills.

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The biller-direct method of electronic bill payment and presentment has so far had more success than any of the consolidation methods. Billing companies, such as credit cards and utilities service providers in the U.S. and Europe, have been very successful in attracting consumers to sign up to view their bills and make payments directly from the biller’s website. One of the reasons for the success of the biller-direct model is that it allows a service provider to maintain control over customers’ billing data. Retaining control of the customer interface is paramount for any billing company, whether it is a telecommunications, utilities or credit card provider. Providers of financial services, such as retail banks, credit card and insurance companies can potentially perform several roles in the process of electronic bill presentment and payment. They can act as traditional billing companies, provide cash management and payment services for billers, or develop consolidating capabilities in arrangement with billers. EBPP implementation can provide companies with a number of competitive advantages, including cost saving.

Prepaid cards Prepaid cards were introduced to serve the needs of a number of customer segments for which a debit or credit card was not appropriate and to offer extra advantages to consumers in general as compared to other means of payment. One of the main target demographics of prepaid cards is the teen market, consumers aged between 10 and 17 years old. Legally, they are not allowed to have their own credit cards and only a very limited number of countries issue debit cards to teens. The teen population in Europe accounted, on average, for 8.4% of the European population in 2002. This represents a significant potential customer base of future adults of more than 32 million. Although teen customers do not have much spending

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power when considered independently, together, the teen market offers interesting opportunities to players. A significant number of adults do not hold a bank account. Consequently, they do not possess a credit or debit card. This segment represents considerable growth potential for prepaid card issuers. Prepaid cards provide customers who cannot be issued a credit card due to a bad or no credit history with the opportunity to hold a bankcard. The fact that prepaid cards are not linked to a bank account means that no personal details are required. Card users are unlikely to face identity fraud problems because of the characteristics of prepaid cards. By not being linked to a bank account, prepaid cards provide a safer way to shop - both online and offline. Electronic purses are smart cards introduced during the early 1990s as an alternative to carrying cash and mainly for the settlement of small value (micro) transactions. ePurses are prepaid cards on which money is loaded and stored in the card microchip. Prepaid cards are relatively widely spread in the United States but other continents have yet to capitalise on the prepaid concept. For instance, in the UK, prepaid bankcards barely exist.

Online security While the increase in eCommerce sales volumes has extended across many areas, tourism and entertainment has grown most rapidly. Partly due to the increased popularity of budget air travel, eCommerce sales categorised as tourism and entertainment made by Visa EU cardholders increased by 531% between the last quarter of 2001 and the same period in 2002. The UK is the largest eCommerce market in Europe. According to Nielsen NetRatings, 12.8 million Internet users in the UK (or 60% of the UK’s Internet 14

audience) visited an eCommerce site in December 2002. This is 3.7 million more than did so in December 2001. eCommerce has been spurred in recent years by the wider and more sophisticated use of the Internet, thanks to higher consumer confidence in the online experience and the increasing number of retailers who have an all-embracing online presence. The extensiveness of home PC Internet access is currently being buoyed by a fall in the cost of accessing the Internet. This has resulted from competition among Internet Service providers (ISPs) in the narrowband and broadband markets, and a fall in the cost of purchasing a new PC. CNP fraud is the most common form of fraud associated with impersonal channels such as the Internet, mail order and the telephone.

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Chapter 1

Report Introduction

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Chapter 1

Report Introduction

Report structure European eBanking overview This chapter begins by considering the development of the online and other channels; it also includes analysis of the number of consumers banking online in Europe at the end of 2002. The chapter examines the issue of improved website functionality, specifically account aggregation and animated online agents. It then concludes with a section on money transfers, covering the methods through which consumer money is transferred internationally.

Online consumer payments This chapter examines the range of payment solutions that currently compete for a slice of the online consumer payments market. Payment cards such as credit and debit cards are covered first, as they are the most commonly used payment solution in many markets. They are not, however, the only payment solution and others include prepaid cards, P2P payments solutions, eWallets and mPayments solutions, all of which are addressed in this chapter.

EBPP This chapter examines different approaches to electronic bill presentment and payment and various types of companies active in this field. It also examines the potential triple role banks can have in the EBPP process.

Prepaid cards This chapter defines and categorises prepaid cards, covers customer segments and provides thorough analysis of prepaid cards.

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Online security This chapter examines why there is a need for card scheme security initiatives. It considers factors including the growth of consumer eCommerce sales volumes, the increasing incidence of online card fraud and the concern that fear of fraud is deterring some consumers from transacting online; the continuing dominance of payment cards as an online payment mechanism; and the concern that alternative payment mechanisms could wrestle away market share from payment cards in the online space.

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20

Chapter 2

The European eBanking Overview

21

Chapter 2

The European eBanking Overview

Summary The number of European consumers banking online continued to increase dramatically in 2002, reaching 48.5 million across Europe. This increase reflects a compound annual growth rate of 41.2% over the period 2000 to 2002. The highest number of online bankers can be found in the UK where 10.0 million consumers were banking online in 2002. Considered in per capita terms, France, Germany, Italy and Spain are the least developed Internet banking markets. In these markets there are only 0.1 Internet banking customers per capita, which leaves the UK as the most developed market in per capita terms with 0.2. As a banking channel the Internet has certainly experienced strong growth in customer uptake in recent years. Yet, despite this the Internet remains secondary to both branches and call centres as a business generator and in terms of customer usage. Ultimately branches remain good generators of business for banks because they are popular with consumers who are either insufficiently familiar with the Internet to bank online or who are reluctant to purchase high-value products online without first taking the advice of a branch based advisor. As a business generator the call centre is the second most important channel to European banks. Indeed, within the financial services sector, comprising retail banking, insurance and financial markets, uptake of call centres has been most pronounced in retail banking in recent years. The revival at the branch level, the growing importance of call centres and the evolving role of the Internet means that banks now recognise that they cannot ignore any of the major banking channels. Equally the fact that consumers do not use particular channels in isolation means that banks now also recognise that it is no longer efficient to adopt a singular view of the channels they offer.

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There are several ways through which individuals can transfer money internationally. These include typical money transfer providers such as Western Union and MoneyGram, online providers such as PayPal and Yahoo Direct and the traditional bank transfers, among others.

Introduction This chapter considers the development of the online banking channel and others. This first section includes estimations of the number of consumers banking online in Europe. The chapter continues by discussing Internet banking launches and closures. The chapter concludes by examining improved website functionality, specifically account aggregation and animated online agent technology.

As recently as in 2000 it was widely expected that the Internet would one day surpass traditional channels such as branches and call centres both in terms of customer usage and new business generation. As the hype associated with the Internet era has calmed a new understanding of the Internet’s role has emerged and is explained below.

Analysis by channel The Internet As illustrated in Table 2.1, the number of European consumers banking online continued to increase dramatically in 2002, reaching 48.5 million across Europe. This increase reflects a compound annual growth rate of 41.2% over the period 2000 to 2002. Most online bankers can be found in the UK where 10.0 million consumers were banking online in 2002. Germany is also a large Internet banking market; 8.6 million German consumers were banking online in 2002. Considered in terms of growth over the period 2000 to 2002, Italy is the fastest growing Internet banking market where Internet banking customer numbers increased at a compound annual growth rate of 168.3% over the period 2000 to 2002 albeit from a very small base. 23

Table 2.1: European Internet banking customer numbers, 2000—2002 000s

2000

2001

2002 CAGR 2000—2002

France Germany Italy Spain UK Other

1,917 3,608 640 1,948 5,573 10,660

3,354 6,134 2,880 2,922 7,802 13,801

4,696 8,588 4,608 3,944 9,986 16,703

56.5% 54.3% 168.3% 42.3% 33.9% 25.2%

Total

24,346

36,893

48,525

41.2%

Source: Business Insights

Considered in per capita terms, France, Germany, Italy and Spain are the least developed Internet banking markets. In these markets there are only 0.1 Internet banking customers per capita, which leaves the UK with 0.2 the most developed market. Table 2.2: European Internet banking customers per capita, 2002 Population, 000s France Germany Italy Spain UK

Internet banking, Internet banking customers 000s customers per capita

59,766 83,252 57,716 40,077 59,778

4,696 8,588 4,608 3,944 9,986

0.1 0.1 0.1 0.1 0.2

Source: Business Insights

The innovation curve The diffusion of the innovation curve, shown in Figure 2.2, highlights how new technologies pass through distinct phases of customer adoption. The ‘innovators’ and ‘early adopters’, who actively seek technologies, are also, by definition, the first to use these technologies. In the banking context, these consumers were first to use Internet banking services when they came online in the 1990s and may have a chosen a bank on the basis of its early Internet services. These consumers are also most likely to be currently using other newly emerged banking channels such as iDTV and mobile phones.

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Figure 2.2: Positioning the Internet on the diffusion of innovation curve

Percentage change of new adopters

Early and late majorities

Early adopters

Late adopters

Innovators

Laggards

Time

Source: Business Insights

The ‘early and late majorities’ are those consumers that adopt a ‘wait-and-see approach’. They await the reactions of the ‘innovators’ and ‘early adopters’ and only begin to use the technologies once they receive positive feedback from those groups. In the Internet banking context these consumers are those that used online services only once they heard early stories of the time and cost saving advantages of banking online.

An assessment of the number of consumers using the Internet for banking purposes, and of the characteristics of the aforementioned groups, allows the Internet to be positioned on the right hand side of the diffusion of innovation curve and specifically in the late majority phase. Consumers in this phase need to observe consumer reactions to new technology before adopting it themselves and will only accept technology once its reliability has been thoroughly tested by others.

Given that Internet banking services have been available for some time now and are used by many consumers it is fair to say that the Internet is no longer in the innovator, early adopter or early majority phase. Yet, since there are still many consumers reluctant to 25

use the Internet at all to fulfil their banking needs, it is equally difficult to position the Internet in either the late adopter or laggard phase where technologies such as televisions, VCRs and microwaves can be found.

Internet as a banking channel As a banking channel the Internet has certainly experienced strong growth in customer uptake in the past few years. Yet, despite this the Internet remains secondary to both branches and call centres as a business generator and in terms of customer usage. Banks are therefore in the process of repositioning the Internet within their multi-channel distribution strategy, a process that has been underway for at least the last 12 months. They are, for example, increasingly realising that the Internet is not suitable for all products and services or as a fully-fledged sales channel. As is illustrated by Figure 2.3, the Internet is good channel for making simple transactions e.g. making payments, transferring funds and checking balances. On the other hand, since the Internet does not facilitate personal interaction with a bank employee and inputting information online can be difficult, it is a poor channel for advice and sales.

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Figure 2.3: Potential of channels to deliver sales, service, advice and transactions

Sales

Service

Advice

Transactions

Branch

Internet Call centre ATM

Key:

High:

Medium:

Low:

Source: Business Insights

The bank branch The advent of the Internet was thought to spell the end of branches, as banks foresaw a time when customers would turn to electronic channels to fulfil all of their banking needs. Branches were both more costly and less efficient than Internet channels. Moreover, the Internet allowed for convenient 24/7 customer service and cheaper products that branches simply could not match. As a result, it was believed that the Internet would gradually overtake the branch. Banks across Europe began progressively reducing the size of their branch network. Analysis of events over the last few years reveals that the bank branch has not suffered, as many previously believed it would. In fact a revival is underway at the branch level.

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Number of people per bank branch, 2002

Figure 2.4: Number of people per bank branch in European markets, 2002

4,500.00 4,000.00 3,500.00 3,000.00 2,500.00 2,000.00 1,500.00 1,000.00 500.00 0.00 France

Germany

Italy

Spain

UK

Source: Business Insights

Figures displayed in Table 2.3, highlight that branches will revive. Across Europe, branch numbers are expected to fall at a compound annual growth rate of –2.9% between 2002 to 2005 as banks continue to rationalise their networks, move simple transactions to automated channels and, in some cases, embark on branch sharing agreements (including use of Post Offices). Table 2.3: Number of branches in Europe, 2002e-2005f, by country

France Germany Italy Spain UK Other Europe Total

2002e

2003f

2004f

2005f

CAGR

25,146 49,990 27,657 37,281 14,125 30,243 184,442

24,895 46,491 27,242 36,535 13,917 29,183 178,263

24,646 44,166 26,425 35,987 13,709 28,492 173,425

24,400 41,958 25,632 35,447 13,502 27,823 168,762

-1.0% -5.7% -2.5% -1.7% -1.5% -2.7% -2.9%

Source: Business Insights

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Table 2.4: Number of people per bank branch in European markets, 2002

France Germany Italy Spain UK

Population

Branches

People per branch

59,765,983 83,251,851 57,715,625 40,077,100 59,779,002

25,146 49,990 27,657 37,281 14,125

2,376.80 1,665.40 2,086.80 1,075.00 4,232.10

Source: Business Insights

Branch closures will be more pronounced in Germany due to the fact that branch networks in this region have traditionally been particularly dense. In Germany, branch closure programs have become a prominent means of cutting costs.

One explanation of the slower than expected decline of the bank branch is the fact that branches continue to generate more business for banks than other channels, including the Internet and call centres. Ultimately, branches remain good generators of business for banks because they are popular with consumers who are either insufficiently familiar with the Internet to bank online or who are reluctant to purchase high-value products online without first taking the advice of a branch based advisor. Despite being an expensive channel to provide, branches have sales and advice giving capabilities which are unmatched by any other banking channel and hence can generate a good return if used appropriately. Branch networks also continue to be more extensive than was originally predicted simply because they are not easy to rationalise. In many countries branches are an integral part of the high street and even the focus of a community. The threat of branch closure therefore generates considerable negative publicity that banks are naturally eager to avoid.

Restrictive labour laws, history and powerful trade unions can also restrict the extent of branch closures in some European countries. In France, for example, when rumours emerged in February 2003 that Bank of France was thinking of closing the bulk of its 211 branches, trade unions and the National Association of Mayors, among other bodies, voiced strong opposition. These bodies have prevented Bank of France from 29

embarking on rationalisation of its branch network on several occasions throughout the last decade.

The future of the bank branch On the one hand bank branches remain popular with consumers. On the other hand, branches are expensive channels to maintain. Given this predicament banks are seeking to ensure that they optimise the use of their branches within the framework of multichannel distribution. Therefore, where possible banks are attempting to automate simple low-margin transactions and inquiries, such as cash withdrawal and balance statement inquiries through ATMs or through next-generation self-service devices placed within the premises of the branch. Ultimately banks will redesign transaction-intensive branches to become open spaces equipped with browser-based self-service stations and telephones that customers can use to access products and services.

Branches are being transformed into selling points for high-value, complex products for which customers continue to require the reassurance of speaking to a bank advisor. Also, banks, particularly in the UK, are already beginning to reinvent their branches as advice centres for affluent customers or financial shops for mass-market customers.

Other channels Despite the introduction of the Internet and the revival at the branch level, call centres and ATMs remain an important component of banks’ distribution strategy.

Call centres As a business generator the call centre is the second most important channel to European banks. Indeed, within the financial services sector, comprising retail banking, insurance and financial markets, uptake of call centres has been most pronounced in retail banking in recent years. As a result, agent positions within retail banking focused call centres are predicted to surpass 400,000 across Europe by 2005. Call centres allow banks to move a range of functions out of branches while simultaneously increasing

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service levels in terms of access and support, to fully or partly automate enquiries thereby saving call minutes, requiring fewer staff and ultimately cutting costs. They also allow to supplement service and support provided by automated channels such as the Internet and ATMs.

The range of functions that can be handled by a call centre ensures that it will remain an important component of banks’ distribution strategies regardless of other channel developments. Indeed, although call centres are already performing an important role, they have considerable unfulfilled potential that will only be realised if banks manage to fully integrate their call centres with their other channels. Full integration will, for example, allow call centres to handle the most complex transactions and service enquiries that are currently handled only by branches.

ATMs At the height of the Internet era when branches dipped in popularity, attention moved to ATMs as a viable distribution channel for financial and non-financial services. Banks subsequently poured considerable investment into their ATM networks. Banks such as La Caixa and Caja Madrid in Spain developed services enabling ATM users to top-up their mobile phone or purchase cinema, theatre or sports event tickets.

