Memorandum submitted by MasterCard
1. SUMMARY
1.1 This submission provides the Committee
with a brief introduction to MasterCard, outlines the structure
of the company's UK business and provides an overview of its payment
card products.
1.2 The submission seeks to draw to the
Committee's attention the development of prepaid cards and identifies
how this relatively new product offering could benefit those who
currently find it difficult to access mainstream financial services.
1.3 In addition the submission draws to
the Committee's attention the fact that for many younger consumers
credit reference checks are flawed because only commercial loans
are identified. Those graduating from university may have substantial
debts incurred through student loans and tuition fees but these
are not identified through the credit reference process.
2. INTRODUCTION
TO MASTERCARD
2.1 MasterCard International is a leading
global payments solutions company that provides a broad variety
of innovative services in support of our global members' credit,
deposit access, electronic cash, business-to-business and related
payment programs. MasterCard manages a family of well-known, widely
accepted payment card brands including MasterCard®, Maestro®
and Cirrus® and serves financial institutions, consumers and
businesses in over 210 countries and territories. The MasterCard
award-winning Priceless® advertising campaign is now seen
in 105 countries and in 48 languages, giving the MasterCard brand
a truly global reach and scope.
2.2 MasterCard UK Ltd is the UK operation
of MasterCard Europe.
2.3 MasterCard does not issue cards, provide
credit, nor acquire transactions.
3. MASTERCARD'S
BUSINESS
3.1 MasterCard's UK business customers comprise
those banks or other financial institutions that issue payment
cards and/or acquire transactions in the UK.
3.2 A typical card transaction will involve
four parties; in addition to the cardholder and the retailer there
is the bank that issued the card (issuing bank) and the retailer's
bank (acquiring bank).
3.3 MasterCard provides the technical mechanisms
to process the transaction as well as international brand acceptance.
3.4 In addition MasterCard acts as the guardian
of the scheme, maintaining standards of service to all parties,
combating fraud and developing technical solutions and new products
to meet changing customer demand.
3.5 There are currently 70 financial institutions
who are UK members of the MasterCard scheme. They issue a combination
of credit, debit, ATM (cash) and prepaid cards. The accompanying
brands are MasterCard®, Maestro® and Cirrus® respectively.
3.6 MasterCard is a global credit card scheme
with over 725 million cards issued and accepted by over 22.3 million
merchants' locations worldwide.
3.7 Maestro is a global debit card scheme
with ATM functionality. There are 545 million cards issued. Maestro
cards are accepted by 6.4 million merchants.
3.8 Cirrus is a global ATM card that can
be used to obtain cash from over 1 million ATMs worldwide.
3.9 In 2004 there were approximately 69.8
million credit cards and 4.4 million charge cards in issue in
the UK (source: APACS). By Q3 2005 there were 30 million carrying
the MasterCard brand. Of the 66.8 million UK debit cards (2004;
source: APACS) around 19 million are Maestro or Maestro/Cirrus
enabled.
3.10 At the end of 2004, there were 12.5
million Cirrus enabled ATM cards in issue which accounted for
approximately 50% of the ATM cards market in the UK. This figure
does not include Maestro/Cirrus enabled cards.
3.11 On the transaction acquiring side of
the business there are 13 financial institutions (in the UK) which
are MasterCard scheme members.
3.12 Membership of the MasterCard/Maestro
scheme does not preclude financial institutions from membership
of competing schemes. Indeed most issuers are members of more
than one payment card system and issue cards on more than one
card scheme.
3.13 MasterCard does not provide store cards
but a number of retailers are MasterCard members, or partner with
MasterCard members, to offer their own credit cards on the MasterCard
platform.
3.14 The 2004 figures for UK credit and
debit card transactions are:
— Credit and charge: 2.16 billion transactions
amounting to £144 billion
— Debit: 5.76 billion transactions
amounting to £288 billion. [Figures Source Apacs.]
3.15 MasterCard believes that its portfolio
of products, provided through banks, building societies and other
institutions, make a significant contribution to the workings
of the economy in general and provide benefits to a wide range
of consumers including those on limited means.
3.16 While accepting that all products will
not be suitable for all consumers, the facilities available provide
effective mechanisms to help financial service providers to tackle
financial exclusion whether that is caused by geographical, social
or financial reasons.
3.17 The Committee has previously raised
its concerns about the growth of IAD provided ATMs that charge
to withdraw cash. A particular concern was for communities in
remote geographical locations and some inner city estates which
no longer had a local bank or building society branch.
3.18 From our experience many residents
of such communities use the cashback facility on their debit card
to draw cash. This is a free service to cardholders as well as
benefiting the retailer who reduces the costs associated with
handling, securing and banking cash. Cashback is only provided
in association with a debit card purchase but the minimum purchase
required to secure cashback is usually quite small (£5) and
many retailers will advance cash of as little as £5 or up
to £50 per transaction. Cashback is not currently available
on MasterCard credit cards.
4. PREPAID CARDS
4.1 For some years there has been concern
from political, regulatory and consumer representatives about
financial exclusion. The Treasury Task Force has addressed various
elements of the banking and payment industry and worked with the
major players to ensure that products such as the basic bank account
are available from High Street banks and the Post Office.
4.2 That said, the new basic bank accounts
have little penetration in the intended market in part because
many in the target audience have a "cash budgeting mentality".
4.3 All too often the financially excluded
miss out on the "best buys" and "discounts"
available to more affluent consumers.
4.4 This is not a phenomenon exclusive to
the financial services industry.
