Local card schemes like Girocard, Bancomat, Dankort, BankAxept, and Carte Bancaires are losing ground fast to Visa and Mastercard – but is that decline inevitable? In this episode, Elisabeth Magnor talks with Flagship partner Yuriy Kostenko about what the data really shows, why domestic schemes have fallen behind on innovation, how PSPs and merchants actually think about them, and what their future in Europe might look like.
Do not hesitate to reach out to Yuriy Kostenko, Yuriy@Flagshipap.com, with any comments or questions.
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Transcript
Elisabeth Magnor (00:08)
Today we're jumping into a topic that keeps stirring up lot of noise in European payments, which is the decline of local card schemes.
And to help unpacking what's going on and what's driving the shift, I'm excited to be joined by someone who knows this space inside and out, Yuriy Kostenko partner at Flagship's Amsterdam office. Welcome, Yuriy!
Yuriy Kostenko (00:27)
Thanks, Elisabeth. Thanks for having me.
Elisabeth Magnor (00:29)
And Yuriy before we dive into the topic, can you please give us a quick pitch about yourself and your experience in the field?
Yuriy Kostenko (00:36)
Yeah, yeah, happy to.
I've been an advisor in payments and fintech space for over 20 years now, supporting my clients around the world through numerous consulting engagements and M&A projects, with a particular focus on the European payments landscape. So in my work, especially within payment acceptance, which is one of my areas of expertise, often encounter questions around local card schemes. It's a topic that consistently raises important strategic considerations for payment providers, for software vendors that are offering payments or merchants. So yeah, looking forward to sharing some of these insights today.
Elisabeth Magnor (01:17)
So Flagship publishes insights weekly with our own research and topics about payment methods and local card schemes always gain a lot of traction amongst our audiences. I mean, it always spurs a lot of debate and discussions and generally it's something that a lot of people care about and have opinions about.
And since we're crowd pleasers, that's basically why we wanted to create this episode. But before handing over to you, to walk us through the study we did I wanted to give the audience a bit of background as to what we mean when we talk about local card schemes, cautious that the term local card schemes may not be immediately obvious for everyone. So a local card scheme is a homegrown card network that a country builds and runs for itself.
So these are the likes of Carte Bancaires in France, Girocard in Germany, and the list goes on. And I personally, I'm a BankAxept user since I'm based out of Norway. And in Europe, these local card schemes are extremely common.
So in a nutshell, the local schemes are competing solutions to Visa MasterCard and they largely compete on price being cheaper alternatives for merchants both networks want cardholders to use their respective rails and how that competition has evolved is something that we dug into. So, Yuriy it would be great to give you the floor to explain the research that we did and the key findings that came out of that research.
Yuriy Kostenko (02:35)
So at Flagship, our team tracks market intelligence across the payments landscape. So one of the recent deep dives that we did was focused on the performance of the local card schemes across Europe. And the trends we uncovered is strikingly consistent.
Domestic schemes have been steadily losing share of their consumers' wallets to international brands, in particular Visa and MasterCard. So we did this assessment and examination across all major local card schemes across Europe, so from Carte Bancaires in France, Girocard in Germany, Bancomat in Italy, to name a few. And no matter which market we looked at, the pattern was quite consistent. Local card schemes continue to seed ground to the international networks, Visa and MasterCard, which are gaining share almost everywhere in the European payments arena. To put this in perspective, five years ago, Girocard in Germany, for example, represented over 75 % of total card payment value. Today, that number has dropped to just under 60%. In Norway, in your home market, Elisabeth BankAxept has seen even a sharper decline. So they started at 62 % of total card payment value five years ago. Today, it's already under 45%. So in many instances, these shifts are quite substantial. And this is what our analysis suggests.
Elisabeth Magnor (04:09)
Yeah, so it sounds like the data tells a pretty clear picture and the story is not super bright, to be frank, for these local card schemes. And the loss is really dramatic in countries like Norway and Germany. I guess it depends on the geo as well here, right? But this leads me to then the obvious next question, which is, can you explain what drives that shift? I mean, why are the local schemes losing to Visa and MasterCard?
Yuriy Kostenko (04:33)
Yeah, look, mean, the drivers behind this change with local card schemes losing their share of wallets are largely technical in nature. In simple terms, I mean, these local schemes, they haven't been able to keep pace with the level of product innovation by Visa and MasterCard. The innovation gap shows up in many ways.
