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MSC by region - Lafferty Global Research

As a region, Europe offers the lowest merchant service charges, closely followed by Asia-Pacific; Latin America has the highest average charges, closely followed by Africa. Retail Banking Opinion: Surfing the Rubicon, or how banks are making peace with the fintech industry The Keyfacts Report — the insider's guide to UK retail banking Arjan Molenkamp: The true path to end-to-end customer service Design: ADCB's new uBank digital branch Cards and Payments The Mobile Wars: Not over yet Abra looks to bitcoin for remittance disruption Mark O'Keefe on PSD2: The EU is not for turning. Right? Cards success in the Middle East Peter Kinihan: Quantum leaps in the world of digital payments Merchant Services Lessons from CNP not present problems in Ireland Merchant Service Charges by Region: A global map

Middle East Net credit losses
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David Hickey's Cards and Payments Column

Although still in its infancy, the Middle East's credit card business is growing exponentially: the number of credit cards expanded at nearly four times the global rate between 2010 and 2016. Over the same period, total billed volume on credit cards increased at a compound annual growth rate (CAGR) of 20 percent, joint top with Asia-Pacific. At the end of 2016, there were, on average, 15 credit cards per 100 adults across the region, up from ten per 100 adults in 2010. However, if the UAE credit cards market was removed, the penetration rate falls to just 12 cards per 100 adults in 2016, suggesting most Middle East markets have a long way to go before credit cards become a mass-market product. Credit card profits have also continued an impressive climb since 2010. Despite the region accounting for just 1.2 percent of the global credit cards industry profit pool, the Middle East beats all other regions for profitability per card. Overall concerns about weaker consumer spending amid low oil prices and slowing economic growth have not affected consumer spending on credit cards. Lafferty Research's credit cards profit pool for the Middle East reveals that people continue to swipe their credit cards at a healthy rate. Credit cards profit pool Profit per card in the Middle East is considerably higher than the global average. One explanation for this is that many markets in the region are still at a relatively nascent stage of development. Early adopters of credit cards tend to be more affluent consumers and there is less competition among issuers, therefore ensuring relatively high profits. Profit per credit card in the Middle East region was $98 in 2016, $49 ahead of the global average. This metric had stagnated in 2014 and 2015 at $104 before dipping in 2016 back to the same level as three years before. Profit per card has dropped due to strong growth in cards in issue, which dilutes the profit per card figure. Due to low loss rates combined with an increase in billed volume and the rising proportion of Premium cardholders within the credit card base, the region will continue to witness a healthy profit per credit card compared to the global average. Revenue Streams Despite a decline in the contribution of interest revenues to total credit cards revenues due to growth in high-income transacting customers, credit card issuing remains a highly profitable business. This is partly due to the contribution of non-interest income, which climbed 208 percent between 2010 and 2016 — compared to a global average of 60 percent during the same period. Card fee revenue as a proportion of total revenue has also declined, albeit at low rate, and it is estimated to continue declining as a direct result of increased competition between issuers. Card fees, like annual fees, are increasingly being removed completely or waived for the first year (or subject to spending thresholds) as issuers compete to bring in new customers. In addition, some banks offer zero annual fees for the first year and waive the annual fee for subsequent years once a minimum spending threshold is reached. Credit card revenues will maintain continuous growth throughout the medium to long term. For example, merchant revenues will grow strongly despite falling merchant service charges as increasing merchant acceptance and growth in POS billed volumes will continue to boost this revenue stream. Credit Quality Net credit losses have become an increasingly important measure of the state of credit card markets since the global financial crisis, when large numbers of cardholders defaulted on their loans — pushing down profits across the globe. Net credit losses can be defined as the proportion of credit card outstandings that are written off by issuers. This is different from the non-performing loans ratio in that, in the case of the latter, banks still expect to reclaim some of the debt in default. The net credit loss rate is an extremely elastic measure and, unsurprisingly, has an enormous influence on profitability. Indeed, most fluctuations in credit card profitability stem from movements in the net credit loss rate. The impact of net credit losses in the Middle East are such that a one percentage point rise in the loss rate would correspond to a fall of over nine percent in pre-tax profits. The variance in net credit loss rate across the region is substantial. Net credit losses remain relatively high in Egypt at an estimated 5.7 percent in 2016, but other markets like Kuwait and Lebanon have one of the lowest loss rates in the region, at 1.8 and 1.9 percent respectively, bringing the regional average to 4.3 percent in 2016. Premium potential Much of the growth in the Middle East credit card profit pool is underpinned by the Premium cards segment's influence in the market, without which profitability of the credit card in the region would arguably be at a much lower rate. The challenge for issuers is aligning the right value proposition with consumers in other segments and adopting new approaches to customer segmentation: that strategy can be adopted across a range of consumer finance products and markets. The need for different countries to develop suitable models to suit local conditions is key. This will be overcome by intelligent innovations. Rather than simply mimicking existing models in other cards markets, issuers must combine the experience and know-how of their international partners whilst leveraging local conditions. Crucially, for the full potential of this young and changing region to be realised, issuers will need to address the young demographic and the gender imbalance prevalent in the region. This approach could well drive revenues and growth through increased number of issued credit cards, increased billed volumes and outstandings — thus providing a far more dynamic profit pool for the issuers in the region. Retail Banking Opinion: Surfing the Rubicon, or how banks are making peace with the fintech industry The Keyfacts Report — the insider's guide to UK retail banking Arjan Molenkamp: The true path to end-to-end customer service Design: ADCB's new uBank digital branch Cards and Payments The Mobile Wars: Not over yet Abra looks to bitcoin for remittance disruption Mark O'Keefe on PSD2: The EU is not for turning. Right? Cards success in the Middle East Peter Kinihan: Quantum leaps in the world of digital payments Merchant Services Lessons from CNP not present problems in Ireland Merchant Service Charges by Region: A global map