More recently, primarily due to tighter constraints on IT spending and the revival at the branch level, banks have reined in their plans for ATM functionality development. Subsequently, there is now less prominence on developing new ATM functionality and more emphasis on ATMs as simple cash-dispensing devices and in a supporting role to other channels.

iDTV and mobile banking Despite being hailed as the future of the banking experience, iDTV and mobile banking have really failed to deliver. Consumers remain uninterested in iDTV services and mobile banking services beyond relatively simple SMS services. While a few banks

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continue to provide services via iDTV and/or mobile phones, primarily, banks remain unconvinced of the return on investment case for providing services via these channels. Even with the rollout of 3G services and with higher penetration of iDTV services it is difficult to see much of a future for these technologies in the banking arena.

Functionality enhancements Prior to widespread availability, banks acquired a competitive advantage by being first to market with Internet banking services. The fact that a bank offered Internet banking services when their rivals did not previously serve as a useful marketing tool - attracting more technologically aware consumers.

Now, however, when Internet banking services are virtually omnipresent, a bank’s promise of access to these services is no longer enough to wow consumers. Instead, banks are forced to try to differentiate their services using enhanced functionality and effective web design.

Conclusions The section draws together the chapter to consider the importance of ensuring banking channels are integrated effectively.

The revival at the branch level, the growing importance of call centres and the evolving role of the Internet has meant that banks now recognise they cannot ignore any of the major banking channels. Equally, the fact that consumers do not use particular channels in isolation means that banks now also recognise that it is no longer efficient to adopt a singular view of the channels they offer. After all, if consumers do not view banking channels as separate entities neither should banks.

As the distinction between banking channels blurs further it will become more and more important for banks to make certain that their channels are integrated effectively. Banks’ 32

ongoing attempts to ensure that consumers receive consistency of service and brand across all channels will become an even more pressing issue, especially where the functions of particular channels overlap. To promote cross selling and strengthen customer retention rates, it will also become more important to ensure that a single operational database is in place. This pooling of information is vital if CRM systems, which have been the focus of investment in the past, are to generate a return.

Account aggregation The past two years were scheduled to be a big year for account aggregation in Europe. A number of launches were rumoured to be on the cards and it was predicted that account aggregation would revolutionise the world of online banking. The fact that the account aggregation miracle has failed to materialise reflects a number of factors including tighter IT budgets, concerns about the service’s ROI, debate surrounding consumer demand and the ongoing issue of the legality of the service.

Account aggregation offers the online customer the opportunity to bring together all of their financial accounts as well as features such as email and loyalty schemes into one personal portal regardless of where those accounts are held. Consequently, account aggregation users are able to use one set of security details, rather than individual sets of details for each of the accounts aggregated.

In theory, the advantages of providing account aggregation are compelling. Advocates argue the following: Customer acquisition: account aggregation can differentiate a provider’s online presence from that of a non-provider and give a consumer a compelling reason to choose the former over the latter. The customer acquisition benefits of account aggregation should be strongest in the early days of the technology’s provision and therefore when it is provided as an exception rather than as the norm;

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customer retention: customers who have gone to the lengths of setting up an account aggregation service should make the provider’s website their first stop on the Internet and should be less likely to use the services of a competitor; improved visitation rates: the ability to use an account aggregation service should ensure that a user visits a provider’s website more frequently than would be the case if the service was not provided. This is particularly true where the user makes the provider’s site their first port of call on the Internet; improved website stickiness: account aggregation gives a user a reason to spend longer on a provider’s site per visit. More lengthy exposure to the provider should build brand loyalty and provide more opportunities for cross selling; improved opportunities for cross selling; account aggregation offers a provider a more extensive picture of a user’s financial and non-financial affairs as well as their attitudes, preferences and buying behaviour. Knowing more about a customer should increase a provider’s ability to cross-sell and up-sell products to that customer especially where account aggregation services are integrated with effective CRM systems.

Given the relatively brief history of account aggregation, particularly in Europe, it is difficult to assess whether the theoretical arguments for an account aggregation service are valid in reality. However, there are two main advantages of account aggregation from a consumer’s point of view:

1. Using an account aggregation service means consumers only need to remember one set of security details rather than security details for each of the aggregated accounts.

2. On the other hand using an account aggregation service should save a user time as they only need visit one site while online rather than each of those where the aggregated accounts are held. Should an account aggregation user wish to

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access any of the aggregated accounts specifically they can do so directly from the account aggregation service.

The Computer Misuse Act (1990) remains an impediment to the development of account aggregation in the UK and particularly services utilising batch screen scraping technology where account details are updated en masse without initiation from the customer. Specifically, the Act states that it is a criminal offence to obtain data from a computer without the owner’s permission. In the context of account aggregation, what constitutes permission and who has that permission is still unclear. In theory at least a provider of account aggregation utilising batch screen scraping technologies could be prosecuted for being in breach of the Act. Although the likelihood of prosecution is slim, FSA rules state that regulated institutions must not knowingly break criminal law, irrespective of the likelihood of prosecution.

Animated online agents Animated online agents are the manifestation of banks’ attempts to improve the advice and information giving capabilities of the Internet. Animated online agents are ultimately artificial intelligence engines that permit users of Internet services to receive a verbal response to their questions in real time over the Internet.

Currently few banks utilise animated online agent technology. However, one bank that has already adopted the technology is First Direct, which unveiled ‘Cara’ in January 2003.

Given the more complicated nature of SmartMortgage, and offset mortgage products in general relative to other mortgage products, First Direct has positioned the trial of Cara appropriately. There is unquestionably more demand for explanatory information on an offset mortgage than on a credit card, loan, savings or current account, each being products with which customers are very familiar. Investments and share dealing represent two more complicated areas of financial services where animated online agents like Cara could be effectively utilised. 35

When Cara was being developed by First Direct the bank’s focus was on its ability to answer questions effectively and not on its ability to move and gesture or on appearance. If necessary, First Direct believes that these aspects can be considerably improved thus making Cara more life-like than she is currently.

Attitudes and behaviour of customers who bank online This part of the chapter considers the attitudes and behaviour of consumers who bank online. It utilises data from a consumer survey, IMPACT, conducted across Europe in 2002, to discuss issues including the penetration of devices used to access the Internet, the demand for online non-financial services among consumers who bank online and the attitudes of these consumers towards their finances. IMPACT 2002 was a consumer research program undertaken in the following European markets: France, Germany, Italy, Spain and the UK.

Before discussing issues specific to Internet banking it is useful to examine how and from where consumers access the Internet, and how long they spend online. Table 2.5: Penetration of Internet access devices in surveyed European markets, 2002 % Mobile phone Home PC with Internet access Work PC with Internet access Games console Digital TV Home PC without Internet access PDA/Palmtop computer with Internet access PDA/Palmtop computer without Internet access

France Germany

Italy

Spain

UK Market average

68.6% 32.8%

79.7% 53.5%

79.9% 43.4%

70.5% 36.5%

81.9% 53.3%

76.1% 43.9%

29.9%

39.4%

26.9%

24.9%

40.6%

32.3%

30.2% 13.4% 18.0%

19.5% 18.8% 21.5%

25.4% 14.7% 17.1%

31.3% 20.0% 14.8%

36.6% 46.2% 14.8%

28.6% 22.6% 17.3%

6.7%

14.2%

5.0%

11.9%

19.1%

11.4%

4.6%

8.9%

7.1%

7.9%

4.3%

6.6%

Business Insights

Base: All respondents, Datamonitor, IMPACT 2002

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As Table 2.5 illustrates, in 2002, 53.3% of consumers in the UK and 53.5% of consumers in Germany had a home PC with Internet access. Outside the UK and Germany, fewer consumers have PC access at home and/or at work. For example, in France only 32.8% of consumers have a home PC with Internet access compared to 26.9% of Italian consumers.

With the exception of mobile phones, the penetration of other devices that can be used to access the Internet, and hence to bank online, is considerably lower than for home or work PCs. For example, across the five surveyed markets an average of only 11.4% of consumers had a PDA/palmtop computer with Internet access. 22.6% of consumers had digital television although in this case it is impossible to determine how many of these consumers have only basic digital television services and how many have more sophisticated services that allow them to access the Internet. Table 2.6: Internet access points in surveyed European markets, 2002 France Germany

Italy

Spain

UK Market average

Home 36.0% 55.7% 34.0% 31.9% 57.1% Work 34.4% 42.8% 23.4% 23.7% 46.2% Home of friend/relative 25.3% 27.8% 18.3% 24.8% 35.8% School, college, university 15.4% 13.6% 12.7% 13.0% 17.1% Public library 10.9% 5.4% 6.4% 7.6% 13.2% Internet café 7.3% 5.8% 4.6% 11.0% 10.5% Other 4.9% 4.8% 2.1% 4.2% 3.1% Base: All respondents who have accessed the Internet in the last 12 months

42.9% 34.1% 26.4% 14.4% 8.7% 7.8% 3.8%

Source: All respondents, Datamonitor, IMPACT 2002

Business Insights

Further indication of the extent of Internet access is provided in Table 2.6. IMPACT 2002 found that 57.1% of consumers in the UK and 55.7% of consumers in Germany had accessed the Internet from home during 2002. Elsewhere, in Spain for example, 31.9% of consumers had accessed the Internet from home during 2002.

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Relatively few consumers had accessed the Internet from a public location. Across the markets surveyed an average of 8.7% of consumers had accessed the Internet from a public library during the last 12 months of 2002 and 7.8% had done so from an Internet café.

The proportion of consumers accessing the Internet has continued to increase in recent years as a result of a number of factors, including widespread availability in public places; Internet cafes are now commonplace and Internet terminals are provided in libraries, stations, airports and in telephone booths. More than 70% of libraries in the UK are now online. Other factors include the range of Internet access devices (although technologies such WAP and iDTV have not generated consumer interest as some would have hoped, their availability has nonetheless broadened the range of devices that consumers can use to access the Internet) and the availability of the Internet in the workplace. The growing penetration of broadband Internet services is also important here. Broadband Internet services now exist as an alternative to narrowband services. Other factors include competitive pressures forcing cheaper residential access and cheaper home PCs.

Is the Internet reaching maturity? The Internet’s high penetration in some European markets suggests that in these markets the technology may be close to maturity – a point where natural growth of new Internet users has reached its limit and where most consumers have already made a conscious decision whether to access the Internet or not. Beyond this point future growth in new Internet users will be predominantly organic and driven by generational change, rather than through increased exposure.

As the Internet nears a state of maturity, providers of all online services, not just Internet banks, will need to lessen their focus on moving non-Internet users online and instead increase attempts to optimise relationships with consumers who are already online.

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Perhaps unsurprisingly, consumers who bank online do spend more time on the Internet for personal reasons per week than those consumers who do not bank online.

There are ultimately two explanations for the correlation between likelihood to bank online and time spent online for personal reasons, both of which are equally valid. Online bankers spend more time online simply because they are spending time managing their finances in addition to the other activities they perform online; online bankers spend more time online because the type of consumer that is attracted to Internet banking is one that already enjoys performing other activities online.

Time spent online per week by European consumers banking online These consumers would spend a long time online per week regardless of whether or not they banked online. Table 2.7: Time spent online per week by European consumers banking online France Germany

Italy

Spain

UK Market average

Less than one hour 24.8% 22.2% 25.9% 15.7% 23.0% 22.3% One to five hours 52.3% 43.0% 48.1% 56.6% 40.0% 48.0% Five to ten hours 13.8% 20.9% 13.0% 15.7% 17.0% 16.0% More than ten hours 9.2% 13.9% 13.0% 12.0% 20.0% 13.6% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Notes: Respondents who answered don’t know or who refused to answer are excluded. Base: All consumers that bank online Source: All respondents, Datamonitor, IMPACT 2002

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Business Insights

Table 2.8: Time spent online per week by European consumers who do not bank online France Germany

Italy

Spain

UK Market average

Less than one hour 60.8% 48.3% 44.7% 41.2% 41.2% 47.2% One to five hours 28.7% 37.1% 41.8% 44.2% 40.1% 38.4% Five to ten hours 6.7% 10.8% 8.6% 8.4% 11.4% 9.2% More than ten hours 3.8% 3.8% 4.9% 6.2% 7.3% 5.2% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Notes: Respondents who answered don’t know or who refused to answer are excluded. Base: All consumers that bank online Source: All respondents, Datamonitor, IMPACT 2002

Business Insights

Internet usage Managing a bank account is the most popular online financial services activity, yet it is overshadowed by a number of leisure activities

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Table 2.9: Use of the Internet for financial services and leisure purposes by European consumers France Germany

Italy

Spain

UK Market average

Use of the Internet for financial services purposes Manage bank account 25.5% 33.5% 18.0% Apply for credit card 3.7% 1.1% 0.7% Arrange home insurance 4.2% 2.3% 2.0% Arrange motor insurance 6.1% 4.6% 13.7% Stock/share trading 14.8% 10.5% 7.7% Arrange a personal loan 3.3% 0.8% 3.7%

27.0% 1.6% 0.6% 2.3% 5.8% 0.6%

32.4% 10.2% 8.4% 16.1% 10.0% 4.9%

27.3% 3.5% 3.5% 8.5% 9.7% 2.7%

72.0% 9.0% 67.0% 48.7% 26.7% 61.7%

76.8% 9.6% 69.8% 43.4% 34.4% 55.0%

87.5% 26.7% 71.2% 30.8% 15.9% 73.9%

79.4% 18.6% 67.9% 36.8% 23.6% 65.6%

19.0% 33.3%

14.8% 29.6%

53.1% 31.0%

33.7% 32.1%

35.7%

22.2%

34.7%

32.1%

24.3%

35.0%

29.0%

29.3%

Use of the Internet for leisure purposes Send email 80.3% 80.2% Make payments 19.9% 27.8% Entertainment 59.7% 72.0% Listen to music 31.6% 29.5% Visit chat rooms 21.1% 20.2% Research products/ 61.8% 75.8% services Order products/services 26.5% 55.2% Resolve a problem with 26.7% 40.0% product or service Looking for medical 29.0% 38.9% health information Other 21.1% 37.1% Source: All respondents, Datamonitor, IMPACT 2002

Business Insights

The popularity of using the Internet to manage a bank account relative to other financial services or life administration uses is highlighted in Table 2.9. In each of the five markets surveyed, managing a bank account is the most popular use of the Internet for financial services purposes. Indeed, in Germany 33.5% of consumers who access the Internet also manage their bank account online. Other relatively popular uses of the Internet for financial services purposes include stock/share trading which is an activity of 14.8% of French Internet users, and arranging motor insurance which 16.1% of UK Internet users have done online.

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Table 2.10 highlights that in some markets and in product areas, a relatively large proportion of those consumers who bank online also prefer to purchase other products/services online rather than via other channels. For example, in Germany 35.2% of those consumers who bank online state that their preferred way to purchase media products e.g. books and CDs, is online and in the UK 40.0% of consumers who bank online state that their preferred way to purchase travel services is online. 30.3% of UK consumers who bank online also state that their preferred way to purchase media services is online. Table 2.10: European consumers who bank online who state that the Internet is their preferred channel over which to purchase specified product or service France Germany

Italy

Spain

Consumer electronics 6.4% 13.2% 7.4% 0.0% products Media products 11.0% 35.2% 11.1% 10.7% Utility service 1.8% 17.6% 3.7% 2.4% Travel products 15.6% 16.4% 0.0% 20.2% Base: All respondents managing their bank account online

UK Market average 13.3%

8.1%

30.3% 10.9% 40.0%

19.7% 7.3% 18.4%

Source: All respondents, Datamonitor, IMPACT 2002

Business Insights

“I am in a better financial position than most people my age” Findings shown in Table 2.11 show that in all surveyed European markets consumers who bank online are more likely to agree with the statement: ‘I am in a better financial position than most people my age’ than are consumers who do not bank online. In France, for example, 65.3% of consumers who bank online strongly agreed or agreed with this statement. In contrast, 49.4% of consumers who do not bank online strongly agreed or agreed with this statement. In Italy, 20.8% of consumers who bank online strongly agreed with the statement as opposed to 8.8% of consumers who do not bank online.