Sometimes it's as basic as the end user experience, so the interface, or even the integration of various value added services like loyalty programs or cash back programs. Visa and MasterCard, they continue to evolve in these areas quite rapidly, while the local card schemes simply can't keep up with that pace of innovation.
One of the biggest ,probably, disadvantages the local schemes created for themselves really was their exceptionally slow adoption of digital wallets. So consumers embraced wallets like Apple Pay and Google Pay quite quickly. But many local schemes lagged behind that integration and that development, making their cards simply less convenient in the world that's become mobile first. Another major gap that we found was one that still persists today for many of these local schemes is e-commerce enablement. A payment channel that has been growing at roughly twice the rates of the physical or point of sale payments channel over the last decade. It's really a missed opportunity for the local card schemes. And of course, by their very nature, the local card schemes are typically confined to their domestic markets. That makes it difficult for them to compete in the environment where cross-border commerce is expanding quite rapidly. So as a result, more of these payments naturally flow to Visa and MasterCard.
Elisabeth Magnor (06:22)
Yeah, I actually had an interesting story that just highlights that innovation point, in the the point of sale centric environment where the local card schemes have traditionally thrived, right? They've lagged online, thrived in the point of sale/ physical channel.
But this goes back from 2019 when I was in Oslo, I was going to the largest supermarket chain here. And at the time, pretty much 100 % of all the cards were contactless enabled and 100 % of all the card terminals were also contactless enabled. So, you know, the chicken and egg problem was solved for. And I tried to tap my card, but the person at the till said, no, you have to use the chip and pin. Which really surprised me.
But you can probably guess why they had turned it off. It was exactly to the innovation point. It was because the local debit scheme was not enabled with contactless. And that meant that each contactless transaction that big merchants was transacting, all would be defaulted to Visa MasterCard. And if you're large enough, that transaction cost would be substantial enough for that merchant to actually turn off that functionality.
And they didn't really turn that on until BankAxept had solved for conductless. So that's just an example of how that lag was so visible. And I mean, I didn't suffer from just dipping my card, but it was this, you know, it's worse than the consumer payment experience, which should be number one for merchants. Merchants just want people to pay just the easiest and most seamless way possible. And that's a bridge actually into my next question. So, there are clearly a lot of different stakeholders within the ecosystem and each have different levers to pull. So that merchant example that I just gave you. And in payments, it's typically referred to as the four party model. So on the payer side, you have the cardholders and you have the issuers that supply the card products to the cardholders. And on the acceptance side, you have the merchants. And then you have the acquirers and PSPs that enable merchants with card acceptance.
So Yuriy, I've been interested to hear your views on these stakeholders. How do you see their needs and behavior impacting that broader adoption of local card schemes?
Yuriy Kostenko (08:26)
Yes, indeed, quite a few different stakeholder groups. And these stakeholder groups can see the role and value of local card schemes very differently. On one side, you have the traditional owners of these schemes, often banks, although not always the case, who tend to have very strong, almost political interest in preserving the existence of these local schemes.
At the time when the European payments community is very much focused on the sovereignty of the payments infrastructure here in Europe, these stakeholders are highly motivated to defend these local schemes and continue to maintain a strong presence in their home markets.
But outside of the legacy stakeholders fear, a very different perspective has emerged. And this has been the case for a few years now. And there's a growing group of newer players, Neobanks, FinTechs and international payment service providers. They approach local scheme needs and requirements with a healthy dose of skepticism, particularly when Local card schemes are co-badged with Visa MasterCard, like you mentioned earlier, Elisabeth, which would allow for that particular payment transaction to default to international networks. For these stakeholders, often much faster growing providers, local schemes often struggle to present a really compelling value proposition.
So many local card schemes in return have not really built strong partnerships with these new stakeholders. And as a result, these providers often just default back to Visa MasterCard, which is simpler, faster, and more scaled. Integrating with a single local card scheme, can be quite complex, could be costly, and certainly time consuming, and requires additional security work, compliance, regulations, and naturally technical maintenance. So in the world where speed and scale matter, many of these newer players, they will simply opt out of using local card schemes.
Elisabeth Magnor (10:28)
yeah, so you're saying that some PSPs and acquirers don't really need to enable a local card scheme to thrive. And is that, can imagine that being true if you service the SMB segment, is that correct? Versus a large enterprise would probably have more focus on enabling that local card scheme.
