Competition in the Danish market for recurring payments can be strengthened

There is a potential for strengthening competition in the Danish market for recurring payments. That is the conclusion of the recently published analysis from the Danish Competition Council, which examines the competition within recurring payments. The analysis contains a number of initiatives and recommendations that can strengthen competition within recurring payments solutions.

The Danish Competition Council has carried out an analysis of recurring payments in Denmark. The analysis examines relevant payment solutions in Denmark, including prices, product-features and market penetration. In addition, the analysis comprises an assessment of the competition between the different solutions, as well as an examination of the costs and margins associated with the most common solutions. Finally, the analysis describes the potential for increased competition in the coming years following e.g. new EU regulation in the payment area.

Due to issues of confidentially specific values are provided as intervals in [brackets].

Based on the analysis, the Danish Competition Council suggests a number of initiatives and recommendations that can strengthen competition within recurring payments solutions.

Recurring payment solutions mediates payments from a customer (often a consumer) to a business (creditor). There are three widespread solutions in Denmark: Automatic card payments, MobilePay Subscriptions and Betalingsservice. The solutions differ in various ways such as level of customer loyalty and flexibility in payments.

Betalingsservice is the most commonly used solution for recurring payments and constitutes [50-75]% of the transactions amongst the most used solutions (Betalingsservice, automatic card payments and Mobile Pay Subscriptions). Measured by turnover, Betalingsservice has a share of [75-100]%.

Nets A/S currently owns Betalingsservice and is the sole supplier of the solution in Denmark. Until 2014 the Danish banks had joined ownership of Nets and thereby Betalingsservice. Subsequently, the banks sold Nets and entered into a vertical relation with the company. Nets’ compensation (interchange fee) to the banks for their services in connection with Betalingsservice has increased over the years, and now constitutes Nets’ single largest operating cost related to Betalingsservice.

Betalingsservice generates relatively high profit margins of [10-30]% in the period 2013-2019. For comparison, the profit margin in the Non-Agricultural Private Sector was around 5% on average in the same period, which is significantly lower. Excluding Nets’ non-recurring costs related to an IPO, delisting and acquisition in 2016, 2018, and 2019, the profit margin has been consistent in the period 2013-2019, resting at the same level as the [1-20] highest earning industries within the Non-Agricultural Private Sector.

Betalingsservice also generates profits for the banks as the interchange fee paid to the banks exceeds the banks’ cost in relation to Betalingsservice. The banks’ profit margin stemming from Betalingsservice is estimated to [10-30]% in 2017.

The combined profit margin of Nets and the banks from Betalingsservice is [15-45]%. This supports the conclusion that there is a potential for strengthening competition in the market for recurring payments.

Betalingsservice’s current price structure towards creditors constitutes a fixed fee (in DKK) regardless of the value of the transaction. Conversely, the prices of automatic card payments and MobilePay Subscriptions varies with the transaction value. This makes Betalingsservice relatively cheap for creditors who have payments with high transaction values, but relatively expensive for creditors with low transaction values.

Betalingsservice is especially common within certain types of products and services, i.e. housing (e.g. rent), financial services, utilities (e.g. electricity, gas etc.) and services provided by municipalities (e.g. daycare). Amongst these creditors other solutions are only used to a very little extent. This may be due to relatively high transaction values making it cheaper to use Betalingsservice comparing with automated card payments with Visa and Mastercard. At the same time, the analysis indicates that product features also play a role, especially mandate management, the ability to send additional information to customers and flexibility in connection with the payment.

For some creditors with lower transaction values, the cost of Betalingsservice can be equal to, or higher than, the cost of using automatic card payment. This applies e.g. to telecommunications and internet service providers, where creditors typically offer both Betalingsservice and automated card payments; indicating more competition between these specific solutions within these industries. In industries with more competition, automatic card payment is typically the creditors' preferred standard solution.

There are also certain creditors that prefer Betalingsservice because the solution has specific features that makes it particularly relevant for these creditors. In some cases, Betalingsservice is preferred despite being significantly more expensive than other solutions. This may be due to the mandate management of Betalingsservice implicating that recurring payments using Betalingsservice continue in the event of a bank change or if the payment card ceases to function. This product feature may be of great importance to customer loyalty.

In general, the price of Betalingsservice in Denmark is higher than similar solutions in other countries, such as Sweden, Norway and the Netherlands. The price differences must however be seen in the light of the fact that the solutions offer different product features, but also that the solutions in other countries often are provided by banks in competition with each other, whereas Nets is the sole provider of Betalingsservice in Denmark. Finally, solutions in other countries typically offer the creditor the possibility to pick and choose between different product features, while Betalingsservice does not provide the possibility of a simpler and possibly cheaper payment solution. The price difference may also reflect different degrees of competition.

It is likely that new solutions for recurring payments will be introduced in the coming years by both banks (e.g. in relation to the P27 partnership between Nordic banks) and so-called third party providers. The new possible solutions are among other things a consequence of new EU regulation (e.g. PSD2). However, it may take some time before new solutions gain a foothold in the market. This is illustrated by the fact that after three years in the market, MobilePay Subscriptions continues to have a very small share of recurring payments. At the same time, the special structure of the Danish market, in which the banks and Nets are part of a collective solution with a high profit margin, might limit competition and the incentive for the same actors to develop new solutions.

Recommendations and initiatives

Based on the analysis, the Danish Competition Council suggest the following initiatives and recommendations:

Initiative 1: Ensure competition amongst new payment infrastructure solutions (e.g. P27)

The Danish Competition and Consumer Authority (DCCA) will focus on that new collaborations within the payment area (such as P27) will contribute to an increased competition in the area of recurring payment solutions.

Initiative 2: Investigate the banks’ costs in relation to Betalingsservice

The DCCA will initiate an investigation of the banks’ costs in relation to Betalingsservice. The DCCA will compare the costs to the compensation that banks receive from Nets.

Recommendation 1: Investigate the potential for a lower cap on interchange fees for card payments

A lower cap on interchange fees for card payments with relatively high purchase amounts may strengthen automatic card payments ability to compete with Betalingsservice. The Danish Competition Council proposes to examine such an initiative in further detail, including different possible designs of the cap.

Recommendation 2: Improve the opportunities for third party providers to offer and develop competing solution

New actors in the market, so-called third party providers, need to cooperate with the established banks in order to gain access to customers’ payment accounts in order to supply their products. The Danish Competition Council recommends examining how the opportunities for third party providers to gain access to consumer accounts in order to offer new and innovative payment solutions may be improved. This could contribute to strengthen the competition in the payment market in general, including the market for recurring payments.

Recommendation 3: Limit adverse loyalty effects from recurring payments

The Danish Competition Council proposes to introduce measures to limit adverse loyalty effects from recurring payments; such as customers making more payments than desired before cancelling a fitness subscription. This can make more solutions in the market for recurring payments more competitive and lead to customers becoming more active in the market.