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Table 2.11: The opinions on their financial position of European consumers who do bank online: ‘I am in a better financial position than most people my age’ France Germany Italy Spain Agree strongly 8.2% 11.8% 20.8% 8.7% Agree 57.1% 48.4% 56.6% 46.4% Disagree 28.6% 30.7% 18.9% 42.0% Disagree strongly 6.1% 9.2% 3.8% 2.9% Total 100.0% 100.0% 100.0% 100.0% Base: All respondents who mange their bank account online

UK Market average 10.5% 12.0% 60.1% 53.7% 24.2% 28.9% 5.2% 5.4% 100.0% 100.0%

Business Insights

Source: All respondents, Datamonitor, IMPACT 2002

Table 2.12: The opinions on their financial position of European consumers who do not bank online: ‘I am in a better financial position than most people my age’ France Germany Italy Agree strongly 4.9% 6.4% 8.8% Agree 44.5% 46.6% 58.1% Disagree 40.9% 37.1% 26.1% Disagree strongly 9.7% 9.9% 7.0% Total 100.0% 100.0% 100.0% Base: All respondents who do not bank online

Spain 3.9% 43.9% 44.7% 7.5% 100.0%

UK Market average 8.0% 6.4% 52.1% 49.0% 33.9% 36.6% 6.0% 8.0% 100.0% 100.0%

Source: All respondents, Datamonitor, IMPACT 2002

Business Insights

“I am very worried about the state of my personal finances” The type of consumer who banks online is not apparently among those who show most concern about their financial affairs. In all surveyed markets with the exception of Spain, more consumers who do not bank online strongly agreed or agreed with the statement: ‘I am very worried about the state of my personal finances’ than those consumers who do their banking online. The difference in opinions was most apparent in Italy. 23.6% of Italian consumers who do not bank online agreed or strongly agreed with the aforementioned statement as opposed to 5.6% of consumers who do bank online.

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Table 2.13: The opinions on the state of their personal finances of European consumers who do bank online: ‘I am very worried about the state of my personal finances’ France Germany Italy Agree strongly 1.9% 2.5% 0.0% Agree 6.5% 12.0% 5.6% Disagree 62.0% 46.2% 53.7% Disagree strongly 29.6% 39.2% 40.7% Total 100.0% 100.0% 100.0% Base: All respondents who do not bank online

Spain 3.7% 36.6% 56.1% 3.7% 100.0%

UK Market average 1.8% 2.0% 12.3% 14.6% 60.7% 55.8% 25.2% 27.7% 100.0% 100.0%

Business Insights

Source: All respondents, Datamonitor, IMPACT 2002

Table 2.14: The opinions on the state of their personal finances of European consumers who do not bank online: ‘I am very worried about the state of my personal finances’ France Germany Italy Agree strongly 3.2% 5.1% 5.3% Agree 18.4% 18.8% 18.3% Disagree 56.6% 44.3% 45.0% Disagree strongly 21.8% 31.9% 31.4% Total 100.0% 100.0% 100.0% Base: All respondents who do not bank online

Spain 7.6% 32.6% 52.0% 7.8% 100.0%

UK Market average 3.3% 4.9% 15.2% 20.6% 62.3% 52.0% 19.2% 22.4% 100.0% 100.0%

Source: All respondents, Datamonitor, IMPACT 2002

Business Insights

It is clearly difficult to ascertain whether consumers who bank online really are in a better financial position than most people their age. Equally it is difficult to determine why consumers who bank online should feel less concerned about the state of their personal finances than those consumers who do not bank online.

Findings highlighted in the previous tables should be of particular interest to any Internet bank considering the launch of an account aggregation service. Although the findings do not confirm consumer demand for account aggregation services they do imply that consumers who bank online will like to be reminded of their financial position (some

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commentators have argued that consumers in financial distress will shun account aggregation services as they will only be reminded of the gravity of their situation).

Actionable recommendations Internet banks should not expect any dramatic increase in the number of consumers accessing the Internet and should not focus on moving non-Internet users online. They should instead look to provide services that appeal to consumers who are already online but have varied levels of online experience.

Providers should attempt to harness the popularity of the Internet as a leisure channel by incorporating leisure focused elements into their online presence. Internet banks have already attempted to make the online banking experience more enjoyable. However, there are still unfulfilled opportunities in this space.

Internet banks should consider broadening their range of non-financial services, and they should not underestimate the level of interest that consumers who bank online display towards their finances. Internet banks should take advantage of this by extending relationships with their customers in new areas via avenues such as account aggregation. Table 2.15: European consumers who do not bank online who state that the Internet is their preferred channel over which to purchase specified product or service France Germany Consumer electronics 0.3% 6.0% products Media products 3.5% 14.6% Utility service 0.3% 13.6% Travel products 5.4% 8.2% Base: All respondents who do not bank online

Italy

Spain

0.4%

1.8%

4.3%

2.6%

4.5% 2.0% 0.8%

4.0% 0.0% 9.7%

12.5% 1.2% 17.7%

7.8% 3.4% 8.4%

Source: All respondents, Datamonitor, IMPACT 2002

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UK Market average

Business Insights

Competition While the past two years have been characterised by the launch and closure of a number of Internet banks, it has also been a period when some of Europe’s Internet banks and banks providing Internet services achieved considerable success. This section considers Egg, which is the UK’s largest Internet bank and reportedly the most visited online financial services website in the world. Egg is at the forefront of innovation having recently launched account aggregation and online digital payment services, and has also recently begun expanding internationally, launching a card product in France.

The tables below highlight that in the ‘big five’ European markets, Internet banks account for a relatively small share of the total number of consumers banking online. In contrast, banks providing Internet services but which remain extensively branch focused, account for a large share of the total number of consumers banking online.

Egg is easily the largest Internet bank in Europe judged on the customer acquisition success having gained 2.6 million customers by the end of 2002. Various banks providing Internet services can boast more than one million customers including BNP Paribas, HVB and Barclays. The latter has attracted nearly four million Internet banking customers by marketing services to its large customer base in the UK.

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Customers banking online with major Internet banks and banks providing Internet banking services Table 2.16: Customers banking online with major Internet banks and banks providing Internet banking services (Million) Internet bank Banque Directe BanqueAGF Covefi1 ING Direct

Bank providing Internet services France 0.1 BNP Paribas 0.3 Credit Lyonnais 0.3 Société Générale2 0.3

2.1 0.6 0.8

Germany

Fineco online IMIWEB Banca Generali Uno-e

Egg Smile Cahoot First Direct

Commerzbank Deutsche Bank HVB Postbank Sparkassen Volks-und Raiffeisenbanken

0.4 1.9 2.1 1.3 5.9 3.5

Italy 0.4 Banca Monte dei Paschi di Siena 0.05 Unicredito 0.2 San Paolo – Imi

0.6 0.4 0.2

Spain 2.2¹

UK 2.6 0.7 0.4 0.5²

Bankinter BBVA

0.4 1.1

Barclays Lloyds TSB HSBC NatWest

3.9 1.9 1.2 1³

Notes: Latest available estimates are provided in all cases. 1. Following integration with the consumer activity of BBVA FINANZI. 2. First Direct has 1 million customers of which 0.5 million bank online 3.Most accurate estimate available from NatWest Source: Business Insights, Annual reports, Primary interviews, Secondary information sources Business Insights

Egg: case study Launched in 1998, Egg is now the largest Internet bank in the UK, owned in 79% by Prudential and claims to be the most visited online financial services provider in the world (according to Nielsen NetRatings statistics). The bank offers banking, investment 47

and insurance services online as well via other channels namely post, telephone and iDTV. Mobile phone services were withdrawn early in 2002.

Following a loss of £75.1 million in 2001 Egg made a full year profit in the UK in 2002 of £34.8 million including a £13.0 million profit recorded in the last quarter. At a group level, principally due to expenses occurred as a result of entry into France, the picture is somewhat different. During 2002 the Egg Group made a loss of £16.6 million before tax. Egg’s French operations recorded an operating loss of £46.1 million in 2002. However, afterwards the situation changed, and Egg’s UK business doubled operating profits to £72.8 million in 2003, (however during this time Egg’s losses in France amounted to £89.1 million). The 2003 figures from Egg show its UK customer base grew by 635,000 to 3.2 million, while unsecured lending balances rose by £1.5 billion to £4.8 billion.

Across its full product range Egg now has a total customer base of almost 3.2 million. Table 2.17: Egg’s customer numbers, December 1999 to December 2002, UK only

Egg Card (4) Savings (3) Personal loans (3) Mortgages (3) Egg Invest (3) Egg Insure (3)

Dec-99

Dec-00

Dec-01

Dec-02

Dec-03

218,801 571,202 31,337 8,649 -

744,545 620,804 78,797 20,545 10,951 7,785

1,368,642 625,720 102,727 24,827 36,659 23,665

1,912,526 740,506 147,453 29,947 55,909 85,468

2,616,505 738,565 227,195 28,929 57,942 118,242

Total Egg customers (1) (2)792,348 1,351,339 1,950,624 2,561,167 3,196,435 Notes: 1.Cumulative as at the date indicated. 2. If a customer holds more than one product they are treated as a single customer for the purposes of this line item. 3. Joint holders are treated as two or more customers. 4. Includes second cardholders and individuals whose applications have been accepted in principle and who have been allocated a credit limit but for whom the application process is not yet completed. Business Insights

Source: Egg company information

Underlying Egg’s success in the area of personal loans is the bank’s strategy of crossselling personal loans to credit card customers. The cross-sale of further products and 48

services to Egg Card cardholders is a central tenet of the Egg business model and although no information is available on the proportion of Egg credit card customers that also have a personal loan, the proportion is likely to be impressive.

Egg’s attractive product portfolio and successful attempts at cross selling explain much of the bank’s success in recent years. Also important, however, is the bank’s ability to fund high profile and innovative marketing campaigns. In 2002 Egg spent £17.5 million on advertising its products, the vast majority of which, unsurprisingly, was spent on its credit card product.

In May 2002 Egg completed the acquisition of French Internet bank, Zebank, for €5.5 million, thus beginning its expansion into France. Egg also reimbursed €30.5 million to Zebank’s previous shareholders, Groupe Arnault and Dexia, who owned 80% and 20% of Zebank respectively, for share capital paid up during the period between signing and completion of Zebank’s acquisition.

Egg launched its first French product, a VISA card branded ‘La Carte Egg’, in November 2002. Table 2.18: Targets and assumptions: La Carte Egg France end of 2002* France end of 2003 Main APR 13.0% 13.0% Percentage revolving 60% 65% Spend per month (€) 600 300 Interchange 0.45% 0.45% Cashback 5% 1% Average balance (€) 800 1,300 Annual fee (€) 0 35 Notes: * Targets set by Egg at launch

UK in 2002 13.9% 80% 300 1.00% 0.50% 2,500 0

Business Insights

Source: Egg company information

However, Egg is now to close its French operations at a cost of £170m due to substantial losses. The move was prompted by Egg's largest shareholder, Prudential, which is trying to sell its 79% stake in the bank. Prudential has advised Egg that it 49

cannot find a buyer with the appetite for investment required to turn the French unit's fortunes around. Prudential first announced plans to sell its stake in January 2004, in order to concentrate on its high-growth Asian life assurance markets. Abandoning the struggling French unit comes as no surprise, and it should help Prudential to sell its stake. But, given how long Prudential's intentions have been known in the market, any bid premium already looks factored into Egg's shares. Egg has spent £280 million on the venture, which has attracted just 133,000 customers in two years.

Forecasts to 2007 This section looks at the future of Internet banking, specifically the increase in the number of consumers banking online and strategies that banks can employ to ensure that they maximise their appeal to current and future Internet banking customers.

Forecasts of Internet banking customers to 2007 are based on its assessment of the importance of a number of factors, including the size of the retail banking population, the number of consumers accessing the Internet, Internet banking relationships per customer, and expert opinion.

Germany and the UK will remain Europe’s largest Internet banking markets where 18.1 and 15.5 million consumers respectively will be banking online by 2007. This reflects the size of the population resident in these markets and the belief that the Internet banking markets in Germany and the UK will remain both innovative and competitive and that German and UK consumers will show a healthy appetite for new Internet banking services.

France, Germany and Spain will be the fastest growing Internet banking markets over the next five years. These markets will grow at compound annual growth rates of 14.2%, 12.9% and 11.6% respectively.

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Table 2.19: European Internet banking customer forecasts, 2003f-2007f 000s

2003e

2004f

2005f

2006f

2007f CAGR 2003-2007

France Germany Italy Spain UK Other

6,105 11,164 6,221 5,128 11,484 2,858

7,631 13,397 7,465 6,153 13,207 3,144

9,158 15,407 8,211 6,769 14,197 3,301

10,074 17,102 8,786 7,378 14,907 3,433

10,376 18,128 9,138 7,968 15,503 3,536

14.2% 12.9% 10.1% 11.6% 7.8% 5.5%

Total

59,298

68,663

75,169

80,200

83,427

9.1%

Source: Business Insights

In some European countries, Internet banking services have progressed a great deal over the last five or so years. Internet banking sites are now faster, they are better laid out and contain more information meaning that fewer visitors have to return to other channels to seek clarification or assurance. Yet many Internet banking services still show room for improvement.

Between 2001 and 2002 European Internet banking technology spend plummeted by almost 20% as banks adjusted to a harsher economic climate by curtailing IT budgets. Spending on Internet banking services will slowly recover surpassing the level of 2001 by the end of 2004. Table 2.20: European Internet banking technology spend, 2001-2005f $Billion Internet banking technology spend

2001

2002e

2003e

2004f

2.1

1.7

1.9

2.2

Source: Business Insights

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2005f CAGR 2001-2005 2.4

3.4%

Account aggregation services will be provided more widely in the future. However, in order to convince sceptics there will need to be a considerable improvement in existing account aggregation functionality. Current account aggregation services are a long way from fulfilling the potential of the technology and indeed in a number of cases are basic at best.

Money transfers This section covers the various formal instruments for international person-to-person money transfers. There are several ways through which individuals can transfer money internationally. These include typical money transfer providers such as Western Union and MoneyGram, online providers such as PayPal and Yahoo Direct and the traditional bank transfers, among others. While some methods require the recipient to have a bank account, others allow the recipient to collect the cash at the counter or to withdraw money through a prepaid ATM card.

The various ways of sending money can be grouped under three categories: Money transfer facilitators; conventional banking money transfer systems; emerging money transfer systems.

Money transfer facilitators Money transfer facilitators includes money transfer providers, other than banks, that provide dedicated cash collection money transfer services to individuals. The sender visits an agent of the money service provider and hands over a certain amount of money to send to a recipient in another country. The sender is charged a fee for the transaction depending on the amount of money being transferred and the recipient country. The sender provides personal details about the recipient and security information. The

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transfer is made electronically and takes only a few minutes to process. The recipient collects the money, in local currency or any other specified currency, at an agent of the same provider after providing the necessary identification papers.

Typical examples of such providers include Western Union and MoneyGram, the leaders in this specific sector. Both providers have a large network of agents throughout the world. These cash collection providers do not require the recipient to hold a bank account since the money is collected at the counter. As far as the sender is concerned, in the case of cash-to-cash transactions, the individual does not require a bank account. However, some money transfer providers have now increased the channels through which money can be sent. The sender has the option of transferring money online and by phone. In such cases, the sender will have to pay by credit or debit card.

Western Union and MoneyGram are the two main international money transfer providers. They have a network of worldwide agents that allows the transmission of money in and out of various regions. However, there are other providers who concentrate on specific countries or regions. These providers operate in niche segments where they can benefit from the advantage of providing cheaper fees and better exchange rates to these specific regions.

