The impact of the euro on the payment card industry -
How payment cards will facilitate the migration to the euro

 
 

Christoph Baert


 
 
 

INTRODUCTION

Although euro notes and coins will not be introduced before 2002, cardholders will begin to be in a position to transact in euro as from January 1999 when making payments with pre-paid, debit and credit cards. As such, Eurocard-MasterCard and Maestro cards will be an excellent tool for customers to gradually adapt to the single currency as they will help consumers to familiarise themselves with the euro before the physical introduction of the new currency.

Cardholders will come across the euro in a number of different ways: at certain retailers when paying for goods and services, on transaction receipts generated by card terminals and on periodic statements issued by the bank.

As from 1999 onwards - in addition to indicating prices in both the national currency (NCU) and the euro (known as dual price display) - an increasing number of (mainly large) retailers will offer cardholders the possibility to transact in euro when paying by card. Even though initially the majority of retailers will continue to operate in their NCU only, the transaction receipt generated by the card terminal, will, in the majority of EMU countries, indicate the euro countervalue.

Cardholders wishing to familiarise themselves with the new currency early on may ask their bank to convert their card account to the euro. Cross-border euro payments will be shown on statements without any conversions from transaction to billing currency. As will be the case for transaction receipts, periodic cardholder statements will include euro countervalues.
 
 

IMPACT OF THE EURO ON EUROPAY INTERNATIONAL’S AND THE MEMBER BANKS’ TRANSACTION PROCESSING SYSTEMS AND ATM NETWORK

Europay International’s strategy for the migration to the euro is threefold:

In terms of pure technical compliance, the introduction of the euro is insignificant for Europay International’s transaction processing systems. All system applications (authorisations, clearing and settlement of transactions) already operate in a multi-currency environment. In that respect, the arrival of the euro is the introduction of a new currency and the removal of 11 currencies. It is however the euro conversion rules, together with the introduction of the euro, that have resulted in the implementation of some minor system adaptations.

The dual currency environment during the transitional period, and the fact that all electronic payments must be in euro at the latest by 31 December 2001, causes banks a number of major technical and logistical challenges. Handling two currencies in parallel at the retail level will be a massive undertaking for acquiring banks and retailers. Acquiring systems are often designed with the concept of a single ‘base currency’. Domestic processing networks will therefore need to be upgraded to enable them to recognise whether the transaction currency is the euro or the national currency. Most domestic processing networks are therefore being upgraded to carry a currency indicator in the transaction message.

ATMs must be looked at as early as 1999 as the software must be euro-compatible for related services (such as checking one’s balance in euro). Looking ahead to 2002, a big-bang migration for ATMs is the option chosen by the banks in most countries, e.g. Germany, Austria, Belgium, the Netherlands. Other countries are expected to migrate their ATMs in a short period of time (between two and three months).

Issuers will need to enhance cardholder statements to introduce increased transparency in respect of processing charges. They also have to make software changes to include euro/NCU equivalents for information, and - on demand of cardholders - respond to cardholders’ requests to convert card accounts from NCU to the euro.
 
 

POS MIGRATION SCENARIOS FOR CARD TRANSACTIONS DURING THE TRANSITIONAL PERIOD

Three possible scenarios at the POS terminal during the transitional period have been agreed on an industry level. There is total flexibility for merchants/acquirers to operate under each of these. Merchants may switch from one scenario to another at any point in time during the transitional period. The choice of one scenario over another is determined by different factors: consumer preference, technical capability of POS equipment and acquirer systems (e.g. dual currency acquiring capability). In some countries, national bodies may mandate a specific method of implementation and operation.
 

Scenario 1: Mono Currency Only

Only one currency at a time can be supported by a particular POS in this scenario. The transaction includes only one currency (the NCU or the euro), depending on the configuration of the terminal accepting the payment card. The cardholder has no choice of currency. Under this scenario, only one currency will appear on the sales voucher for cardholder verification. This scenario results from some of the existing POS equipment for which it may be too costly to upgrade for the temporary situation of the two currencies existing alongside each other. In addition, the message format between the POS device and the acquirer host does not always include a currency code indicator that enables the acquirer to determine whether a particular type of transaction was in euro or the NCU.