Yuriy Kostenko (10:45)
That's right. mean, there are distinct views in the ways you approach the needs and requirements of the end merchant users that want to accept local card schemes.
Elisabeth Magnor (10:53)
I think from what I've seen, a company like iZettle, they don't really work with local schemes at all because they offer such a simple product that the SMB is willing to pay more slash paying for Visa, MasterCard transactions for that simplicity and that ease of use. And iZettle hasn't really been, I don't know, bothered to accept local use because I guess the demand hasn't really been there, right? It's nothing that SMBs find extremely important. Or is that the right interpretation?
Yuriy Kostenko (11:26)
There is a distinction in how different stakeholders, especially international payment service providers that have very global ambitions and do not want to be bogged down to integrating every single local card scheme across Europe. for them, especially those that are focused on the SMB market, it's not as critical to integrate and be hyper localized in their offering.
And it is sufficient for the SMB community that is not as sensitive in their ability to accept local card schemes. Now that may be true for the SMB market. It is certainly far from reality for the enterprise segment, where for them, the element of cost is quite critical and where local schemes tend to have, for them, it's a differentiating factor because they just tend to be cheaper, in some cases significantly cheaper compared to the international card schemes in any given market. And that drives the need for the payment providers who serve these enterprise clients to have the right set of localized capabilities, which would include the local card scheme.
Elisabeth Magnor (12:31)
Yeah, examples of those would be, Adyen would be a perfect example of someone who really wants that localised payment method ⁓ offering, whereas an iZettle or a MyPOS may just go with a basic Visa MasterCard
Yuriy Kostenko (12:43)
That's right. I mean there also needs to be a business case for any vendor that enters any given market, let's say would be Germany, to really understand the cost dynamics behind integrating that payment method versus ultimately finding a partner that will give you access to that payment scheme. So Adyen is an excellent example in Germany where they went through the exercise of integrating the local scheme Girocard. I'm certain it was time consuming and probably expensive exercise in doing so. But now they can properly serve large enterprise clients that operate in German point of sale environment.
Elisabeth Magnor (13:23)
Yeah, perfect. And we have to keep in mind that this is always going to be that what we talk about is the chicken and egg situation. We talk about that a lot in payments, right? The chicken and egg, where you can't solve for the one side without the other. So it's not enough to just have the card holders with your local card scheme when you don't have the merchants and PSPs that enable those schemes.
Circling back to the study and the results that you described earlier, has there been any changes in how rapid the local schemes are losing ground to Visa and MasterCard?
Yuriy Kostenko (13:55)
Look, mean, what our study and the results of the study suggest is that local card schemes across Europe are really starting to push back on that trajectory of them losing share of their consumers' wallets. They haven't exactly reversed that decline, but many are working quite hard in at least stabilizing that trend, if that makes sense.
One of the key reasons behind this change is these local schemes are starting to close this innovation gap that I described earlier, which has become a priority, a top priority for many of them. We're now seeing local schemes expanding into e-commerce, rolling out stronger digital capabilities, and finally being enabled to be added to the popular ⁓ digital wallets like Apple Pay and Google Pay. These steps are essential in staying relevant with their end users and the cardholders in their home markets. The same local card schemes of course will continue to double down on one of their traditional strengths that we just discussed. It's the lower ⁓ acceptance cost, especially when compared to Visa and MasterCard. This is appealing to really large enterprises where even small cost differences can have a significant impact on that retailer or other types of merchant bottom line. But beyond pricing, local schemes are increasingly trying to also win back their consumers directly. So they're experimenting with integrated local popular loyalty programs, they're adding benefits to the card product itself, they're even running nationwide cash back programs. All of these are aimed at bringing those users back into their ecosystem.
Elisabeth Magnor (15:41)
Yeah, and an example of that from my home market is that you have this really huge coalition loyalty program. And the only way you can accumulate points and get bonuses and rewards is if you use the local debit scheme. So there's definitely some strong collaboration going on between the domestic scheme in this case and the largest supermarket group. Yeah, it's going to be interesting to see whether that will be enough to drive that shift.
Yuriy Kostenko (16:07)
Well, the data suggests so, so I hope so. It is at a minimum slowing down in that trend or the share of wallet shift that these local schemes have been experiencing in the past.
Elisabeth Magnor (16:23)
Yeah, and it's ultimately a function of just changing the consumer habits and nudging users to use your local networks and not the international ones. Which is not an easy task, right? And I can imagine that the willingness to switch is there if they get something in return, like perks or benefits.
