European and U.S. financial institutions hoping to unlock the potential for U.S.-style revolving credit cards in Western Europe will continue to face significant cultural, legislative and technological challenges. New research from TowerGroup’s Consumer Credit service finds that though Western Europe represents a consumer credit market potentially one-third larger than the U.S., issues such as a traditional reliance on debit products and the predominance of country-by-country card processing networks remain barriers to sweeping change in both European payments habits and infrastructure.
The region discussed as Western Europe in TowerGroup’s new research comprises the United Kingdom, Portugal, Spain, France, Italy, Germany, Scandinavia, Belgium, Netherlands and Luxembourg. Highlights of TowerGroup’s findings include:
Western Europeans continue to favor debit cards, specifically the “deferred debit” type of card which allows issuers to deduct purchases made on a 30-day cycle directly from a cardholder’s pre-established account. 73% of all cards in the European Union (not including the UK) are debit cards, versus only 27% that are revolving credit cards. “True” credit cards in the U.S. sense-a plastic-based revolving line of credit on a 36-month cycle-remain essentially a “niche product” in Europe. The UK represents a “mid-point” between the U.S. and Western Europe-57% of UK cards are debit cards versus 43% that are credit cards.Culturally, Western Europe has tended to be a “savings-oriented” society, in contrast to what observers have termed the U.S.’s “borrower” mentality. This has resulted in slower adoption of revolving credit products for payments. In addition, bank secrecy legislation has made it difficult for financial institutions to execute the kind of direct-mail marketing campaigns that have driven credit card growth in the U.S.,because those laws impede comprehensive statistical account scoring.Profitability may become a driving force for change. Western Europe’s total combined dollar volume for debit and U.S.-style credit will be approximately US$795 billion in 2001, versus U.S. dollar volume for credit alone of US$1.35 trillion. And though Western Europeans carry almost half the number of total cards as U.S. consumers, European banks’ IT expenditures for card processing will be 88% as much as U.S. processing costs for the same period.The lack of common technical standards remains a central challenge. Country-by-country credit card processing and proprietary national systems predominate in Western Europe. This has led to consistently higher processing costs for European financial institutions, on top of less income derived from a low-margin, debit-heavy mix of products. Yet some progress on the technical front is now evident. First Data Europe has begun card processing for three of the largest German banks, just as one of the largest German issuers, DeutscheBank, is gearing up to process cards for other banks using a U.S.-sourced technology platform, CAMSII from CSC.
“For years, observers have seen evidence of a new climate in European consumer lending in the limited but real success some U.S. issuers of plastic credit have had in the UK,” said Theodore Iacobuzio, a senior analyst in TowerGroup’s Consumer Credit practice. “Yet despite the swift progress the region is making toward economic and fiscal integration, it’s clear that the current payments infrastructure and ingrained preferences of European consumers for debit-based products will not be transformed overnight.”
Iacobuzio noted that cultural, technical and legislative barriers will likely allow for only a slow, incremental evolution toward more credit card offerings. “Proprietary processing networks remain a significant issue. Until the standards issue is resolved-most likely under the pressure of a central banking authority-Europeans will continue to pay more for less. By addressing technical standards relative to card processing and bringing more third-party, cross-country processors on the scene, European banks could leverage economies of scale that would reduce overall costs. And as the profitability pressures long faced by American banks continue to increase for Western European financial institutions, TowerGroup expects to see more of these institutions looking more seriously at cards as a instrument for lending as well as payment,” he said.