In order to avoid confusion and possible cardholder disputes between the two currencies in operation, the scheme rules mandate that the transaction currency denomination should be clearly printed on the transaction receipt.
 

Scenario 2: Mono Currency Only with Advisory Conversion

Under this scenario, the terminal operates in one currency (similar to Scenario 1). However, the cardholder is provided with the countervalue in either euro (if the terminal is operating under NCU) or NCU (if the terminal is operating under euro) for information/advisory purposes. The countervalue (in euro or NCU) printed on the ticket issued by the merchant and on the transactions sales slip generated by the POS (either electronically or manually) must be mentioned at the total level (as opposed to the item level) and preferably be printed at the bottom of the receipt (below the usual signature panel as to separate it clearly from the transaction currency).
 

Scenario 3: Dual Currency capability of Terminal

Under the third and most flexible scenario, the cardholder will have the possibility to transact in either euro or the NCU by using the same POS terminal. The cardholder therefore has the choice of currency. This scenario may be combined with Scenario 2 as the euro or NCU countervalue can be indicated on the receipt.
 

Traditional paper vouchers

Paper vouchers may fall under each of the above described Scenarios. Scenario 2 is less favoured for paper vouchers as it contains a far greater potential for human error. The idea of a different colour voucher for euro paper transactions is preferred by several countries. Cheques are expected to carry a pre-printed currency code.
 
 

THE READINESS OF RETAILERS TO OFFER EURO AS A TRANSACTION CURRENCY AS FROM 1999

Less than four months before the launch of the euro, the question remains what the attitude will be of the retailers during the transitional period in terms of POS readiness to transact in euro. Will retailers make use of the entire transitional period to upgrade their terminals or will the majority of them decide to implement system changes towards the end of 2001?

The situation varies by country. The banks is most countries (like Belgium, Germany, Ireland, Spain, etc.) are of the opinion that certain retail sectors will wish to start early with the euro as a transaction currency for card payments. They plan for an early migration for competitive reasons and in order to avoid a "big-bang" at the end of 2001.

It remains very difficult to predict the speed of transition in the retail sector. A decisive factor will be the attitude of large retailers and consumers. For example, consumers who receive their salary in euros will also wish to spend their money in that currency. The majority of merchants are not expected to offer euro as a transaction currency before 2001. The main merchant sectors expected to offer euro before 2002 are those located in border areas, airports, large international merchants such as hotels, car rentals, mail & telephone order, electronic commerce, etc. The T&E industry will be among the first to publish their prices and accept payments in euro.

The agreement recently concluded between representatives of retail and consumer organisations on the display of a quasi-official euro label may well provide an impetus to retailers for upgrading their POS systems early on in the transitional period. The label shall distinguish between those retailers simply abiding to a minimum number of euro ‘friendly’ standards of good practice and those who also accept payments in euro.

The display of the label will signal that the retailer complies with the following commitments: dual display of prices on various categories of goods; correct use of the conversion rates and rounding rules; not charging more when payment is in euro; training staff on the euro; and accepting euro payments by card or cheque.
 
 

HOW PAYMENT CARDS WILL FACILITATE THE MIGRATION TO THE EURO

The Transitional period (1999-2002) and the final changeover period (January-July 2002) represent a unique opportunity to promote the use of payment cards and increase transaction volumes to the benefit of banks, merchants and consumers:

One of the reasons for having a long transitional period was to create a critical mass of transactions and a general acceptance of the euro before the introduction of the euro notes and coins. Whilst this is almost guaranteed to take place for wholesale financial transactions, the situation is less clear in the retail market.

Payment cards will also play a facilitating role during the final phase of the euro migration between January and June 2002. During at least the first weeks of the final changeover period, problems will exist with consumers wanting to pay in NCU, when retailers will be giving change in euro (or vice versa).