4.5 The introduction of mobile phones was
initially restricted to those with a good credit reference and
the ability to sign up to a long term contract, yet the benefits
of mobile communications were the same for all consumers irrespective
of their financial standing and credit rating.
4.6 The mobile phone industry addressed
this issue by introducing "pay as you go" phones which
allowed those less well off to pre-purchase set amounts of phone
calls without running the risk of overextending themselves with
a large bill at the end of the month which could not be paid.
4.7 In addition, the "pay as you go"
model also enabled parents to provide their children with a valued
product which enabled:
— the parent to check on their child
when away from home
— the child to contact the parents
or police in an emergency, and
— access to a "status" product.
4.8 Crucially, the "pay as you go model"
also enabled parents to control the expenditure incurred.
4.9 Inevitably, the call charge rates for
the "pay as you go" model were higher than the unit
cost of a standard contract. This reflected the capital costs
of the phone, as well as the administrative costs of connecting
to the network and the uncertainty of the revenue stream.
4.10 That said, the growth of the "pay
as you go" products has clearly demonstrated consumer demand
and the consumer's willingness to pay the slightly higher call
charges associated with his/her preferred product choice.
4.11 Prepaid cards perform the same function
in payments.
4.12 The advent of the prepaid card will
have a major impact on the issue of financial inclusion.
4.13 E-retailing is possibly the fastest
growing sector of the UK economy and for many consumers purchases
made online provide considerable discounts. The majority of consumers
now have access to the internet either at home or from work. For
those who do not have personal access many public libraries provide
free access.
4.14 The vast majority of e-purchases are
transacted using a payment card. Frequently these are debit or
credit cards but the recent introduction of MasterCard's prepaid
products enables consumers without bank accounts and credit status
to transact online.
4.15 In common with credit cards, prepaid
cards can be used to set up standing orders for regular payments
such as utility bills enabling consumers without bank accounts
to access the "direct debit" discounts offered by many
providers. Chip & Pin enabled prepaid cards can be used to
withdraw cash from ATMs as well as transacting purchases in shops,
online or by post.
4.16 Consumers can "top up" their
card and set their personal card limit from within their budget
knowing that they cannot over extend themselves thus avoiding
the risk (or fear) of becoming overdrawn.
4.17 Use of the card enables the cardholder
to:
— avoid the risks of lost or stolen
cash;
— budget within their means;
— access discounts offered by merchants
for direct debits (eg utility companies—avoiding the premium
rate key meters etc);
— transact online accessing the savings
provide by e-retailers (eg budget airlines, e-bay, online insurers
etc);
— make telephone purchases;
— make mail order purchases; and
— receive payments from employers or
others avoiding expensive cheque encashment fees.
4.18 Inevitably, there is a cost to a convenience
product of this type. Each consumer has the opportunity to decide
whether the fee charged is more than outweighed by the increased
security over cash transactions, the provision of a gateway to
mainstream discounts and the budgetary control offered. Fees charged
are set by issuers and are subject to market competition.
4.19 One particular feature of certain prepaid
cards is the ability to set spending criteria. A parent providing
a prepaid card as "pocket money" could have the card
restricted so that alcohol or tobacco products cannot be purchased.
4.20 Equally, systems could be set so that
a parent providing their child with school lunch money could have
the card programmed only for use at the school terminal. Where
a child is entitled to free school meals use of the same card
type would avoid drawing the attention of other pupils to the
fact.
4.21 There are a number of discussions already
underway to enable governmental entities within the UK to use
prepaid cards to pay a variety of benefits, often to those recipients
who do not have bank accounts. These could be topped up regularly,
reducing costs to the public purse. In the United States, governmental
agencies issue MasterCard prepaid cards for disaster relief, child
welfare payments and unemployment insurance, among other purposes.
4.22 MasterCard brings significant experience
to the UK from its experience in prepaid cards around the world
and partners with UK banks and companies to help them introduce
these products into the UK.
5 INNOVATION
IN PRODUCT
DESIGN
5.1 MasterCard goes to great lengths to
work with its financial institutions and other partners to provide
flexibility in product design. A recent example is a two in one
card. The credit card includes a facility to transfer two major
purchases a year to an associated loan account reducing the cost
of borrowing from x% APR to y% APR. In effect this enables a consumer
to combine the convenience of a credit card purchase, the security
of Section 75 of the Consumer Credit Act and a competitive loan
rate in comparison to most retail provided credit.
5.2 Gaining access to financial services
is frequently difficult for those consumers who do not have a
bank or credit history. A number of card providers have addressed
this "sub-prime" segment by issuing low credit limit
credit cards to higher risk customers. These cards still provide
the consumer with the interest free period common to credit cards
and enable the cardholder to develop a credit history. Used prudently,
the cardholder has the convenience of using a credit card, up
to 6/7 weeks interest free credit, the security of Section 75
and can establish a credit history providing access to more main
stream financial service products in the short/medium term.
6 CREDIT SCORING
6.1 One particular barrier to financial
inclusion is when a consumer loses their credit rating. Improvements
in data sharing between different lenders and the credit reference
agencies has improved credit scoring and hence reduced the risk
of over indebtedness.
6.2 However, for students graduating from
university their credit rating fails to reflect their tuition
fees and student loan debt. Banks offering credit to these newly
employed clients are making credit risk assumptions based only
on the data available from commercial lenders. While student loans
could be categorised as being at a "preferred rate"
the total loan outstanding could be in excess of £20k and
is not reflected in the bank's credit assessment. This combination
of visible and invisible debt could lead some borrowers to default
with a consequential loss of their credit rating. In extreme cases
some may file for bankruptcy with losses incurred by the banks
and the public purse.
January 2006
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