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Table 2.21: Examples of cash collection money transfer providers Money transfer providers

Sending regions

Receiving regions

Western Union

Global

Global

MoneyGram

Global

Global

BBVA – Dinero Express

Spain

Travelex Money Transfer

Operates in 25 countries spread globally

Chequepoint

UK, US, Holland, Spain, Czech Republic, Hong Kong

Global

Zoha Inc

UK, US, India, Hong Kong, Bangladesh, Pakistan

UK, US, India, Hong Kong, Bangladesh, Pakistan

Latin America Operates in 25 countries spread globally. The provider is actually expanding its money transfer business

Sahloul & Kamar Trading services

UK

Middle East, Arab countries, US, Australia

Bakadies International

UK

Africa, India, Sri Lanka, Bangladesh, Pakistan, Jamaica, Trinidad & Tobago

Source: Business Insights

Conventional banking money transfer systems This category includes money transfer instruments that are available through the banking channels. However, some of these services are also available at specific money transfer providers. For instance, many online money transfer providers offer international money orders where the sender pays by credit or debit card. The conventional money transfer instruments include international drafts and money orders and bank wires (international bank transfers).

International drafts and money orders function in the same way as a cheque but they are issued on behalf of the sender by the bank. The sender normally pays cash to the bank

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and a draft is issued. The bank’s fee is normally a fixed fee per draft issued. The sender then posts the document to the recipient, who signs the draft. The amount of money is payable to the bank account of the named recipient on presentation of the draft.

These instruments have the advantage of providing a cheap way of transferring money but it takes longer for the recipient to access the money, since the money is deposited in the recipient’s account. Where the draft or money order is written in a different currency to the recipient’s currency, the transaction will take even longer to process. Table 2.22: Examples of providers of international drafts and money services, other than banks Providers other than banks

Comments

Western Union

Provides global services

Travelex

Provides cash to draft services internationally. The provider is actually expanding its money transfer business.

Zoha Inc

Zoha delivers the draft to the recipient at his/her residence. The provider offers services to India, Pakistan, Bangladesh, Hong Kong from the UK

Payingfast

Online provider that sells Travellers Express money orders. The company sends the order directly to the recipient

Remit2India

Online provider that offers money order services to India from several countries such as UK, Japan, US, EU countries. The money is deposited directly in the recipient’s account and in case the recipient does not hold a bank account with any of their partners, a draft is doorstep-delivered to the recipient

Source: Business Insights

Bank wires are also referred to as ‘telegraphic transfers’. It is similar to a domestic electronic transfer. For recipients who do not hold a bank account with the sending bank, the sender has to provide rather extensive personal details of the recipient to the sending bank, such as bank account and Bank Identifier Code. Sender fees are generally fixed per wire, but sometimes include additional fees in case an intermediary bank is involved between the sending and receiving bank. In addition, the receiving bank also charges a fee.

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Apart from banks, there are some specific money transfer providers that offer wire services. They include both online and offline providers. Some examples are provided in Table 2.23. Table 2.23: Examples of providers of wire money transfer services, other than banks Providers other than banks

Comments

Travelex

Has agents internationally

Zoha Inc

The provider offers wire services to India, Pakistan, Bangladesh, Hong Kong

Easy Exchange

Online provider for senders in the UK to send money to Australia, New Zealand and South Africa

Tranzfers

Online provider for transfers between the UK, Australian and New Zealand

Online FX

Online provider mainly for senders based in the UK

Source: Business Insights

Emerging consumer money transfer instruments This category includes providers of less conventional money transfer methods. It is further broken down in two sub-categories, including online wallets and ATM withdrawal.

Online wallets: PayPal The Internet era has witnessed the rise of online account-based money transfer solutions by non-bank organisations, where consumers can open a free account for online purchases. In addition, many of these providers offer an online platform where money can be transferred from a sender’s account to a receiver’s account. Generally, money is deposited in the account through credit or debit cards or bank transfers.

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The following table outlines some of the online account-based providers that provide international money transfer services. Table 2.24: Examples of international online account-based money transfer providers Online wallets

Comments

PayPal

Present in 37 countries and money can be transferred in US$, £, Canadian dollars, Yen, euros but recipient countries are restricted.

Moneybookers

Money can be transferred worldwide in US$, £ and euros

Yahoo PayDirect

InternationalIn association with HSBC, MoneyGram

Visa ePassporte

Allows money to be transferred anywhere in the world among account holders

Source: Business Insights

Founded in 1998, U.S. company PayPal is considered to be one of the greatest success stories in the online payments space. PayPal allows customers, retailers and businesses with an email address to securely send and receive payments online through existing bank accounts, credit and debit cards. Its email money transmission service has proved highly popular and now has over 40 million account holders worldwide in 38 markets. In 2002, PayPal was acquired by eBay, the renowned online auction provider.

In addition to providing a gateway for online real-time payments such as paying bills and an auction item, PayPal can also be used for international money transfers. The initial process is simple. The customer registers for a free online PayPal account, enters the amount of money to be transferred and the email address where the fund should be sent. The recipient receives an email prompting them to set up an account too. The latter can either opt for the money to be paid into their bank account or keep it in their PayPal account for online purchases.

While customers with a personal PayPal account receive payments free of charge, such accounts cannot receive payments made by credit cards. In such cases, the customer

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needs to upgrade their account to a Business or Premier account, where a fee is charged to receive payments.

PayPal’s accounts can now be held in five different currencies: U.S. Dollars, Canadian Dollars, Euros, Pounds Sterling and Japanese Yen. Up to October 2002 accounts could only be held in U.S. Dollars and hence Europeans using the service could only make payments in this currency. Money transferred to a country that does not use any of the above-mentioned currencies should be done in sterling. With payments involving two different countries, an additional cross border fee is charged. The cross border fee is an additional 1% for U.S. Dollar payments and 0.5% for Canadian Dollar, Euro, Pound Sterling and Yen payments. If transactions involve a currency conversion, it is completed at a retail foreign exchange rate determined by PayPal, which is adjusted regularly based on market conditions. This exchange rate includes a 2.5% spread above the wholesale exchange rate at which PayPal obtains foreign currency, and PayPal retains the spread.

ATM withdrawal An increasing number of providers are currently offering ATM withdrawal facilities to recipients in collaboration with global card schemes, namely Visa and MasterCard. Basically, the sender transfers money to an account to which a debit card is linked and the recipient uses the ATM card to withdraw the money in the local currency. This service is being offered by both online and offline providers.

There are several channels through which the ATM card is issued. The debit card can be issued by the sender’s bank – the sender opens a new account with his bank for transferring money to the recipient. Upon request of the sender and the recipient, the bank registers the recipient as a secondary account holder. The recipient is issued with a debit card linked to the account that he uses to withdraw the funds abroad. This is one of the preferred methods adopted by parents of students studying abroad. However, the recipient should ensure that a certain amount of money is left in the account for fees

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charged by the bank, such as foreign currency conversions and withdrawals. Please note that this method requires the recipient to have spent some time in the sender’s country.

Another option is that the debit card is issued by the recipient’s bank – this is the traditional bank account linked to an international debit card. The recipient has a bank account in the sender’s country that is linked to a debit card. The recipient takes the card abroad with him/her. The sender transfers money to the recipient’s account and informs the recipient whenever a transfer is done. The recipient withdraws cash abroad with his/her debit card. This method requires the recipient to leave a certain amount of money for fees charged by the bank. Similar to the above option, this method is often used by parents of students studying abroad.

The third option is prepaid cards issued by the service providers – the sender buys a prepaid gift card at a provider, online or at a branch, and provides details about the recipient. The bank posts the card to the recipient. The latter uses the card to withdraw cash through ATMs and for purchases at retailers accepting the card scheme logo. Fees involved include a purchasing fee for the card, postage fees, withdrawal fees and transaction fees, among others.

Yahoo! PayDirect International Yahoo! PayDirect, an online auction similar to eBay, was launched by Yahoo! in 2000. A year after its introduction Yahoo! entered into partnership with HSBC and the service was rebranded ‘Yahoo! PayDirect from HSBC’. As part of its P2P payment services, Yahoo! PayDirect has launched its international money transfer services - branded PayDirect International - with the aim of breaking into the growing remittance market through alternative online money transfer methods. PayDirect International was introduced in December 2003 in the United States and allows Yahoo! and Yahoo! en Espagnol users to send money in 182 countries.

Yahoo! PayDirect International offers two options to consumers to transfer money worldwide, the PayDirect MoneyGram (Yahoo has entered into a partnership with 59

MoneyGram, which allows the recipient to collect cash on the counter at one of the 60,000 MoneyGram agents) and Yahoo! PayDirect International World Card, where Yahoo! has entered into partnership with Cirrus/MasterCard in order to provide disposable ATM cards as a method of withdrawing cash by the recipient. Through this partnership, customers have access to more than 800,000 Cirrus ATMs worldwide. The card is delivered to the recipient within five days by DHL following the transfer by the sender.

The prepaid card works like a typical gift card. The recipient can withdraw the entire balance at any time, subject to ATM withdrawal limits, or over a period. The sender can reload the same card, up to a certain limit, via Yahoo! PayDirect website from his/her bank account for further transfers to the recipient.

The two options mentioned above were strategically chosen by Yahoo!, as research has showed that ‘convenience’ is one of the key factors for money transfers along with safety and cost. Yahoo! PayDirect International provides recipients with a number of choices for collecting the funds. For instance, it is not compulsory for the recipient to have access to a computer or to hold a PayDirect account or a bank account.

According to the general manager of Yahoo! PayDirect International, the system ‘revolutionises current Internet person-to-person payment methods’. It covers the global market with more than 180 countries and offers more competitive rates than traditional money transfer providers like Western Union. However, like all prepaid cards, various fees are attached to the use of such cards. For instance, fees paid by the sender for the PayDirect World Card start from US$5.95, depending on the value of the funds being sent and the recipient country. Recipients of the card are charged a minimum of US$1.50.

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Chapter 3

Online Consumer Payments Overview

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Chapter 3

Online Consumer Payments Overview

Summary In two countries - Germany and the UK - more than 50% of consumers accessed the Internet from home during 2002. Spanish consumers are the least likely to access the Internet from home, with only 31.9% of consumers doing so in 2002. Results from a consumer survey conducted in Europe in 2002 indicated that while many consumers are happy to research products and services online far fewer are happy to actually purchase them online. For example, in France, Italy and Spain more than 50% of consumers accessing the Internet during the last 12 months of 2002 have researched products and services online. Despite the extensive penetration of the Internet, making payments online remains an activity in which relatively few consumers engage. Germany and the UK were the only surveyed markets in which more than 25% of consumers accessing the Internet during the last 12 months made payments online. Despite the unsuitability of credit cards to the online environment they are still the dominant payment mechanism in this area in the majority of markets. In the UK and the United States, for example, more than 80% of consumers who purchased goods and services online have paid with a credit card in 2002. In Germany more than two-thirds of consumers who purchased from an online merchant paid by mail on receipt of invoice. This is significantly more than the percentage who have paid this way in any other European market as well as in the United States. Credit cards remain a safe way to purchase goods and services: less than eight cents in every $100 spent on Visa cards in the Visa EU region is fraudulent. However, fraud and Card Not Present (CNP) fraud in particular is on the increase.

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Introduction This chapter presents a number of findings from IMPACT, a consumer research program collected in 2002 in France, Germany, Italy, Spain, and the UK, followed by the analysis of the range of payment solutions that currently compete in the online consumer payments market.

Consumer online behaviour As table below indicates, in two countries – Germany and the UK - more than 50% of consumers accessed the Internet from home during the last 12 months of 2002. Spain was the market where fewest consumers accessed the Internet from home during the last 12 months, with only 31.9% of consumers doing so.

Outside of the home, a consumers’ place of employment was where most consumers accessed the Internet. 46.2% of UK consumers accessed the Internet from work during the last 12 months, more than in all other surveyed European markets. Table 3.25: Percentage of consumers that have accessed the Internet from specified locations during the last 12 months France Germany Home 36.0% Work 34.4% Home of friend/relative 25.3% School, college, university 15.4% Public library 10.9% Internet café 7.3% Other 4.9% Base: All consumers

55.7% 42.8% 27.8% 13.6% 5.4% 5.8% 4.8%

Italy

Spain

34.0% 23.4% 18.3% 12.7% 6.4% 4.6% 2.1%

31.9% 23.7% 24.8% 13.0% 7.6% 11.0% 4.2%

UK European average 57.1% 46.2% 35.8% 17.1% 13.2% 10.5% 3.1%

42.9% 34.1% 26.4% 14.4% 8.7% 7.8% 3.8%

Business Insights

Source: IMPACT 2002

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Increased confidence in the Internet and in technology in general has been both a cause and a consequence of higher levels of Internet access in recent years. Yet, a number of other factors are also key including the eventual take-off of broadband services and the ubiquity of access devices.

Results indicated that while many consumers are happy to research products and services online far fewer are happy to actually purchase them online. For example, in France, Italy and Spain more than 50% of consumers accessing the Internet during the 2002 researched products and services online.

In contrast, fewer than 30% of consumers accessing the Internet in these countries have ordered goods and services online. For example, in all countries except Spain more than 60% of consumers accessing the Internet research products and services online. However, only in Germany, the UK do more than 30% of consumers order products and services online. Table 3.26: Percentage of consumers engaging in specified activity online during the last 12 months France Germany

Italy

Spain

UK European average

Research products/ 61.8% 75.8% 61.7% 55.0% 73.9% services Order products/services 26.5% 55.2% 19.0% 14.8% 53.1% Base: All consumers accessing the Internet during the last 12 months

65.6% 33.7%

Business Insights

Source: IMPACT 2002

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Table 3.27: Percentage of consumers that have engaged in specified online activity during the last 12 months France Germany

Italy

Spain

Send email 80.3% 80.2% 72.0% 76.8% Make payments 19.9% 27.8% 9.0% 9.6% Entertainment 59.7% 72.0% 67.0% 69.8% Listen to music 31.6% 29.5% 48.7% 43.4% Visit chat rooms 21.1% 20.2% 26.7% 34.4% Research products/ 61.8% 75.8% 61.7% 55.0% services Order products/services 26.5% 55.2% 19.0% 14.8% Resolve a problem with 26.7% 40.0% 33.3% 29.6% product or service Looking for medical 29.0% 38.9% 35.7% 22.2% health information Manage bank account 25.5% 33.5% 18.0% 27.0% Apply for credit card 3.7% 1.1% 0.7% 1.6% Arrange home insurance 4.2% 2.3% 2.0% 0.6% Arrange motor insurance 6.1% 4.6% 13.7% 2.3% Stock/share trading 14.8% 10.5% 7.7% 5.8% Arrange a personal loan 3.3% 0.8% 3.7% 0.6% Other 21.1% 37.1% 24.3% 35.0% Base: All consumers accessing the Internet during the last 12 months

UK European average 87.5% 26.7% 71.2% 30.8% 15.9% 73.9%

79.4% 18.6% 67.9% 36.8% 23.6% 65.6%

53.1% 31.0%

33.7% 32.1%

34.7%

32.1%

32.4% 10.2% 8.4% 16.1% 10.0% 4.9% 29.0%

27.3% 3.5% 3.5% 8.5% 9.7% 2.7% 29.3%

Business Insights

Source: IMPACT 2002

It is testimony to the development of many different, complicated and content rich online travel websites that almost 30% of U.S. consumers state that they prefer purchasing travel services online than via any other channel. Although in Europe the online channel is a much less popular channel over which to purchase travel services, it is still preferred by more than 18% of UK consumers.

More than 12% of consumers in Germany, the UK state that the online channel is their preferred channel for purchasing media products such as CDs, DVDs and books.