Abra
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Abra looks to bitcoin for remittance market

For all of its technological and cultural import, bitcoin is not particularly easy for non-tech heads to use. California remittances start-up Abra hopes to use bitcoin to deliver low-cost cross-border payments while maintaining that its users won't have to know anything about bitcoin. In fact, Abra's story goes to the heart of the bitcoin battle: for years we've heard the claim that bitcoin will upend the expensive global money transfer business because of its low transaction fees. Lafferty News investigates. There was some online hilarity recently when investors noticed that a newly launched fintech ETF listed Western Union in the fund. One commenter pointed out the irony of a "company that was the monopoly power for the telegraph" 150 years ago was now listed as a fintech business. Western Union would in fact have been pleased, as it has been trying to re-invent itself as a fintech business with services such as Edge, its B2B payments service. To be fair, Western Union has always been a technology business. It was indeed Western Union that built the first US telegraph networks which revolutionised everything from time zones to news services. However, Western Union's success and enormous profits rests on more than technology. Its tried-and-tested model involves more than half a million agents. While fintech start-ups huff and puff to overturn the Western Union behemoth, others are taking a leaf from the Western Union playbook and combining technology and the agent model. The high hopes of bitcoiners to take on the money transfer giants One of these is Abra, which is launching a global peer-to-peer money transfer business that combines bitcoin with a "teller" network that will serve as the point to get money in and out of the system. Co-founder Bill Barhydt has been involved in the online payments business since working with Netscape in the 1990s. With a goal of building a global business, Abra is initially targeting the US-Philippines corridor, and with good reason. The Philippines is the third-largest remittance market in the world after India and China. Another reason? The Philippines has recently followed Switzerland and Japan into regulating bitcoin. "In the Philippines, the government is now the second government in Asia after Japan to regulate the buying and selling of digital currencies by including them under the anti-money-laundering framework," Abra's head of business development Eric Rosenthal tells Lafferty News. "Any company needs to start somewhere to catalyze the network," he says. "But with that said we already have a partnership with a payment gateway in the Philippines that is integrated with Abra and is re-selling our services to its merchants. We have two merchants in the Philippines that are already using Abra to accept payments online." Mr Rosenthal says that the company's mission is to build the first fully interoperable global mobile money system. It allows users to send money between any two smartphones in the world, in a way that would allow people, banked and unbanked alike, to have the same capabilities to have access to the digital economy albeit through making payments: peer-to-peer payments, B2B payments, B2C payments. But why smartphones only? In much of the developing world, feature phones continue to be popular due to their lower cost and longer usage time — and MPESA's success was built largely on feature phones. "Plenty of people still don't have smartphones," agrees Mr Rosenthal, "but you can't build a company — especially if it's venture backed and you are building for the future — you can't build a company for everybody. You need a hypothesis of what the future looks like, and we see the likelihood that more than 60 to 70 percent of the world will have a smartphone inside five years." He points out also that while data connectivity remains a problem, several of the world's biggest tech businesses including Google and Facebook are trying to extend internet services into the last obscure corners of the world. Abra is using the bitcoin blockchain (aka the original blockchain) to facilitate the movement of money, but it insists that its users don't have to be bitcoin or blockchain experts — or even be aware that bitcoin and blockchain is being used. Users will have the Abra app on their phones, and will be able to see their balance in their local currency, but the money will be moved around using the bitcoin network. Given bitcoin's relative volatility, how will the company hedge fluctuations in value? Abra CEO Bill Barhydt told Techcrunch.com that "Abra instantly creates self-settling contracts for users, which are built on the Blockchain and assigned to a counter-party that will share in the hedge. Basically, users are given a short contract to protect the price, while the assigned counter-party is going long on the hedge." Barhydt told Techcrunch.com that Abra has found willing counter-parties from across the bitcoin ecosystem, and they range anywhere from exchanges to mining companies. "People are kind of obsessed about how bitcoin and blockchain will disrupt the remittances market," says Mr Rosenthal. "Our stance is that we are not building Abra to build a better Western Union. We're building Abra to build a better form of cash, and to extend payment services to the world. Our 'issuing platform' to a degree is the app store. Unlike the card networks, we don't need financial institutions to reach an end customer to get a payment instrument into their hands. In our case, they download an app and then they have a payment instrument in their hands." How human tellers are part of the solution The practical issue remains of getting the money into the recipients hands in the Philippines or anywhere else — usually referred to as 'cashing out', and normally done at the Western Union counter. How does this work? The Abra site invites applications to be Tellers