The Changing Retailer Financial Services Landscape in Europe

Navigator Edition: August 2014
By: Maria Popova and Claire Nooij

The retailer financial services market in Europe has undergone several key changes in the past few years due to the turbulent economic environment. First, nearly all major retailers have outsourced their financial services. Second, forthcoming reductions in interchange will prompt changes in product structures. Third, non-traditional providers are growing as traditional issuers have pulled back from the market.

Trend 1: Outsourcing trend nearly complete
European retailers began outsourcing their credit businesses in the mid-2000’s, and today the trend has nearly played out. One of the last major holdouts, Spanish retailer El Corte Ingles, sold 51% of its consumer finance business to Santander in October 2013. The remaining significant exceptions include large U.K. retailers Tesco, Kingfisher, Argos, and quasi-retailer/brand Virgin, and continental European retailers IKEA (Sweden), and Auchan (France). The U.K. has to some extent run counter to the trend: British supermarket chain Sainsbury’s bought out its financial services JV partner Lloyds Banking Groups in January 2014, and several retailers in the U.K are expanding into core banking services (e.g., Tesco with current accounts, Virgin with actual branches, and Marks & Spencer with premium and zero fee current accounts via their JV with HSBC).

Trend 2: Product structures are changing
European retailers moved more quickly from private label credit cards to co-brand cards than their U.S. counterparts, starting in the early 2000’s (e.g., most large U.K. department stores and Cetelem’s Aurore network). However, as has occurred in the U.S., we expect increased interest in private label cards in Europe due to significant declines in interchange rates proposed by the European Commission. For example, in the U.K. credit card interchange will decline from just under 1.0% to 0.3%. Although there were many co-brand programs in Europe, in some markets, especially in smaller ones, many programs were unsuccessful. With pending interchange reductions further decreasing the co-brand business case, we expect that private label cards will become more attractive for retailers due to their lower operating costs and ability to go deeper in the risk spectrum and increase approval rates.

Additionally, general purpose credit card issuers and acquirers will drive installment functionality at the POS to make up for lost revenue, which will compete with retailer card programs. POS installments are widespread in Turkey and Southern Europe, and are being examined in other markets and by card schemes.

However, our recent examination of retailer cards revealed no major changes to date. Travel co-brand programs have made several changes to further differentiate their products, including Turkish Airlines eliminating annual fees (Turkey is outside of EU interchange regulation), Melia Hotel Group increasing its earn rate, and NH Hotels revamping its entire program and tiering structure.

Trend 3: The issuer landscape is evolving
The supply of issuers has decreased significantly during the financial crisis (e.g., in the U.K., both GE Money and then its successor Santander exited the market). European banks struggle to meet return hurdles in the consumer credit business. Constrained by stringent regulation that forces lenders to be conservative in their lending practices, makes it challenging to make money on fees, and effectively prohibits proactive marketing of credit. Additionally, there are still no issuers that can provide a truly pan-European solution for multinational retailers, although BNPPF and Santander, have broad geographic footprints. Therefore major retailers are challenged to find partners willing and able to issue on a multinational or even on a domestic basis.

New non-traditional players are filling in these gaps, particularly in the Nordics, Benelux, the Germanic markets, and the U.K. To name a few examples, transactional lender Klarna is rapidly expanding across continental Europe and has recently announced plans to enter the U.K., transactional lender After Pay is active in the Netherlands, Billpay provides invoicing and transactional finance services in Germany, and payday lender Wonga is active in the U.K. Key differentiators for these newer players include ease of use in the e-commerce environment, effectively softer regulatory constraints (as the new lenders do not fall under the same definitions as banks), and more aggressive and sophisticated underwriting and risk management.

Most of these new players are focused on e-commerce, which is growing at 10% – 35% per year (depending on the region) as compared to zero/low growth in the face-to-face channel in Western Europe. Traditional issuers, and to some extent retailers, risk losing out on the significant growth opportunity due to the convergence of e-commerce and transactional lending. However, these e-commerce players face significant operational challenges making the leap to a face-to-face environment, but in the end probably no real need to move to the physical world.

Figure 1: Retailer Financial Services in Europe: Trends and Outlook

Fig-1_-Retailer-Financial-Services-in-Europe--Trends-and-Outlook_v2Source: First Annapolis Consulting research and analysis.

Implications for retailers and issuers
The retailer financial services market is changing significantly, and over the next 5 years it is likely to take a new shape.

Retailers with well-established financial services, especially in the U.K., are likely to offer a broader spectrum of retail financial services, while others will probably focus on partnerships with both traditional and non-traditional lenders to drive core sales. While legacy banks will increasingly move towards banking via direct channels, many large retailers are well placed to capitalize on their geographic footprint and frequency of visit to offer in person sales and service. Although e-commerce is growing rapidly, the physical POS is still likely to stay the key point of contact with customers for such merchant categories as supermarkets and departments stores, giving ample opportunity for them to sell financial services.

Interchange reductions will result in the restricting or closure of many co-brands, and retailers will find it more feasible to turn to private label and/or instant financing services, such as POS installments. Non-traditional lenders will capture significant share via transactional lending in the e-commerce and mobile environments.

While certainly these trends present challenges to existing retailer finance market, they also present a variety of new interesting partnership opportunities for retailers with banks and non-traditional lenders for in-store financial services and new types of lending in the physical, e-commerce and mobile environments.

For more information, please contact Maria Popova Associate,, or Claire Nooij, Analyst, Both specialize in Credit Card Issuing.

To read the rest of this article, please subscribe to

The Navigator Newsletter