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Table 3.28: Percentage of consumers stating that the Internet is their preferred channel for purchasing specified product or service France Germany

Italy

Spain

UK European average

Electronics 1.1% 5.7% 0.9% 0.6% 5.3% Media products 3.2% 14.4% 2.6% 2.5% 13.2% Utility service 0.4% 1.6% 1.0% 0.4% 3.1% Travel products 4.7% 7.4% 5.1% 6.2% 18.1% Base: All consumers accessing the Internet during the last 12 months

2.7% 7.2% 1.3% 8.3%

Business Insights

Source: IMPACT 2002

Despite the extensive penetration of the Internet, making payments online remains an activity in which relatively few consumers engage. Germany and the UK were the only surveyed markets in which more than 25% of consumers accessing the Internet during the last 12 months made payments online. Table 3.29: Percentage of consumers that made online purchases via specified means France Germany

Italy

Spain

UK European average

Online with credit card 41.7% 33.6% 52.8% 58.2% 86.4% Online with debit card 52.1% 2.0% 3.8% 10.9% 57.1% Online via standing 16.7% 35.6% 28.3% 25.5% 19.2% order/direct debit By cash on delivery 8.3% 40.3% 39.6% 36.4% 13.0% By mail on receipt 16.7% 67.1% 3.8% 27.3% 24.9% of invoice By mail in advance 12.5% 18.8% 3.8% 7.3% 15.8% Other 8.3% 16.8% 9.4% 9.1% 5.1% Base: All consumers making purchases online during the last 12 months

24.7% 27.1%

Source: IMPACT 2002

Business Insights

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59.2% 26.0% 23.3%

12.3% 9.4%

Payment solutions This section examines the range of payment solutions that currently compete for a piece of the online consumer payments market. Payment cards such as credit and debit cards are covered first, as they are the most commonly used payment solution in many markets. They are not, however, the only payment solution and others include prepaid cards, P2P payments solutions, eWallets and mPayments solutions, each of which is also covered in this section.

Credit and debit cards It is well documented that payment cards such as credit and debit cards are not well suited to the online environment. In the offline environment credit cards can be authenticated at the point of sale. The merchant verifies that the individual making the purchase is also the person to whom the card belongs by checking the signature they provide with that on the reverse of card or by requesting that they enter a PIN into a point of sale device. If the signatures match or if the PIN is verified, the sale is agreed.

In contrast, in the online environment, and indeed via other impersonal channels such as mail order and over the telephone, authentication is more difficult since the merchant is unable to collect a PIN or see the card and therefore verify a signature. This weakness gives rise to CNP fraud since ultimately anybody can provide anybody else’s card details and assuming the card has not been reported lost or stolen and the funds are available, the sale will be agreed.

Despite the unsuitability of credit cards to the online environment they are still the dominant payment mechanism in this area in the majority of markets. In the UK and the United States, for example, more than 80% of consumers who have purchased goods and services online have paid with a credit card. Furthermore, in May 2003 Visa EU announced that Visa cardholders in the EU region used their cards to make online purchases worth €2.6 billion in Q1 2003, an increase of 120% on the same period in 2002 and amounting to 120 million transactions. 67

Credit cards are not used as frequently to pay online in all markets. German consumers (33.6%) are the least likely of the ‘big five’ in Europe to have purchased online and paid using a credit card. In France, only 41.7% of consumers who have purchased online have paid using a credit card. In Germany more than two-thirds of consumers who have purchased from an online merchant have paid by mail on receipt of invoice. This is significantly more than the percentage who have paid this way in any other European market as well as in the United States.

Credit cards remain a safe way to purchase goods and services: less than eight cents in every $100 spent on Visa cards in the Visa EU region is fraudulent. However, fraud is on the increase and CNP fraud, the type of card fraud associated with online transactions as well as transactions via mail order and telephone order, is increasing in prominence faster than other types of card fraud.

The major card schemes recognise that online card fraud is increasing and with it the associated costs for all parties involved in the payment value chain. They are also concerned that alternative payment mechanisms, which consumers may perceive to be more secure in the online environment, may wrestle market share from credit and debit cards if no action is taken.

Security initiatives Since the mid 1990s the card schemes have developed a number of online security initiatives, starting with the ill-fated SET (Secure Electronic Transaction) in 1996 and continuing with initiatives such as Verified by Visa, MasterCard SecureCode and Maestro’s eCommerce program.

Visa Verified by Visa’s straightforwardness means that it is a considerable improvement on SET. For example, initially shopping via Verified by Visa does not differentiate the online shopping experience from that which consumers enjoy when the service is not

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involved. Only when consumers click on the ‘pay’ button, and assuming they are already enrolled, is there any noticeable difference.

Mastercard MasterCard’s Securecode has two components: Secure Payment Application (SPA), which is the protocol that authenticates cardholders over the Internet; Universal Cardholder Authentication Field (UCAF), which is a series of data elements generated by the Issuer Wallet Server (IWS) providing evidence that the cardholder originated the transaction.

Since September 2002 MasterCard has incorporated all of its eCommerce authentication protocols into its ‘MasterCard SecureCode’ program. It is therefore this name that features on all consumer and merchant facing materials.

To boost online use of debit cards Maestro has developed a system of pseudo card numbers (PCNs) replacing the 19-digit debit card number with a 12-19 digit ‘credit card like’ Internet-only number. These PCNs are entered in the same way as credit card numbers (where a merchant is able to accept them) and are stored by a wallet downloaded by the cardholder.

There is little official information on the rollout of Maestro’s eCommerce program. It is, however, believed that the program’s rollout will follow that of MasterCard’s SecureCode due to the compatibility of the protocols upon which the two systems are based. Maestro’s website advises cardholders to contact their bank to see whether it is participating in its eCommerce program.

The future significance of card scheme security initiatives greatly depends upon the card schemes’ ability to maximise cardholder enrolment and card issuer and merchant

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acceptance as quickly as possible. While the card schemes are making strides in this area, more can be done, as awareness, particularly among consumers, is still low. If successful, card scheme security initiatives will lessen fraud, and importantly the fear of fraud, when using credit and debit cards in the online environment. In so doing, the card scheme security initiatives will remove one of the key advantages of alternative payment mechanisms and strengthen the case for using credit and debit cards for the majority of online and offline purchases.

Prepaid online payment methods One of the limitations of credit cards in the online (and offline) environment is that all consumers cannot hold a card. For example, consumers under the age of 18 are among the most Internet literate but they are not able to hold a credit card. Non-standard consumers also may or may not be able to hold a credit card depending on the severity of the characteristics that render them non-standard and the lending policies of credit card issuers at that point in time.

Prepaid online payment solutions vary in sophistication ranging from disposable vouchers to prepaid cards: Vouchers: disposable vouchers with a fixed value. The user reveals a unique voucher number or code by scratching off an area of the voucher. This is entered directly into the merchant’s payment page to complete the payment process or first into the provider’s website to activate the card. Once the value of the card is used up a new voucher must be purchased. Example: France Telecom’s Ticket Surf; plastic cards: re-usable cards that can be loaded with value at offline terminals. Users activate their cards on the provider’s website and can make purchases by entering their card number in addition to a unique identifier. Example: Splash Plastic.

The first forms of prepaid online payment solution were voucher based. More recently vouchers have given way to plastic cards, which are recognised as a more sophisticated

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alternative. They do, for example, more closely replicate a credit card and offer providers more insight into individual’s buying behaviour.

While prepaid cards have so far been targeted almost exclusively at teenagers they are an attractive option for consumers who for whatever reason do not have a credit card or who have a credit card but who do not want to use it online. Prepaid cards are regarded as a more secure online payment method because if they are used illegally fraudsters only have access to the value credited to the card.

Prepaid cards have limited utility for high value online purchases. Instead, where their value lies is in medium or low value, ‘micropayment’ purchases such as online content including news, music and video, mobile phone ring tones and media products such as books and CDs.

P2P payment solutions P2P Payment solutions are unique in comparison to the payment solutions already profiled as they are targeted more directly at consumers wanting to purchase from auction websites such as eBay as well as at consumers wanting to send money to friends and family online. Auction websites such as eBay have been hugely successful in recent years by bringing buyers and sellers together in a way that was not previously possible and by appealing to consumers who are hopeful of getting a bargain.

While buyers and sellers are free to determine through which mechanism payment is made, auctions such as eBay and Yahoo encourage buyers and sellers to use their P2P payment services, PayPal and Pay Direct. eBay acquired PayPal in October 2002 for approximately US$1.5 billion. It has now replaced eBay’s own payments service, eBay Payments by Billpoint. 60% of PayPal’s business comes through eBay.

Yahoo launched Yahoo Pay Direct in 2000. In 2001 Yahoo entered into partnership with HSBC, which now offers ‘Yahoo Pay Direct from HSBC’.

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Launched in October 1999, U.S. company PayPal is considered to be one of the greatest success stories in the online payments space. Although PayPal is often considered to be only a P2P payment solution provider, any business or consumer with an email address can use the service. In fact a high proportion of PayPal’s transactions are actually between consumers and businesses. 42,000 websites now accept payment by PayPal.

eWallets An eWallet is a software solution that facilitates online payment through automatically populating fields when a customer is purchasing a product. The eWallet stores customer card and billing information and in some instances is able to allow the purchase to be made without transmitting ‘true’ card details to the merchant. eWallets, which can be stored on a server or on the user’s desktop, first emerged in 1999.

ePurses are similar albeit different from eWallets. ePurses are effectively stored value tools. Users can load value into their ePurse and make purchases up to that value at participating online and offline merchants. ePurses were originally developed as an alternative to cash in the offline environment but have since moved online.

In contrast to ePurses, eWallets are a service product rather than a payment method. Their main role is therefore to store card and billing information and to facilitate payment by other methods, for example credit and debit cards. A variety of providers have launched eWallets in recent years ranging from banks and credit card issuers to ISPs to well known offline security companies. Some continue to offer services while have others have been withdrawn. Going forward, it is difficult to see much scope for more advanced eWallets such as those able to facilitate a transaction without the transmission of ‘true’ card and billing information. These solutions face the same challenge as virtual card number solutions i.e. proving that they can co-exist with the card scheme security initiatives. Since virtual card number solutions have a better record of success so far they may be better positioned than advanced eWallets to make such a case.

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mPayments Like a number of other payment solutions, mPayments solutions were regarded a few years ago as being the future of consumer payments having particular pertinence in the micropayments space. While mPayments solutions have largely failed to live up to this billing the mPayments market has nonetheless seen a number of interesting developments.

mPayments solutions are those linked to a mobile device such as a mobile phone or a PDA. In their most simplistic form they work on a reverse billing basis. Upon finding some restricted access content they would like to view or a ring tone that they would like to download, users send an SMS message to the content provider containing a specified keyword. The provider sends a SMS in return containing a unique PIN, which is entered into the Internet site to enable the content to be viewed or the ring tone to be downloaded. The charge is added to the user’s telephone bill. This system is relatively simplistic, and hence easy to understand for consumers, and benefits from the ubiquity of mobile devices.

A reverse billing system relies upon co-operation between the mobile operators and the content providers. The mobile operators must share a significant portion of the revenues with the content providers in order to make the system viable.

Yet, it is widely claimed that mobile operators are reluctant to share these revenues with the content providers, in particular being slow to make payments to content providers when payment is due. It is also claimed that when mobile operators do share revenues they take too big a slice leaving the content providers with a small, and ultimately unviable, share. For example, if a user pays 10 pence to download online content, it is estimated that the mobile operator will retain 6 pence or 7 pence of this leaving the content provider with a measly 3 pence or 4 pence. Costs may also escalate if the provider fails to achieve threshold levels of business.

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Vodafone is one example of a mobile operator that has taken the mPayments model forwards in recent years. In March 2002 it launched its mPayments system called mPay Bill and in September 2002 it launched an additional service called mPay cards. Also in September 2002 Vodafone launched mPay bill in Germany.

Vodafone’s mPay Bill is targeted at the micropayment market and works on a reverse billing basis. In order to use the service, customers register their details online and open an mPay Bill account. When they want to make a purchase with an mPay Bill registered merchant, they click on the mPay icon. Doing so redirects them to their mPay Bill account, where they will be requested to login, check the details of the purchase and accept or decline the purchase as appropriate. Assuming they wish to make the purchase, the transaction will be billed to their Vodafone bill at the end of the month, or in the case of pre-pay users will be deducted from their next top-up voucher.

Vodafone mPay Cards is effectively an eWallet service utilising a mobile device. It enables Vodafone customers to register their debit and credit card details with Vodafone. Once registered, users can use mPay Cards to shop at any Vodafone partner merchant.

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Chapter 4

EBPP – Electronic Bill Presentment and Payment

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Chapter 4

EBPP – Electronic Bill Presentment and Payment

Summary The biller-direct model is the most widespread method of EBPP (electronic bill presentment and payment). A billing company, such as a telecommunication, utility, insurance or a credit card provider, establishes electronic billing capabilities on its own website, where consumers are provided with their billing information and the means for bill payment. The consolidator model of EBPP relies on a central consolidator to present charges from multiple billers and provide customers with a single site for viewing and paying their bills. The biller-direct method of electronic bill payment and presentment has so far had more success than any of the consolidation methods. Billing companies, such as credit cards and utilities service providers in the U.S. and Europe, have been very successful in attracting consumers to sign up to view their bills and make payments directly from the biller’s website. One of the reasons for the success of the biller-direct model is that it allows a service provider to maintain control over customers’ billing data. Retaining control of the customer interface is paramount for any billing company, whether it is a telecommunications, utilities or credit card provider. Providers of financial services, such as retail banks, credit card and insurance companies can potentially perform several roles in the process of electronic bill presentment and payment. They can act as traditional billing companies, provide cash management and payment services for billers, or develop consolidating capabilities in arrangement with billers. EBPP implementation can provide companies with a number of competitive advantages, including cost saving.

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Introduction There are two main approaches to electronic bill presentment and payment, including the biller-direct approach, which involves a service provider setting up EBPP capabilities directly on its own website and the consolidator approach, which involves a third-party aggregator acting in agreement with different service providers to offer their customers the ability to view and pay several of their bills at the same site. This chapter focuses both approaches.

EBPP – electronic bill presentment and payment The biller-direct approach The biller-direct model is the most widespread method of EBPP. A billing company, such as a telecommunication, utility, insurance or a credit card provider, establishes electronic billing capabilities on its own website, where consumers are provided with their billing information and the means for bill payment. Customers, therefore, must visit the biller’s website in order to use this service, which is typically free.

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Figure 4.5 provides an overview of how the biller-direct approach works. Figure 4.5: The biller-direct model requires customers to view and pay their bills directly through their service provider’s website

2. Notification (email)

1. Enrollment

3. Bill Detail Biller 4. Payment Authorization

5. Payment Processing

Customer

Payment Provider

Source: Business Insights

The biller-direct process The process is as follows: first the customer enrols at the biller’s website. The biller emails a notification to the customer, which might contain bill summary information, the customer views bill details at the biller’s website and authorises payment. The payment is processed - this takes several steps, including: The biller forwards customer instructions to the biller’s payment provider (BPP); remittance information is forwarded from BPP to the biller; payment execution originated from BPP to the customer’s financial institution (CFI) and payment execution completed and funds deposited from CFI and BPP. 78

The consolidator model of EBPP relies on a central consolidator to present charges from multiple billers and provide customers with a single site for viewing and paying their bills. This method is based on agreements a consolidator, which can be a bank, Internet portal or other private entity, establishes with a variety of billing companies. Acting as a ‘service bureau’, a consolidator then collects billing data from billers, delivers it to customers and collects payment instructions from customers online. Customers have the ability to access several bills at one site and enjoy the convenience of one-stop bill presentment.

Figure 4.6 below provides an overview of how the consolidator model of EBPP works. Figure 4.6: The ‘consolidator’ model relies on central aggregator to present bills and provide payment capabilities for customers through its website

4. Notification (email) 2. Enrollment

1. Enrollment

3. Bill Detail

Biller

5. Bill Detail Bill Consolidator

8. R e

mitt

6. Payment Authorization Customer

ance

7. Payment Processing

Payment Provider

Source: Business Insights

The consolidator process The process involves the following steps: the customer enrols at the consolidator site, activation request is forwarded from the consolidator to the biller and bill information is made available from the biller to the consolidator. The consolidator notifies the 79

customer about a bill, by letter or email and the customer logs on to the consolidator’s website to view billing information and authorises payment. The consolidator forwards payment instructions to the biller’s payment provider and the customer’s financial institution and remittance information is forwarded to the biller.

