Competition in the debit card issuing market

30th May 2018
Contributor:
George Willis
George Willis

The news that the UK’s fifth largest debit card issuer, Santander, plans to transition its debit card portfolio from Visa to Mastercard threatens to have a large impact on the dynamics of the card schemes and the UK card issuing market. This comes after a similar announcement in 2017, when TSB also changed its debit cards issuance from Visa to Mastercard.

Background

Historically, Visa has dominated the UK debit card market, with partnerships with all major UK issuers and a market share of greater than 95%. Mastercard has had a more significant presence in the credit card issuing market, with a market share of 65%. These markets have been very stable and have experienced very little churn over the years. However, with the changes recently announced by Santander, Mastercard now has an 18% share of the UK debit card issuing market – compared to less than 5% previously.

What does this mean?

The market dynamics have changed radically. Issuers across Europe historically had an inherent preference for Visa due to an ownership structure that was related to Visa volume, while Mastercard’s European entity has been publicly listed since 2006.

Additionally, the sale of member-owned Visa Europe to publicly listed Visa Inc. means that European card issuers no longer have an ownership preference towards Visa (following a €18 billion merger, over 70 times EBITDA). This means that issuers will now be willing to migrate away from Visa, and the door for Mastercard to chip away at a long-dominant Visa debit card issuing market has opened. However, there needs to be a catalyst for this migration.

Historically, where churn did occur it was as a result of interchange fee variations – for example, HSBC and RBS moved their debit cards from the domestic UK Maestro to Visa in 2009, leading to the decline of the domestic scheme altogether. However, since Interchange Fee Regulation (IFR) in Europe, there is a perception that Visa and Mastercard can no longer compete for issuing contracts on cost. However, this isn’t really accurate, as Visa and Mastercard are now likely to compete over issuer scheme fees.

Previously, CMSPI understands that issuing scheme fees and acquirer scheme fees in Europe were broadly similar, primarily because market-leader Visa Europe was not-for-profit and owned by both issuers and acquirers. Under a commercial profit seeking model, however, Visa is far more inclined to appeal to issuers than acquirers, given that merchant acceptance is so high. The mechanism it would use to do this would be via lower issuer scheme fees. At CMSPI we’ve seen evidence of acquirer scheme fees increase (passed on to merchants, of course), subsidising lower issuer scheme fees. This competitive dynamic is bad news for merchants as it leads to higher costs.

Conclusion

Following key contract losses in the UK, Visa will undoubtedly want to win business back – this competition could put further upwards pressure on acquirer scheme fees. CMSPI believes a potential solution to this problem would be a regulatory mandate that acquirer and issuer scheme fees are identical. This would mean that any move by Visa or Mastercard to win issuing business would be met by a corresponding benefit to acquirers and, therefore, merchants.

This is of course a potential solution for the European Commission as part of its ongoing IFR review. One key consideration is that it would need ongoing monitoring for compliance – and we’ve seen in the U.S. that circumvention of free-market based solutions can occur. Merchants must remain aware of these developments, as any market changes will almost certainly have a knock-on effect to the merchant community.

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