Yuriy Kostenko (16:39)
Well, at the same time, local schemes, have established that brand that have been building for many years. So hopefully, as long as they provide the same set of capabilities that international networks can offer or the reasons behind those consumers leaving that local scheme in the first place, I think it will not be an extremely difficult exercise in for them luring them back into their orbit.
Elisabeth Magnor (17:01)
Okay, it's good to hear that you're optimistic and think that there is a future for these card schemes to thrive. if we look into the crystal ball and looking at the trend that we have explored, I'd be super interested in hearing what does the data show us in five years and 10 years? So looking ahead, how do you think these local schemes are performing given the trends that we're seeing today?
Yuriy Kostenko (17:27)
question to ask and certainly a critical one. it's a question that local schemes are asking themselves today. Local schemes in Europe really do find themselves at a crossroads. So for years, they've been steadily losing relevance and the share of consumers' wallets to international networks.
But this isn't necessarily a story of inevitable decline. I think the next few years will be critical for these card schemes. Well, first, the consumer expectations have really changed, particularly the European very mobile friendly users. So people now expect seamless digital payments. They want their cards integrated into their mobile wallets.
They want very smooth online checkout experience and ideally, some of the value added features that they use every day to be integrated into their card products. So historically, local schemes have really fallen behind here. But we are now finally seeing that momentum as they started to build out these digital capabilities and catch up with the international networks. The second is the cost, right? mean, the cost remains a very powerful differentiator for the local schemes. I mean, these local schemes, they still offer meaningfully lower fees compared to international networks. And that matters, especially for large retailers who are laser focused on their cost efficiencies. This gives local schemes a bit of an edge to remain competitive. And third, and arguably, the most relevant these days is the geopolitical landscape. Europe is placing growing emphasis on payment sovereignty and really reducing reliance on any networks that are not European, I mean, there obviously will be competing initiatives like EPI that will create a trend where local schemes will have to find the way to either coexist or compete with these networks.
But at the same time, there are two key challenges that local card schemes will see ahead of them. So first is scale. That's a difficult one to address quickly. Local schemes, by definition, will operate within their national borders. The second one is the partner alignment, right? We're talking about those high growth fintechs and neobanks and other global payment service providers that are entering their markets. And today still continue to avoid integrating the local schemes because they find the exercise costly, time consuming and complex. So look, I mean, if you aggregate all these findings, I mean, what does that mean for these local schemes? It's unlikely that the local card schemes will regain the dominance they once held. But I think they will find a more balanced ecosystem where, you know, the local card schemes will stay relevant, they'll still competitive, and they will continue to be strategically important in their own home markets. And that's absolutely within reach for them. The decline of their market share has already slowed. And if the innovation that I described earlier continues, we may see a shift from pure survival mode to a more genuine reinvention of these local schemes. They won't disappear, but their future will depend on how quickly
they will evolve and how well they will find ways to collaborate with the new providers that are entering their markets and how effective they will be in adapting to the world that is no longer domestic, no longer physical and no longer patient with outdated technology.
Elisabeth Magnor (21:08)
And I was wondering, you know, we had this shift from Magstripe to EMV, where the shift from EMV to contactless, from contactless to mobile wallets. And now what's coming after mobile wallets that they have to catch up with. That's going to be interesting for sure, right? What that next technology is going to be.
Yuriy Kostenko (21:24)
I'm curious myself, right? I mean, I'm sure we will be at the top of seeing that innovation ourselves and how we will impact the industry. But yes, curious to see what will happen.
Elisabeth Magnor (21:35)
Well, that brings us to the end of this episode. ⁓ A massive thanks to you, Yuriy for sharing your insights. Always sharp and data-driven.
Yuriy Kostenko (21:45)
I'm always happy join your podcast, Elisabeth, and certainly was happy to speak today. And look, if anyone out there in the audience wants to discuss this topic or argue some of the points that I've shared during our podcast today, then yes, please get in touch and I will be happy to ⁓ schedule a call.
Elisabeth Magnor (22:03)
Awesome. Well, the evolution of local card schemes is clearly a story still being written and the next few years will tell us a lot about whether these domestic networks can rebuild relevance in an environment that is increasingly competitive and more innovative. If you're interested in knowing more about the topic, feel free to reach out to Yuriy myself or anyone else at Flagship. And you can also visit our website to see the relevant content on the topic. Thank you for listening in.