The consolidator model of EBPP offers two options to a billing company, one of which is a thick consolidation model, where the biller sends all of its billing data, including information such as transaction details, to the consolidator, which acts as a single point of contact for the customer to manage multiple bills. The billing company, therefore, has limited control over customer relationship management.

The second option is a thin consolidation model, which combines the features of the biller-direct and thick consolidation models by collecting and preparing only bill summary information. So far, the biller-direct method has proved more popular, though the future momentum lies with the thin version of consolidation model.

The biller-direct method of electronic bill payment and presentment has so far had more success than any of the consolidation methods. Billing companies, such as credit cards and utilities service providers in the United States and Europe, have been very successful in attracting consumers to sign up to view their bills and make payments directly from the biller’s website.

One of the reasons for the success of the biller-direct model is that it allows a service provider to maintain control over customers’ billing data. Retaining control of the customer interface is paramount for any billing company, whether it is a telecommunications, utilities or credit card provider. The monthly bill is one of the few vehicles that guarantee a regular, repetitive, interactive communication with customers, enabling service providers to generate profiling data and offering targeted marketing and cross-selling opportunities. The biller-direct approach, therefore, strengthens the relationship between the customer and the service provider and ensures that control over important customer data is preserved in-house. 80

While it requires consumers to establish and maintain multiple biller relationships, the biller-direct model has experienced a considerable amount of success with customers. This service is typically free and easy to use and navigate. Consumers evidently feel more comfortable when viewing detailed billing information from their service provider’s website and making payments directly to the biller.

While customers might seem perfectly happy with travelling to multiple sites each month for bill payment, industry research indicates that there is a potential ceiling on the extent to which they will do it. According to research conducted by CheckFree (a global leader in the provision of EBPP solutions), consumers typically never view and pay more than three bills directly at each individual biller’s site.

What does the future hold for EBPP? As a result, there are long-term questions as to how sustainable the biller-direct model will be over time. Consumers consistently indicate in regular surveys their preference for a consolidated interface. From a customer’s point of view, being able to view and settle all bills from a single website offers greater convenience than having to visit each biller site in turn.

The thin consolidation model is widely regarded as having the best chance for widespread EBPP acceptance, as it combines the strengths of the biller-direct and thick consolidation models. This hybrid approach allows billers to achieve the broad reach of consolidation while retaining direct interaction with the customer for control over strategic marketing initiatives and customer relationship management. At the same time, consumers are able to enjoy a one-stop shopping experience for reviewing and authorising bills from multiple billers.

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The market context The current global EBPP market is contested by a large number of companies, ranging from traditional high-street banks and utilities providers to software solution specialists, Internet portals and telecom companies.

Historically, telecommunication and utility companies gravitated towards online bill presentment and payment earlier than many financial institutions, driven by the tremendous cost savings associated with automating their paper billing process. EBPP also provides these companies with an important differentiator in a highly competitive environment and reduces customer churn. From these companies’ point of view, making EBPP the entry point for all customer interactions creates a situation where it becomes impractical and inconvenient for customers to change carriers when they have easily available online services, such as customised bill formats and self-provisioning and targeted direct mail marketing.

Many billers have retained their legacy paper bill printing systems and have outsourced the responsibility of developing EBPP services. A broad proliferation of third-party providers have stepped up, each offering solutions to critical functions of EBPP, including provision of billing, eCommerce, statement delivery and data warehousing systems and services. These companies offer outsourcing of EBPP services to billing organisations and manage information technology systems, the billing data, and the electronic payment transactions on a services basis.

In addition, Internet portals such as Yahoo! and MSN have emerged as major players in the provision of bill consolidation services to consumers and EBPP outsourcing services to billers. By acting as customer service providers, these companies can increase their revenue streams by charging for bill payment services.

Providers of financial services, such as retail banks, credit card and insurance companies can potentially perform several roles in the process of electronic bill presentment and payment. They can act as traditional billing companies, provide cash management and 82

payment services for billers, or develop consolidating capabilities in arrangement with billers. Retail banks, in particular, are in a unique position to become direct billers and bill presenters for other companies, as well as key electronic payment players.

As providers of credit cards, mortgages, and other financial loans, banks are a major source of recurring bills to consumers. But, although most banks offering Internet banking are already providing consumers with the ability to pay bills electronically through their website, this functionality is typically limited to ‘payment’ not ‘presentment’ of bills. This means that the resulting service falls short of eliminating one of the more expensive parts of the process – reproducing and mailing paper bills.

Many billing companies are hedging their bets and setting up their own biller-direct services, while also opting to partner financial services organisations to provide full electronic billing and payment services at an aggregated site. Banks have the ability to assist and generate revenue from billers by facilitating their presentment and collection processes. Because banks maintain a payment system, electronic-transmission capabilities, and understand and can plan how payments will be made, partnerships between banks and billers are attractive for the latter.

As well as assisting billing companies with electronic billing and payment services, retail banks are also in a position to help consumers by providing consolidated bill interfaces, primarily (but not exclusively) to their retail customers, who have payment accounts with the bank.

This role is particularly compelling for retail banks. As consolidators, banks can ensure that they remain the trusted gateway between their customers and billers. Consumers consistently indicate in regular surveys that they want all of their bills aggregated at a single place – and that place is overwhelmingly at their bank’s website.

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Advantages arising from EBPP EBPP implementation can provide companies with a number of competitive advantages, including: Cost saving is one of the most compelling arguments for EBPP. The cost reduction involved in eBilling can be substantial. Energy services providers spend on average $1.71 on processing payment through a branch and $1.17 on processing a mailed paper bill, while the cost of processing a transaction through the Internet can be as little as $0.25 (2001). An operator can, therefore, cut up to two thirds off the cost of paper bills by implementing EBPP solutions; EBPP offers competitive advantages through delivery of superior customer service. EBPP offers providers the ability to build a strong Customer Relationship Management (CRM) platform into and on top of the electronic billing process. EBPP generates stronger customer loyalty by providing better service, and today’s most robust EBPP solutions not only provide a new vehicle for paying bills, but also a better way to submit bill disputes and commonly asked questions; EBPP offers valuable opportunities for targeted marketing. While serving customers more efficiently, EBPP also offers service providers the opportunity to gather market intelligence about customers in real-time. EBPP offers enhanced cross and up-selling opportunities. In addition to new marketing opportunities, EBPP makes it possible for service providers to cross-sell and up-sell products and services more efficiently and effectively by targeting offers to customers based on their current billing experience, as well as the demographic and financial information. Once a customer trusts a service provider, returns to its site regularly and relies upon the increasingly valuable data bundled with their bill, enhanced cross and up-selling opportunities can be developed; EBPP helps in attracting more affluent customers. Considerable industry research suggests that individuals who bank online and engage in EBPP are more likely to have higher annual incomes, more assets to invest and a greater number of financial

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products than those who do not. These ideal prospects also have a high probability of becoming early adopters of other new products and services their provider might offer.

EBPP has the ability to turn the routine billing function from a costly operation on the part of the biller, and an often painful task on the part of the consumer, into a value added experience both ways. These advantages were recognised in the early stages of the EBPP development, but the growth and adoption rates of this service have been slower than expected, with the size of the current EBPP market paling in comparison with its potential size.

The EBPP market in the UK is relatively undeveloped, and the bills presented and paid electronically account for a fraction of the total consumer bills. According to the National Office of Statistics, 24.5 million households in the UK receive on average six bills per month, or 72 bills per year.

While billing companies in the United States and the UK can potentially save billions from EBPP adoption, these savings can only be achieved if the paper bill were eliminated from the process completely. In reality, EBPP is still host to a massive amount of paper at the front end, since most billers continue to mail out paper bills to the customers along with any electronic bill presentment and payment services they might offer. This creates a major paradox for EBPP: one of the key drivers of this market is cost reduction, but as long as paper bills continue to be sent, the argument for cost saving becomes eliminated, and, in fact, companies end up facing an extra layer of cost through maintaining both billing systems.

Proportion of customers paying their bills online Sweden, where contracts between service providers and banks allow ePayments to be accepted more easily, is by far the most developed country in terms of its movement towards a paperless billing system, with 22.75% of Swedish consumers paying their bills online. While the United States can boast greater EBPP development in terms of 85

technological implementation, only around 13% of U.S. consumers opt for online bill payment. The situation is even more discouraging in the ‘big five’ of Europe: only in Germany does the proportion of online paying customers rise over 1%, while only a tiny fraction of UK and French consumers chose the Internet over other methods for paying their bills. Table 4.30: Proportion of customers paying their bills online Percentage of consumers paying bills online 1. Sweden 2. United States of America 3. Germany 4. United Kingdom 5. France 6. Italy/Spain

22.75% 13% 1.22% 0.49% 0.14% 0% Business Insights

Source: Analysis of Energy Impact Survey 2001

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Chapter 5

Prepaid Cards Analysis

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Chapter 5

Prepaid Cards Analysis

Summary Prepaid cards were introduced to serve the needs of a number of customer segments for which a debit or credit card was not appropriate and to offer extra advantages to consumers in general as compared to other means of payment. One of the main target demographics of prepaid cards is the teen market, consumers aged between 10 and 17 years old. Legally, they are not allowed to have credit cards and only a very limited number of countries issue debit cards to teens. The teen population in Europe accounted, on average, for 8.4% of the European population in 2002. This represents a significant potential customer base of future adults of more than 32 million. Although teen customers do not have much spending power when considered independently, together, the teen market offers interesting opportunities to players. A significant number of adults do not hold a bank account. Consequently, they do not possess a credit or debit card. This segment represents considerable growth potential for prepaid card issuers. Prepaid cards provide customers who cannot be issued a credit card due to a bad or no credit history with the opportunity to hold a bankcard. The fact that prepaid cards are not linked to a bank account means that no personal details are required. Card users are unlikely to face identity fraud problems because of the characteristics of prepaid cards. By not being linked to a bank account, prepaid cards provide a safer way to shop - both online and offline. Electronic purses are smart cards introduced during the early 1990s as an alternative to carrying cash and mainly for the settlement of small value (micro) transactions. ePurses are prepaid cards on which money is loaded and stored in the card microchip. Prepaid cards are relatively widely spread in the United States but other continents have yet to capitalise on the prepaid concept. For instance, in the UK, prepaid bankcards barely exist. 88

Introduction This chapter analyses the prepaid cards issue in detail, covers the arguments behind prepaid cards, differentiates between the different categories of prepaid products and summarises the range of prepaid cards available under card schemes.

Prepaid products Prepaid cards were introduced to serve the needs of a number of customer segments for which a debit or credit card was not appropriate and to offer extra advantages to consumers in general as compared to other means of payment.

Prepaid cards allow issuers to target particular segments for which these products are best suited, including the teen population, unbanked customers, customers who do not possess credit cards and customers with a bad or no credit history.

Overview of prepaid cards Prepaid cards are relatively widely spread in the United States but other continents have yet to capitalise on the prepaid concept. For instance, in the UK, prepaid bankcards barely exist, although retail gift cards have expanded recently. Among the major European countries, Italy and Spain seem to have started to warm to the prepaid concept. MasterCard states that the scheme has approximately 300,000 and 200,000 prepaid gift cards in Italy and Spain respectively, while no MasterCard prepaid cards are in circulation in France, Germany and UK. The travel card market offers a great potential as emphasized by the sales realised in the United States in 2003. A total of $250 million prepaid travel cards were sold and sales of traveller's checks amounted to over $30 billion. Given that this market is still in its infant stage, it is likely that more players are going to enter the segment at a later stage.

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Although the global prepaid card market is still in its development stage, card schemes argue that the market has a huge potential.

Prepaid cards are generally targeted towards specific niche markets, but the current prepaid card portfolio does not address each targeted niche segment specifically. Despite the theory that prepaid cards are good for customers with a poor or no credit history, no products have been developed specifically for that segment.

Another factor that is impacting on take-up is the number of banks that currently issue prepaid cards offered by the card schemes. The greater the number of issuers the easier it is for customers to access these cards. Currently, the number of prepaid card issuers appears to be limited. For instance, in Spain, only a couple of big banks issue prepaid cards, namely La Caixa and BBVA.

Finally, history has shown that customers tend to be slow in accepting new alternative means of payment as portrayed by ePurses. The main reason for this is that customers tend to stick to products they know best and that have already proved to be efficient and suitable for their needs. For instance, credit and debit cards have a strong hold on consumers in general and with the global rollout of CHIP and PIN, these cards will offer greater security to customers – an advantage which prepaid card issuers will not be able to emphasise any more.

The teen population One of the main targets of prepaid cards is the teen market, consumers falling in the age bracket 10 to 17 years old. Legally, they are not allowed to have credit cards and only a very limited number of countries issue debit cards to teens. In the UK, Royal Bank of Scotland offers a Cashline card to teens aged between 11 to 15 years old that only gives them access to cash from ATMs.

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Although teens are not highly profitable to banks because of their limited means of income and limited needs, they provide a means of rejuvenating a bank’s customer base. By successfully targeting and serving the teen market, issuers are more likely to retain these customers and fulfil their banking needs in their adult life. Table 5.31 below shows the potential of the teen market for different European countries. Table 5.31: Teen population in Europe, 2002

France Germany Italy Spain UK Other Europe Overall

Teens (million)

Total population (million)

Percentage- teen population

5.6 6.5 4.1 3.2 5.6 7.6

59.8 82.8 57.7 39.4 59.4 89.4

9.40% 7.90% 7.00% 8.20% 9.40% 8.40%

32.6

388.5

8.40%

Source: Business Insights

The teen population in Europe accounted, on average, for 8.4% of the European population in 2002. This represents a significant potential customer base of future adults of more than 32 million. Although teen customers do not have much spending power when considered independently, together, the teen market offers interesting opportunities to players.

Unbanked customers A significant number of adults do not hold a bank account. Consequently, they do not hold a credit or debit card. This segment represents a considerable growth potential for prepaid card issuers.

Customers who do not possess credit cards Many adult customers have not yet warmed to the idea of having and using a credit card, for various reasons such as fear of fraud or running into debt. This is particularly

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emphasised in continental Europe where other payment means are more used than credit cards. The characteristics and advantages of prepaid cards, as covered below, are well suited to fulfil the needs of these customers. Given the considerable size of this market segment, the latter offers a huge growth potential for prepaid card issuers. For instance, non-credit card customers are believed to account for approximately 50 million in the U.S. and to about half of the adult population in the UK according to industry research.

Customers with bad or no credit history Prepaid cards provide customers who cannot be issued a credit card due to a bad or no credit history with the opportunity to hold a bankcard. The fact that prepaid cards are not linked to a bank account means that no personal details are required, hence, no credit checks are involved in their issuance. Consequently, prepaid cards offer good alternatives for these customers.

Extra advantages from prepaid cards As mentioned previously, identity fraud and theft are common worries among cardholders. However, the characteristics of a prepaid card mean that card users are unlikely to face identity fraud problems. By not being linked to a bank account, prepaid cards provide a safer way to shop - both online and offline. In the case of theft or fraud, personal data of the cardholder cannot be accessed at all. Consequently, prepaid cards have a lesser appeal to thieves than credit and debit cards, since only a limited amount of money is available on the card. The security offered by prepaid cards is particularly useful when travelling abroad.

The fact that funds are loaded in advance on to a prepaid card means that the cardholder can budget his/her expenses. Coupled with that, since a prepaid card allows the customer to have access only to the current balance on the card, it can act as a powerful tool to control debt.

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Prepaid cards offer a good alternative to carrying out cash, since they are suited to low value transactions for example ePurses such as Proton in Belgium and GeldKarte in Germany.

Types of prepaid cards A variety of prepaid product types have been developed, each targeting the theoretical needs of customers. As far as the consumer market is concerned, the prepaid cards available globally can be summarised in two categories: EPurses: smart card-based products where money is loaded on to a chip for general purposes. Examples of ePurses are GeldKarte, VisaCash, Quick and Mondex; special purpose cards: chip or magnetic stripe-based products for specific uses. Special purpose cards could be split into the classes mentioned below. However, some prepaid card issuers do not differentiate between the different categories. These include: teen prepaid cards, gift cards, travel cards, and virtual prepaid cards for online transactions.

ePurses Electronic purses are smart cards introduced during the early 1990s as an alternative to carrying cash and mainly for the settlement of small value (micro) transactions. ePurses are prepaid cards on which money is loaded and stored in the card microchip. Each time the consumer uses the card at a merchant’s point of sale, the amount is deducted from the chip. Customers normally have the choice to upload the ePurse from ATMs or phones. It is a secure means of payment since the card is PIN-protected.