who exchange paper cash for digital cash. Presumably many of these may be merchants who would have cash on hand — just the way that supermarkets and many retailers will offer cash back to shoppers using cards. Users check the app to find nearby Tellers, and bring their cash to a Teller who will accept the cash and exchange it for digital cash that is held on the user's smartphone (via the Abra wallet). That money can then be sent for no fee to another Abra user abroad, who can transfer that digital cash to their own bank account or else approach a local Teller to take that money out in local currency. Abra will take a cut of the Teller's fee. Tellers will set their own fees, with CoinDesk reporting Barhydt as saying: "If you're in Mexico City, the teller is going to get away with 1-2.5 percent for money in and money out and be very competitive with ATMs. On the other hand, he said someone in a rural location with fewer users around, you may get away with rates as high as 3-5 percent." "What people think they are behaviorally doing is cashing out and that causes a tremendous amount of confusion with regard to the regulatory treatment and the regulatory analysis.," says Mr Rosenthal. "What is not happening is cash out. What is happening is a conversion of digital for physical, which is conceptually no different than me walking up to you and giving you a US dollar and you saying to me, I'm going to Europe, can I sell you some Euros? So it's an exchange of value. Now it feels like cash out but it's once again something like me giving you gold and you giving me cash in exchange. The regulatory treatment goes through a natural evolution — which is ironic because the technology has only been around for about six years. The evolution that seems to happen in regards to government thinking is 'I don't understand it, so I'm going to make some audacious or bold statement saying it's not backed up any governments'. That's just a consumer warning." Mr Rosenthal reaches for an analogy. "It's like the Mexican government forewarning Mexicans that the US dollar is not backed by the Mexican government. Does that mean that Mexicans decide not to hold US dollars? No. People will still make the conscious decision to be long or short on certain currencies and ultimately once you have a US dollar in Mexico, there's literally nothing that the Mexican government can do to protect you from the value of that dollar going up and down. The factual element of this is that digital currency, whether treated as a commodity, asset or a currency, is something that people are assigning value to, whether they are making an informed decision — or an uninformed decision — and that is a primary concern, at least at the beginning, that governments have. "Once governments graduate from that realisation that people will make the decisions they want to make, the second thing governments realise is that this could actually be used to facilitate illicit financial activity, just like any other payment instrument whether it be a pre-paid card, cash or travellers' cheques. They are all open to abuse because unfortunately, humans tend to abuse systems. So regulators begin to treat the on- and off-ramps as points of risk, and in a risk-based approach to anti-money-laundering policy, begin to regulate these on and off ramps." Despite forecasts that Western Union and Moneygram would be upended by the arrival of digital upstarts, the existing remittance business has proved remarkably resilient. Western Union will point to factors such as the communal and human elements of the Western Union counter, and the resilience of the agent model. Abra intends to introduce agents too, calling them tellers or human ATMs. Abra is inviting people to serve as human tellers, delivering cash to Abra users at pre-arranged locations, with the tellers setting their own fees. The regulatory obstacles Will consumer regulations apply to users of Abra? "That's very different in terms of the case of digital currency because you are holding your own money," says Mr Rosenthal, "except in the case that you are having a custodial exchange. Custodial exchange means that if I give someone else my private key, that is literally exactly the same as me giving my money to you and saying, 'Can you make sure you don't lose it?' Well of course, any regulator will say that if someone is holding someone else's money, we should be supervising them to make sure they don't lose it. In Abra's system, the custody of the funds is held directly on the phone, always consequently in the hands of the individual user. When you have money deposited in the bank, that is the bank's responsibility not to lose that money. When you take money out of the bank and put it in your wallet, it becomes your sole responsibility." That idea that custody of funds stays with the user rather than a financial institution may seem like regulatory arbitrage but Mr Rosenthal insists that the custody approach inhibits new solutions. "As soon as you have any notion of custody, the approach you have to take, from regulatory and tech perspective means that your solution will naturally be inhibited," he says. "Then you will not be able to build a fully interoperable system that can work in 190 countries." The promise remains unfulfilled, for now. Retail Banking Opinion: Surfing the Rubicon, or how banks are making peace with the fintech industry The Keyfacts Report — the insider's guide to UK retail banking Arjan Molenkamp: The true path to end-to-end customer service Design: ADCB's new uBank digital branch Cards and Payments The Mobile Wars: Not over yet Abra looks to bitcoin for remittance disruption Mark O'Keefe on PSD2: The EU is not for turning. Right? Cards success in the Middle East Peter Kinihan: Quantum leaps in the world of digital payments Lessons from CNP not present problems in Ireland Merchant Services Merchant Service Charges by Region: A global map

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