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Competition analysis of “Betalingsservice”, a Danish direct debit product

24. juni 2014

The Danish direct debit product, Betalingsservice, is one of the best -known payment solutions in Denmark. Betalingsservice was launched in 1974 by PBS (now Nets Holding) and 95 % of households are using the product. In 2012 more than 16,500 businesses, public authorities and associations (creditors) carried out 195 billion payments using Betalingsservice.

Betalingsservice is a direct debit product, where the payment is initiated by the creditor. Direct debit is a convenient payment solution for recurrent payments. Compared to other direct debit products such as recurrent card payments, Betalingsservice has some specific advantages and is by far the most common direct debit product in Denmark today.

New payment solutions such as Mobile Pay (a well-known mobile payment service in Denmark) are developing. However, these solutions have only limited applicability for recurrent payments and the Danish Competition and Consumer Authority (DCCA) finds that these solutions currently exert only limited competitive pressure on Betalingsservice. Nets is the key provider of direct debit in Denmark and its Betalingsservice has market power.

To ensure that the benefits resulting from Betalingsservice also benefit creditors and consumers to the largest extent it is crucial to avoid inappropriate features in the service and its entire system. It is important that the market provide those products that customers demand at the lowest possible price.

Nets consider parts of the financial information provided to the DCCA as business secrets. These financial results and figures are therefore left out of the report or replaced by percentage ranges or specific wording in squared brackets.

Nets’ earnings from Betalingsservice are increasing. Between 2003 and 2012, Nets has [more than doubled] its profit before tax on Betalingsservice. In 2012 the profit before tax amounted to [150-350] million DKK. In the same period, the number of transactions with Betalingsservice grew by 40 %. Nets increased the profit before tax per transaction, while the number of transactions was increasing. This led to a profit margin (operating profit as a percentage of net turnover) of [10-30] %, which is [significantly higher] than the average profit margin in Denmark’s private sector.

The main driver behind the increased earnings is the price of Betalingsservice. The price of the basic service has since 2007 amounted to 4,32 DKK per transaction. However the average price is higher, since Nets also offers a number of additional services that creditors can and do make use of. The average price per transactions was [4,32 - 6] DKK in 2012, which is [0-20] % lower than the level in 2003 when accounted for inflation.

The costs associated with Betalingsservice can be divided into three categories: distribution costs, decentralized production (Nets’ paying the banks for their cooperation/contribution) and other costs. The total costs per transaction have been decreasing since 2007 and amounted to [2-6] DKK in 2012. When comparing the costs of Betalingsservice to the costs of direct debit products in other countries, Betalingsservice is characterized by significantly higher costs. The costs of Betalingsservice is for instance almost twice as high as the costs of the Norwegian direct debit product.

From 2003 to 2012 the total real costs per transaction decreased by [10-30] %, while the number of transactions increased by 40 % and the average price per transaction has decreased by [0-20] %. The lower cost level has thus not resulted in Nets lowering prices for Betalingsservice.

The largest costs for providing Betalingsservice stem from Nets’ payments to the banks – called decentralized production. The payments can be characterized as interchange fees, where the payment is a fee paid from Nets to the consumer’s bank. Such fees have been regulated at EU-level and interchange fees on direct debit products are eventually to be prohibited for all transactions denominated in Euro. This regulation will thus have no impact on direct debit transactions in Denmark, which are denominated in Danish krona. However, it is possible for Denmark to extend parts of the regulation to its national currency.

Nets’ payments to the banks have increased with more than [40-60] % in the period 2003-2012. Nets changed the structure of these payments in 2011, but this did not on average result in lower interchange fees. On the contrary, the payments increased in 2011 and 2012. In the following years, the payments to the banks will be based on recurrent assessments of banks’ costs for contributing to Betalingsservice.

Betalingsservice is subject to the Danish Competition Act. While several of Nets’ card-based products such as the domestic debit card, the Dankort, and the acquiring of international payment cards transactions are subject to the Danish Payment Service Act and thereby on the prohibition of setting unreasonably high prices, Betalingsservice is not today.

In 2011, the DCCA drew attention to the fact that Nets had high and increasing profits on Betalingsservice and that the competitive pressure from other products was limited. Since then Nets’ profits have increased even more as have Nets’ payments to banks. Nets continues to be the key provider of direct debit in Denmark, the number of alternative direct debit products is limited and Betalingsservice does still hold significant market power.

Tighter regulation of direct debit can entail both advantages and disadvantages and this analysis does not contain a thorough assessment of these issues. Tighter regulation of direct debit can possibly hinder continuous growth of profits from Betalingsservice. Conversely, it may entail a risk for limiting innovation, such as new and profitable products that can contribute to a more competitive payments market.

The DCCA finds that it could be considered to more closely evaluate the possible advantages and disadvantages associated with tighter regulation of direct debit in Denmark, including an assessment on whether such regulation may harm the research and development of new competitive products. Such an analysis may also outline how a targeted regulation could be designed.