The appearance of ePurses as an alternative payment scheme created a wide interest, since many factors pointed to their future success. Around 90% of worldwide transactions are made in cash, of which a significant proportion accounts for low value

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transactions. Hence, there was a huge market potential. However, time has shown that only a few ePurses have enjoyed success.

While some have completely failed others are enjoying only limited success. For instance, Mondex was a failure in the UK, whereas Proton in Belgium is a benchmark in the ePurse industry. In between the two lies Geldkarte in Germany. While more than 50 million cards have been issued, success is rather limited. GeldKarte was issued as a general add-on to debit cards but little has been done to encourage customers to make more use of the card. As a result, value of transaction and average use per card stays low.

Why have some ePurses failed where others have succeeded? ePurses offer the advantage of being secure and the technology behind them is established. Through the Common Electronic Purse Specifications (CEPS), ePurses can be used on a global platform but still most customers have not really warmed to the idea.

Examples of ePurse schemes Table 5.32: Examples of ePurse schemes in Europe and the United States ePurse schemes

Country of origin

Avant Danmont Geldkarte Mondex Moneo Proton Quick VisaCash

Finland Denmark Germany UK France Belgium Austria US

Source: Business Insights

Examining teen prepaid cards Prepaid teen cards are more common in the United States than in other markets, although they account for a small share of the prepaid market. In Europe, Italy and 94

Spain are among those where the concept of prepaid teen cards has taken off, whereas in the UK prepaid cards are not currently in circulation. Targeting teens holds a particular significance to issuers particularly as a means of capturing future customers. However, targeting the teens has given rise to a lot of criticism within the consumer industry, particularly in the United States.

Opinions largely differ about whether it is ethical to target the teens. For instance, the Consumer Federation of America has criticised the concept, arguing that prepaid cards might encourage the teen population to use a credit card at a future stage, thus encouraging them to get into debt. A teen prepaid card basically allows parents to transfer money from their current account or credit card to an online account, which their offspring can use.

On the other hand, advocates of teen prepaid cards have pinpointed that a prepaid card is more likely to help teenagers to learn the basics of budgeting by managing the prepaid amount on the card. Parents also have the possibility to control their kids’ spending through online tracking of purchases.

Prepaid teen products can be split into two categories, including general purpose prepaid cards, used for both physical and online purchases where the customer is issued with a physical card with access to cash withdrawal services at ATMs and online prepaid cards, used for online purchases only. An example is Splash Plastic in the UK.

The first prepaid cards introduced to target the teen segment were mainly online payment cards. The reason behind this is that the teens are typically the most Internetconversant segment of the population. However, teens were limited in their desire to shop online as the primary means of payment used on the Internet was credit cards, which by law they are not entitled to.

There was, of course, the alternative of using parents’ credit cards to indirectly make a purchase but it has the disadvantage of limiting their independence, a very important 95

factor in a teen’s life. Acceptance of debit cards was lower than credit cards and although in some countries such as the Netherlands the young customer can hold a debit card, it is not the case in many countries. Hence, players in the card and payment market introduced a new payment solution for the teen market – the online prepaid card.

Smartcreds and Splash Plastic In the UK, two Internet prepaid cards were introduced: Smartcreds and Splash Plastic. Smartcreds was introduced by UK Smart in 1999, which is a wholly owned subsidiary of EU Smart.

PrePay Technologies launched splash Plastic in January 2001. Both cards work in a similar way, where money is loaded on to the account (an eWallet protected by a password and pin code) through a magnetic stripe card. In addition, Smartcreds offer other alternative top-up methods such as through standing orders, cheques, scratch cards and credit cards.

However, of these two players, only Splash Plastic has been able to achieve a certain level of success. After nearly three years in operation, Smartcreds closed down in September 2002 on the basis that the level of investment involved to run the business was too high. Two main factors have contributed to the failure of Smartcreds, namely brand recognition and limited network of retailers participating in the scheme.

On the other hand, the success of PrePay Technologies could be attributed to its expansion strategy. Splash Plastic was created for the teen market for online shopping. However, profits derived from serving the teen segment could be restricted given their limited spending power. Coupled with that, the level of investment required to maintain an online system is quite significant.

To prevent these potential problems, PrePay chose to expand its range of activities at the right time. PrePay Technologies rebranded Splash Plastic under its own company

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name to reflect its shift towards general prepaid solutions. The company business can be split between processing, products and solutions, of which 50 per represent electronic stored value and 50% is Splash Plastic. The number of Splash Plastic cards has exceeded the 400,000 mark and PrePay stated that the card is ‘successful enough to take it to the next stage’, that is, a broader consumer acceptance than the youth market.

As far as solutions and processing are concerned, PrePay partnered with GE Global Consumer Finance to develop a high street gift card. Moreover, PrePay successfully uses the existing technology behind Splash Plastic and the experience gained in running such a scheme to assist retailers in changing their paper gift vouchers into magnetic strip cards.

Gift cards Gift cards are the most common prepaid cards issued by players in the banking sector. The mechanism is similar to gift vouchers issued in the retail sector. However, gift cards give the recipient access to a wide range of retailers, hence a broader choice of gifts. For instance, with a Visa Gift card, the recipient will be able to use the card at merchants accepting the Visa logo. Another advantage of gift cards over ordinary gift vouchers is the option of using the card at ATMs for cash withdrawal purposes.

On the other hand, a gift card can be expensive. There are various fees involved, such as a purchase fee based on the denomination of the card, ATM fees and reloading fees. Gift cards are available both under reloadable and disposable options.

Gift cards can be further split into ‘general purpose gift cards’ that function like generalpurpose prepaid cards. Customers use the card for themselves for general transactions instead of giving it as a gift to someone else. Many issuers classify their prepaid card portfolio as ‘gift cards’. It generally includes both types of gift card.

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Travel cards It is no surprise that issuers have started to apply the same prepaid mechanism to the travel segment. The traveller’s cheque offers a great opportunity for the prepaid concept since the mechanism is as simple as for a gift voucher. Foreign currencies are loaded on to the travel card and, similar to the gift card, the traveller can use the card to make purchases and access ATMs. It is a simpler and more secure way to carry money abroad.

One example of a travel card is the American Express TravelFunds Card. It is PINbased, which provides additional protection against fraudulent use. Apart from American Express, which both develops and issues prepaid cards, Visa is the only other active scheme in the prepaid travel market. Visa has developed the Visa TravelMoney, which is issued by big players such as Travelex.

The market undoubtedly offers a great potential, as emphasised by the sales realised in the United States in 2003. A total of $250 million in prepaid travel cards were sold and sales of traveller’s cheques amounted to over $30 billion. Furthermore, the European markets are still untapped. Given that this market is still in its infant stage, it is likely that more players are going to enter the segment at a later stage. Table 5.33: Examples of issuers of travel cards in the United States Issuers

Travel cards

AAA American Express Interpayment Travelex Wildcard systems

Cash Passport Card (in collaboration with Visa) American Express TravelFunds Card Visa Travel Money Cash Passport Visa Travel Money Visa Travel Money

Source: Business Insights

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Virtual prepaid cards As covered earlier, prepaid cards are also available under a virtual option. They function like a prepaid online account, which customers can use to shop online. For instance, in the U.S. Visa has created the ‘ePassporte Virtual Visa’, a prepaid virtual account that combines several uses such as online shopping, money transfer and gift giving. The virtual account comes with an optional Visa Electron Card that allows customers to withdraw cash at ATMs.

Conclusions Given that take-up is limited, one issue that emerges in the prepaid card arena is whether a market really exists for these cards.

One of the main strengths of prepaid cards is the security offered by these products. As discussed previously, an increasing number of customers are showing concern about the possibility of fraud attached to the use of debit and credit cards. Prepaid cards are good alternatives for these customers. By not being linked to any banking details and other personal data, prepaid cards offer peace of mind. Prepaid cards can also act as a budgeting tool. In a consumer world where consumers tend to spend more than their disposable income, prepaid cards offer the opportunity to control expenses and limit debt.

Prepaid cards - more specifically the prepaid gift cards - also have the advantage of offering freedom of choice to the recipients by allowing customers to access the large network of retailers that accept the card scheme. Coupled with this, customers also have the possibility to use the cash withdrawal function of the card at ATMs accepting the scheme.

In spite of these strengths, prepaid cards do have some drawbacks. These cards are targeted towards niche segments and although these markets have significant potential, prepaid cards will probably stay a niche product.

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The other issue about prepaid cards is the high fees attached to their use such as issuance fees, reloading fees, servicing fees and cancellation fees. Consequently, prepaid cards are more expensive to use than other payment cards. This is particularly a disadvantage for issuers concentrating on the teen market. Teens generally have limited pocket money and, as such, cash transactions may be more appropriate for them.

Another weakness that players of prepaid cards must overcome is that of acceptance. While prepaid cards under the card schemes - American Express, MasterCard and Visa – are globally recognised, issuers of prepaid products outside these schemes will have to expand their merchant network and gain consumer acceptance.

As long as players concentrate their efforts on exploiting niches there is definitely a market for prepaid cards. The segments that players are currently targeting offer huge opportunities but a lot more needs to be done to market the product. Issuers should be more aggressive both in their marketing and product strategy. They need to develop more products that are tailored to the needs of each of the targeted niche segments. For instance, prepaid cards are said to be good alternatives for customers with bad or no credit history. However, there are no prepaid products specifically for them, as it is the case with the teen market.

The other important issue that players need to address in order to increase take-ups is the high price involved with prepaid cards. Players need to address each niche separately and consider whether the targeted segment can bear the charges involved. For instance, if an issuer is offering teen prepaid cards, it will make sense to scrap some of the fees involved. This also applies to gift cards.

Another factor that impacts on the success of prepaid cards is the positioning of the products. It may be wiser for issuers to present some of the prepaid product types, for instance travel cards, as complementary payment products to other established payment means such as debit and credit cards instead as competing against them.

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Chapter 6

Online Security: Combating Fraud

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Chapter 6

Online Security: Combating Fraud

Summary While the increase in eCommerce sales volumes has extended to many areas, tourism and entertainment has grown most rapidly. Partly due to the increased popularity of budget air travel, eCommerce sales categorised as tourism and entertainment made by Visa EU cardholders increased by 531% between the last quarter of 2001 and the same period in 2002. The UK is the largest eCommerce market in Europe. According to Nielsen NetRatings, 12.8 million Internet users in the UK (or 60% of the UK’s Internet audience) visited an eCommerce site in December 2002. This is 3.7 million more than did so in December 2001. eCommerce has been spurred in recent years by the wider and more sophisticated use of the Internet, thanks to higher consumer confidence in the online experience and the increasing number of retailers who have an all-embracing online presence. The extensiveness of home PC Internet access is currently being buoyed by a fall in the cost of accessing the Internet. This has resulted from competition among Internet Service providers (ISPs) in the narrowband and broadband markets, and a fall in the cost of purchasing a new PC. CNP fraud is the most common form of fraud associated with impersonal channels such as the Internet, mail order and the telephone.

Introduction This chapter examines the background to the development of card scheme security initiatives. It considers the range of issues that underline the development of these initiatives including rising consumer eCommerce sales volumes, the increase in online

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card fraud and fear that consumers are being deterred from using their cards online due to fear of being a victim of fraud.

Card scheme security initiatives Consumer eCommerce payment volumes have exploded in recent years. This section considers the growth of eCommerce, the factors that underline it and some of the merchants who have benefited.

The growth of eCommerce in recent years has been nothing short of impressive. In the mid-1990s the idea of buying on the Internet was largely dismissed as something with only novelty value and a fad that would soon pass. Now, however, opinions have largely changed, and for example in the last three months of 2002 European Internet sites sold goods and services worth more than €2.5 billion to Visa cardholders. While the increase in eCommerce sales volumes has extended to many areas, tourism and entertainment has grown most rapidly.

Visa figures revealed continued growth of online shopping in the UK and across Europe. Total EU eCommerce sales for the first quarter of 2003 were more than double that of the same period in 2002 - an increase of over 120%. During that time, European Visa cardholders spent over €2.6 billion on the Internet, with over 31 million transactions processed in total.

The travel and entertainment sector has been the key driver of the overall eCommerce growth across Europe. Despite the recent conflict in Iraq, the amount spent online on tourism, leisure and entertainment in the first months of 2003 was three times (303%) that of the same period in 2002. Bookings for restaurants, cinemas and car rentals were among the biggest climbers with online bookings for airline tickets also growing in the first quarter of 2003 with total sales volumes over six times (666%) that of the same period in 2002.

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Sustained quarterly growth has helped support the annual increase in sales. Over Q2 2004, total eCommerce spend across the EU rose by 18% compared to the previous three months, which included the Christmas shopping period. All the major European markets experienced healthy quarterly growth in the first three months of the year with online purchases by Visa cardholders up by 16% in the UK, 17% in Germany, 26% in Italy, 20% in France and 28% in Spain. Despite slower rates of growth in the UK, it remains the strongest eCommerce market in Europe with total online sales in the first three months of the year amounting to over €1.8 billion almost 40 times that of less developed online markets in Spain (€40million) and France (€75 million). Table 6.34: Visa EU eCommerce sales volumes year-on-year growth, Q4 2001Q4 2002 and Q1 2002 and Q1 2003 EU ECommerce sales year-on-year and quarter-on-quarter growth: Date Sales Volume Q1 2002 €1,195,753,426 Q4 2002 €2,252,750,429 Q1 2003 €2,660,598,240 Q4 2001-Q4 2002

Q1 2002 and Q1 2003

eCommerce sales

136%

123%

Retail: total Retail: sports Retail: computing Retail: supermarkets/food Retail: general Retail: books Retail: electrical

112% 164% 149% 98% 91% 74% 47%

101% n/a n/a n/a 89% 40% 86%

Services: total Services: utilities Services: insurance Services - professional Services - recreational

57% 119% 114% n/a n/a

85% n/a n/a 93% 118%

Tourism and entertainment: total 531% Tourism and entertainment: airlines 1326% Tourism and entertainment: car rental 947% Tourism and entertainment: hotels 125% Tourism and entertainment: Entertainment n/a Tourism and entertainment: Travel Agencies n/a Tourism and entertainment: Rail and Coach n/a

303% 666% 586% 111% 182% 184% Business Insights

Source: Visa EU

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The UK: the largest eCommerce market in Europe The UK can rightfully claim to be the largest eCommerce market in Europe. According to Nielsen NetRatings, 12.8 million Internet users in the UK, or 60% of the UK’s Internet audience, visited an eCommerce site in December 2002, 3.7 million more than did so in December 2001. Popular eCommerce sites included www.amazon.co.uk, which had a unique audience in December 2002 of 6.7 million and eBay, which had a unique audience of 5.1 million. High street retailers also proved popular – Argos had a unique audience of 2.6 million.

The growth of the eCommerce market can also be demonstrated by examining the success of a number of Internet retailers. Although the bursting of the dot.com bubble in 2000 saw many Internet retailers go out of business, a number of retailers who have got their business model right and who have found a market niche are now doing well, primarily eBay. For the full year 2003, eBay generated consolidated net revenues of $2.17 billion, a 78% increase over the $1.21 billion reported in 2002. Gross profit was a record $532.9 million, or 82% of net revenues, which was up from the 80% level reported in the fourth quarter of 2002.

Growth of eCommerce eCommerce has been spurred in recent years by the wider and more sophisticated use of the Internet, both a cause and a consequence of higher consumer confidence in the online experience, and the increasing number of retailers who have an extensive online presence.