Wide use of cards (especially for small payments) will help to avoid these practical problems. From the retailer and consumer perspective, card payments involve the same handling process irrespective of their currency. The more cash is taken out of circulation and replaced by electronic payments, the easier the physical migration will be.
 
 

INCREASED PRICE TRANSPARENCY ON CARDHOLDER STATEMENTS

As far as intra euro-zone transactions are concerned (both the cardholder and the merchant are located in the euro zone), cardholder statements will have to indicate the fixed conversion rate (cross rate or the rates against the euro) separate from any other charges that the issuer may want to continue to charge (referred to as the issuers’ mark-up which is today part of the exchange rate for converting foreign currency transactions).

In other words, the conversion rate and any other charge must be ‘unbundled’. However, it should be well-understood that charges for making cross-border transactions are not legally challenged by the introduction of the euro. It is highly recommended to introduce this element of price transparency ahead of 1999, as not to create the perception among cardholders that they are faced with a "new" charge resulting from the introduction of the euro.
 
 

THREATS AND BUSINESS OPPORTUNITIES RESULTING FROM THE EURO

Although most of the advantages of payment cards - such as convenience, security, etc. - will remain, some advantages over cash will be reduced in 2002 once euro cash will be around. Cash will not know any boundaries in a large part of continental Europe and across borders. Payment cards clearly have a head start over cash, but as soon as euro notes and coins are circulating, the three year window of opportunity ends.

Specific business opportunities resulting from the euro are pan-European acquisition, increasing the points of acceptance and purse inter-operability.

The need for banks to support dual-currency acquirer processing during the transitional period is expected to accelerate acquisition of transactions across borders. A larger number of acquirers will probably implement full multi-currency processing capabilities, enabling them to process centrally transactions from specific type of retailers across Europe. Those acquirers best positioned to exploit the euro dual currency environment will be able to establish a leadership position in the pan-European merchant acquiring business.

There is undoubtedly an opportunity for banks to extend the use of prepaid cards, especially in sectors such as vending machines, car parking and toll payments, where the device has to be upgraded anyway to accept the new coinage. This opportunity should be taken to insert a card reader.

There are approximately 3.5 million vending machines (offering drinks, snacks, cigarettes) and 6 million other coin-operated machines (parking, public transport, payphones, etc.). These machines operate for 90% on coins. It is estimated that the new euro coins will be widely available around the 6th/8th week after the 1st of January 2002. Vending machines must be euro compatible by that time. In order for this to occur, all machines must be refitted. This represents a unique opportunity and strong business case to install vending machines with a card reader.

Clearly, cardholders will derive the maximum benefit from electronic purse if domestic purse products can be used across borders. The euro strengthens the business case for the development of a cross-border inter-operable prepaid card. Europe currently has close to 20 different purse schemes all operating exclusively at national or local levels. In the absence of an agreement on a technical standard for purse inter-operability, the industry risks to end-up with as many (electronic) euros as countries participating in EMU.

With interoperability at the forefront of its purse strategy, Europay’s Board of Directors recently endorsed the adoption of a two-level approach to achieve electronic purse interoperability. For the first level, "federations" - based on existing technology are being facilitated. This aims to preserve Member interests by facilitating interoperability between existing domestic purse schemes across Europe and thus leverages on investments and technologies already made. In the second level, Europay will define a fully interoperable purse product under the Clip brand, which will be based on an open electronic purse standard.

The business case for a cross-border interoperable purse is furthermore fueled by a number of factors: increased travel in Europe, euro cash will be useable in all countries as from 2002 and a strong political will within Europe to develop a common purse solution.
 

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In conclusion, payments cards can play an important role in facilitating the migration to the euro. It is now up to the banks and the retailers to make a number of technical changes to the existing infrastructure and inform the large public about the possibilities to pay in euro as from the 1st of January 1999.
 

13-09-1998


 
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