Can Stored Value Cards Reduce the EU Cash Mountain?

The European banking industry is experiencing rising costs due to the increasing use of cash, and barriers to efficiency due to the different eurosystem central bank rules for banks to pay in and get value on cash at the counters of various euro system members. In order to address this issue, the single euro payments area (SEPA) cash framework and industry spokespeople are considering several solutions in addition to the harmonization of the pay-in process:

• Charging for ATM withdrawals from bank accounts.
• Thinning out the number of free ATMs and allowing non-banks to charge.
• Stored value cards (noting that this service can contain acquiring/interchange costs for merchants while appearing cheap for the consumer).

The law of unintended consequences applies in this space, as consumer and merchant behaviour is very sensitive to environmental change and to one another’s responses to it, such as price increases by the merchant to offset acquiring/interchange costs, or discount for cash, or refusal to accept certain cards or larger cash withdrawals by consumers.

Need for Industry Focused Solutions

These responses are self-perpetuating, and lead to even higher levels of cash in circulation. If banking industry solutions are not highly sensitive to the dynamics of the market and the needs of users or merchants they will not be accepted.

For example, consider the latest events in Belgium. At the request of the European authorities and the European Payments Council (EPC), and in order to comply with the SEPA cards framework, the banks have worked on de-commissioning Bancontact and Mistercash (the national debit card schemes) and replaced them with Maestro – incurring considerable investment costs. Now the merchants have demanded that Bancontact and Mistercash be re-commissioned because the Maestro acquiring/interchange fees are too high. Maestro is SEPA-compliant with EU-wide acceptability while Bancontact and Mistercash are not SEPA-compliant but that advantage doesn’t count for anything at a certain price point.

Card usage will be unlocked by confidence in acceptability, which in turn is unlocked by low acquiring/interchange fees, i.e. merchants could apply a discount to payment by debit card rather than cash, and then consumers would be willing to use debit cards (a UK example) for purchases below the magic £5 barrier.

Introduction of SVCs

Certain industry representatives are pushing stored value cards (SVCs) as the way to reduce the cash mountain. No doubt the brands that hope to sit behind these cards are rubbing their hands with glee. SVCs have different features and we can make the following distinctions:

1. Single-purpose SVC with no PIN:
• Invisible purpose (e.g. employer canteen).
• Visible purpose (e.g. Oyster card for London Transport).
• No security – the more visible and commonly used, the more attractive the SVC will become to steal.
• The stored balance is invisible on the face of the card itself.
2. Multi-purpose SVC:
• Balance is invisible.
• No PIN, i.e. low security levels similar to cash.
• With PIN – like a debit card but with the amount locked into the purpose of the card and its acceptability.

All SVCs have the advantage that the maximum possible loss to the holder if it is lost or stolen is the amount stored at the time of loss. The consumer will, of course, consider all the pros and cons of keeping money on SVCs rather than cash or debit cards. For instance, the advantage of the Oyster card system on London transport is that it includes a 50% discount on the journey and no queuing at the ticket office.

Setting aside issues regarding the size of the acquiring/interchange fee that a merchant incurs when accepting a SVC (and this will not be small if the SVC carries a global card brand), one has to contrast the SVC against the traditional advantages of cash to appreciate its shortcomings as a substitute:

• Combining funds: The balances on two SVCs cannot instantly be combined in your wallet to make one payment for a purchase that costs more than the combined stored balances. Both cards have to be used, which takes longer at the till, and can cause problems if the first card works and the second doesn’t. The transaction results in a single sale reference on the merchant’s side with two card transactions. But what happens when the goods are faulty and the purchaser wants a refund? Can the merchant’s systems cope?
• Divisibility: The balance cannot be split so that simultaneous purchases can be made in different shops. £25 in cash can have £5 peeled off from it; £25 on a SVC can’t.

• Acceptability: There is no guarantee that all traders will accept all cards for all purchases in all amounts. Depending on the acquiring/interchange fees, a merchant will refuse a card completely or below a certain amount. A merchant may refuse SVCs that are branded the same as debit cards if the merchant thinks they might cost them more.
• Anonymity: Consumers (should) believe card transactions are traceable, even if the card has no name on it. One assumes that an anonymous card that has references on it will be able to be matched to data records at the card issuer where the cardholder’s identity is either explicitly held or easily distinguished. This can still be an advantage where the merchant cannot discover the holder’s identity: there are some substantial niches on the Internet where this is a prime driver, but cash is not a viable alternative for the buyer of these kinds of services.
• Lack of security: cash is not secure and neither are SVCs without a PIN. The latter’s security is enhanced if its purpose is invisible, or if its purpose is inaccessible to the thief (e.g. an Oyster card stolen in Sydney) or if using it would compromise the thief (e.g. gym membership card). SVCs with a PIN would have the same security as a debit card so the consumer may consider it to be a debit card, albeit one which requires re-loading, and where the balances don’t attract interest or cannot combine with other purposes.

This is not to say that there cannot be niche roles for SVCs. They could be used as gifts or prize vouchers for a single shop or for all the shops in a certain shopping centre or for a traveller concerned about fraud who wants to have €600 to spend but does not want to carry cash, and does not want to have their mainstream debit or credit card (mis)handled by a foreign merchant.

Yet these are not areas where SVCs will have a mainstream effect on the consumer operating in person in their own country and currency, with their own earned money. So what is the answer?

Conclusion

The industry knows it, and so does the euro system: a debit card with low acquiring/interchange fees and high acceptability. Those two factors combined give merchants and consumers confidence, and bring the advantages of the card to the forefront of the merchant’s mind: automation, security (‘No cash in our till’) and no time wasted going to the bank.

The advantages of a card for the consumer will then outweigh the risks and inconvenience of getting and holding cash.

The European Commission is transmitting this message loud and clear to the industry: co-branding national debit cards with a global brand will not deliver SEPA if acquiring/interchange costs rise for the merchant. There needs to be a debit card for POS and ATM with no charge to the consumer, and low acquiring/interchange costs for the merchant.

If the debit card scheme is not delivered, the cash in-circulation will rise far faster than the trends that caused the drafting of the SEPA cash framework, and the banks will be pinned down for having taken a different view on SEPA for cards, by having their fees chipped away.

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