Consumers are now able to access the Internet from a range of locations including their own homes, their place of work, Internet cafes, libraries, Internet terminals in stations, airports etc. and telephone booths, and from a range of devices. IMPACT 2002, which surveyed consumer behaviour in the UK, Germany, France, Italy and Spain, found that more than 50% of consumers in Germany and the UK have accessed the Internet from home during the last 12 months. 46.2% of UK consumers have accessed the Internet from work during the last 12 months. 105

Table 6.35: Percentage of consumers who have researched and ordered products and services online in surveyed European markets, 2002 France Germany

Italy

Spain

Research products/ 61.8% 75.8% 61.7% 55.0% services online Order products/ 26.5% 55.2% 19.0% 14.8% services online Base: All respondents accessing the Internet in the last 12 months

UK Market average 73.9%

65.6%

53.1%

33.7%

Business Insights

Source: IMPACT 2002

The extensiveness of home PC Internet access is currently being buoyed by a fall in the cost of accessing the Internet. This has resulted from competition among ISPs in the narrowband and broadband markets, and a fall in the cost of purchasing a new PC. Also, the Internet is viewed as a convenient low cost channel where prices are often lower than on the high street. The 24/7 advantages of the Internet also attract consumers hard pressed to fit trudging the high street into their busy lives.

With increased exposure to the Internet comes greater confidence in the online experience. Consequently, more consumers are happy to transact online while shopping, banking and gambling in addition to their use of the Internet for entertainment, email, information gathering etc. The majority of large retailers now have a transactional online presence. In addition the profile of online-only retailers such as eBay.com, amazon.com, and lastminute.com has grown such that these companies now enjoy considerable levels of brand recognition.

Online card fraud Credit cards remain a safe way to purchase goods and services: less than eight cents in every $100 spent on Visa cards in the Visa EU region is fraudulent. However, fraud is on the increase and CNP, the type of card fraud associated with online transactions as well as transactions via mail order and telephone order, is increasing in prominence faster than other types of card fraud.

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Credit card fraud is on the increase. Visa, for example, estimates that absolute losses from card fraud now amount to €0.5 billion per year or €3 for each card issued in Europe and that losses are equivalent to a fraud-to-sales ratio of 0.08%. This ratio has increased from 0.05% in 1998 although it is actually considerably lower than during the late-1980s when it reached 0.18%.

Relative to other types of card fraud, the percentage of total fraud that is categorised as CNP fraud is also on the increase. Principally due to the growth of eCommerce, the increased popularity of mobile phone top-up transactions and the prevalence of mail order and telephone order, CNP fraud now accounts for 23% of total card fraud up from eight% in 1997 and 20% in 2000. In contrast the percentage of total card fraud accounted for by lost and stolen cards has fallen from 64% in 1997 to 31% in 2002. Lost and stolen card fraud continues to account for the largest share of total card fraud.

Relative to mail order and telephone order fraud, online card fraud is believed to account for a relatively small proportion of total CNP fraud. Yet commentators recognise that domestic and international/cross-border online card fraud is growing rapidly. Indeed, it is even believed that while online credit card transactions account for around four or five percent of total credit card transactions, the incidence of fraud online is now up to 15 times as high as it is offline. Visa USA has revealed that fraud related to eCommerce now accounts for 10% of the fraud it records despite eCommerce accounting for only 5% of sales volumes.

Card not present fraud CNP fraud is the most common form of fraud associated with impersonal channels such as the Internet, mail order and the telephone. CNP fraud can take a number of forms, for example fraudsters gain possession of a card after it is lost or stolen and use the card before the owner realises it is missing, or they make a copy of a card’s details without the owner’s knowledge and use the details to make an online purchase, or gain possession of a discarded card receipt. In some cases a receipt includes sufficient information for an additional, fraudulent purchase to be made. 107

In an offline environment credit cards can be authenticated at the point of sale. The merchant verifies that the individual making the purchase is also the person to whom the card belongs by checking the signature the cardholder provides with that on the reverse of the card. If the signatures match, and the card is verified, the sale is agreed.

In an online environment, and indeed via other channels such as mail order and over the telephone, authentication is more difficult. The merchant is unable to see the card or to verify a signature. This weakness gives rise to CNP fraud since ultimately anybody can provide anybody else’s credit card details and assuming the card has not been reported lost or stolen and the funds are available, the sale will be agreed.

In order to overcome the difficulties of authentication in the online environment centralised address verification systems have been developed. Though basic, these systems allow merchants to use the card issuer’s address records to cross reference the residential address of the account holder with the address to which the goods will be delivered.

Address verification systems are an early line of defence in the fight against online card fraud. They work effectively only in credit card markets where accurate and up-to-date centralised records are kept. They are also of little assistance when the cardholder chooses to have the goods sent to another address, as is often the case when the cardholder is purchasing a gift, or where no goods are physically sent e.g. when online content is purchased.

Fraud related costs Many credit card issuers offer their customers online fraud guarantees. If a card is used fraudulently online the cardholder will not be liable for expenses incurred. However, the value of this protection is ultimately dependent on consumer vigilance i.e. it relies on consumers always realising when their card has been used fraudulently. In reality, despite advice from consumer groups stating that consumers should keep receipts and check statements regularly, many consumers do not do so. The guarantee also does not 108

take into account the time and effort required to alert and prove to the card issuer that a fraudulent act has taken place.

Dating back to the 1970s when the magnetic strip on the reverse of cards emerged and the 1980s when the hologram on the front of cards was first seen, card schemes have introduced a number of measures to counter card fraud including: Card activation (the card issuer sends a card to legitimate cardholder in an ‘inactive’ state, once received the cardholder calls the issuer to confirm receipt and pass through a verification process before the card is activated); Card Verification Value (CVV) and Card Validation Code (CVC): these are security codes introduced by Visa and MasterCard respectively that are embedded in encrypted form on the card’s magnetic strip. If the codes do not match the transaction is refused; CVV2 and CVC2: these are three digit codes imprinted on the card’s signature panel used in CNP transactions. The cardholder relays the code to merchant as part of the authentication process. The code is cross-referenced with central records and if the codes do not match the transaction is refused; Neural Network Fraud Solutions: a monitoring system that tracks cardholder spending patterns and typically fraudulent transactions often on the basis of geographical location, type of purchase, size of purchase, type of merchant etc.

EMV standard In a bid to combat rising levels of fraud a decision was taken in 1998 for European card markets to migrate to chip cards and PIN at the point of sale (PoS). To ensure the interoperability of cards between countries, card schemes Europay, MasterCard and Visa formed a joint industry working-group to establish common standards for chip cards that later became known as EMV (Europay, MasterCard and Visa). The card schemes have stipulated that all markets should be chip and EMV compliant by 2005.

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EMV will combat counterfeit card fraud and will also deal a blow to fraudsters who attempt to use lost or stolen cards at the point of sale. However, it will have less impact in the online environment where in order to take advantage of the chip stored in their card consumers will need to install a card reader.

Conclusions As was outlined in the previous section credit cards are not an ideal payment mechanism for making online purchases. Since merchants are not able to authenticate them as effectively as they can in the offline environment, there is an increased risk of CNP fraud associated with the use of credit cards online. As the European Commission (EC) once said: ‘credit cards were not made to function on the Internet’.

Yet, despite their weakness as an online payment mechanism credit cards remain consumers’ preferred means of online payment in many markets. Ultimately, the high volume of online purchases made using credit cards relative to other payment mechanisms is the result of the wide acceptance of credit cards by online merchants, the limited acceptance of other online payment mechanisms and consumers’ preference towards using credit cards in the offline environment. Using credit cards online, as opposed to any other payment mechanism, involves no additional product holding and no additional effort learning how the payment mechanism functions.

While credit cards remain the dominant means of making online purchases in many markets, there is justifiable concern that alternative, newly developed payment mechanisms could wrestle away market share if consumers perceive these alternatives to be just as user friendly and more secure in the online environment. Indeed, these payment mechanisms already have considerable market share. Visa EU estimates that non-card payments accounted for 36% of total EU eCommerce volumes in 2002.

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Chapter 7

Appendix

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Chapter 7

Appendix

Definitions 3D-Secure An authentication protocol developed by Visa.

3D-SET An enhancement of the original SET system which sought to improve on SET by being server rather than customer based.

Account aggregation Account aggregation offers the online customer the opportunity to bring together all of their financial accounts as well as features such as email, loyalty schemes etc. into one personal portal regardless of where those accounts are held. Consequently, account aggregation users are able to use one set of security details, rather than individual sets of details for each of the accounts aggregated.

Acquirer An institution which acquires data relating to transactions from merchants and which feeds this data into the interchange system.

Animated online agents Animated online agents are ultimately artificial intelligence engines that permit users of Internet services to receive a verbal response to their questions in real time over the Internet.

ATM withdrawal

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This is a recent money transfer service offered by some providers. It involves sending a debit card to the recipient to withdraw funds received through ATMs.

Bank providing Internet services A bank that remains predominantly branch-focused although it may still offer services via the Internet and other channels.

Balance outstanding All money owed to a card issuer at a given point in time. This includes the value of transactions made within that month, which will be paid upon receipt of the bill.

B2B B2B is an abbreviation that stands for business-to-business.

B2C B2C is an abbreviation that stands for business-to-consumer.

Biometrics Technologies used for measuring and analyzing human body characteristics such as fingerprints, eye retinas and irises, voice patterns, facial patterns and hand measurements, especially for authentication purposes

CAGR CAGR stands for compound annual growth rate and is used by Datamonitor to give an indication of year-on-year growth in a market. It is calculated using the formula:- (last value in series/first value in series)^(1/(number of years in series - 1)) – 1.

Card issuer

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The institution which issues the payment card to the consumer. This institution may or may not be a bank.

Card not present fraud (CNP) Fraud committed when there is no face-to-face contact between the customer and the merchant and hence where the merchant is unable to verify the signature on the reverse of the card against the signature provided by the customer.

Card scheme A card scheme provides products, systems and services for banks and other financial organisations. It does not issue cards directly to consumers. For instance, Visa and MasterCard are card schemes.

Charge back Where the consumer denies they made a card purchase for which they have been billed and where the cost is charged back to the merchant, or as part of the card scheme security initiatives, to the card issuer.

Conventional banking money transfer systems Typical banking channels through which money is sent internationally, such as bank wires, money orders and drafts.

Credit card A revolving credit card provides consumers with access to a line of credit. Consumers make payments using their card and receive a bill at the end of the billing cycle. A minimum payment against the outstanding balance is usually demanded by the card issuer, but beyond this the customer can choose how much of the bill he wishes to repay, up to and including 100% of the balance outstanding. Any balances which are not repaid within the interest free period offered by the card incur interest at the rate

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advertised by the card issuer. A revolving credit card may or may not be linked to a customer’s bank account.

CVV CVV (card verification value) can help with card-not-present fraud. It can be found on the back of cards and verifies the card number and the CVV number batch.

Debit card (pay now) A debit card allows customers to pay for purchases using a plastic card. The money is then drawn directly from the customer’s current account to pay the merchant. Customers verify payments either by signing a receipt or by entering a personal identification number (PIN). A debit card does not offer access to a line of revolving credit and is always linked to a customer’s account.

Digital Wallet Software used to store credit card account information often downloaded from the Internet.

Direct Debit An instruction from a customer to their bank or building society authorising an organisation to collect varying amounts from their accounts, as long as the customer has been given advanced notice of the collection amounts and dates.

EBPP Electronic bill presentment and payment - billers, banks or central service providers establish an electronic bill capacity and provide customers with billing information and the capability to effect bill payments. The customer, in an online connection, accesses his/her billing information, reviews the bill(s) and provides the billers, bank or csp with payment instructions.

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eCommerce The buying and selling of goods and services on the Internet.

EMV EMV (Europay, MasterCard, Visa) is the name given to the specifications drawn up by the EMV working group to ensure interoperability of smart cards across competing payment systems.

ePurse An ePurse or electronic purse is a smart card on to which money is pre-loaded. The card is then used to make small value payments for which the customer does not have to sign an authorisation form. Each time the card is used, the value of the transaction is deducted from the total stored on the chip. When the pre-loaded amount is exhausted the card can be re-loaded with more money.

eWallet An eWallet is a software solution that facilitates online payment through automatically populating fields when a customer is purchasing a product. The eWallet stores customer card and billing information and in some instances is able to allow the purchase to be made without transmitting ‘true’ card details to the merchant.

Emerging money transfer systems These are relatively new systems for sending money abroad. They could be technologybased, such as online wallets, or a new service such as withdrawing funds received through an ATM.

Hawaladar Hawaladar stands for ‘broker’.

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IMTS ‘Informal money transfer systems’ are systems, other than official ones, through which migrants send money to their country of origin. They operate outside or in parallel to conventional regulated channels.

Inflow of remittances Flow of workers’ compensation and salaries entering a particular region.

Internet bank A bank for which the Internet is the primary channel for serving its customers.

Money transfer facilitators Typical non-bank specialist money transfer services providers that operate mainly through a network of agents such as Western Union and MoneyGram.

Online wallets These are online account-based money transfer solutions by non-bank organisations, where consumers can open a free account for online purchases. In addition, many of these providers offer an online platform where money can be transferred between a sender’s account and a receiver’s account. Generally, money is deposited in the account through credit or debit cards or bank transfers.

Outflow of remittances Flow of workers’ compensation and salaries leaving a particular region.

Macropayment A macro payment is defined as a payment that is over £10.00 in value.

Micropayment 117

A micropayment is defined as being under £10.00 in value.

mPayment An mPayment is a payment for goods or services that occurs from a mobile device, such as a mobile phone or a personal digital assistant (PDA).

P2P P2P is an abbreviation that stands for person-to-person or peer-to-peer.

Pay later card Pay later cards can be divided into deferred debit cards and revolving credit cards. Transactions with deferred debit cards are automatically debited from the account holder’s account, but only once a month. Thus banks give consumers an interest-free extension of the payment period, which is the key feature of a deferred debit card. With revolving credit cards, on the other hand, only a pre-agreed instalment is due on the invoice date. The rest can be carried forward in the form of a loan. Amounts outstanding accrue interest at the pre-agreed rate.

PDA PDA (Personal Digital Assistant) is a term used for any small, mobile hand-held device that provides computing and information storage and retrieval capabilities for personal or business use.

PIN PIN stands for personal identification number.

Prepaid card A card that cardholders can load up and then use to spend only the amount that is loaded on the card.

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Pseudo Card Number (PCN) A card number generated uniquely for a specific online purchase.

Reverse billing Using a reverse billing solution all transactions are billed to the customer’s mobile, landline or ISP bill, which is typically invoiced on a monthly basis.

Secure Sockets Layer (SSL) A protocol ensuring the confidentiality of credit card information through data encryption when processing payments between the cardholder and the merchant via the Internet.

Secure Electronic Transaction (SET) A protocol developed by MasterCard and Visa in the 1990s for securing online credit card payments.

Secure Payment Application An authentication protocol developed by MasterCard.

SMS SMS (Short Message Service) is a service for sending messages of up to 160 characters (224 characters if using a 5-bit mode) to mobile phones that use GSM communication. GSM and SMS service is primarily available in Europe.

The biller-direct model The biller establishes an electronic capability through its website and provides its customers with their billing information and the capability to effect bill payments directly from the site. The customer accesses his/her billing information, reviews the bill and provides the biller with payment instructions. 119

The thin consolidation model A central service provider consolidates electronic bills from different types of billers, so that the customer has a single site of access for viewing all billing information and effecting payments electronically.

The thick consolidation model A central service provider consolidates summaries of electronic bills from different types of billers. The customer accesses the aggregator site for viewing billing summaries and is then linked to the biller’s site, where billing details are provided and electronic payments can be effected.

Universal Card Authentication Field (UCAF) A hidden field provided by the merchant on their payment page critical to MasterCard’s SecureCode and Maestro’s Online Debit Solution.

Universal Serial Bus (USB) A plug-and-play interface between a computer and add-on devices (such as audio players, card readers, joysticks, keyboards, telephones, scanners and printers). With USB, a new device can be added to your computer without having to add an adapter card or even having to turn the computer off.

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