The International EMV Software Market Author Antti fversten

The International EMV Software Market Author Antti Öfversten Supervisor Professor Heikki Hämmäinen Instructor M. Sc. Sakari Ranta

Introduction ü EMV is an internationally agreed standard for payment cards ü The name EMV is an acronym of ”Europay Master. Card Visa” ü The main purpose of the EMV standard is to introduce a more secure payment method by using a chip card instead of a magnetic stripe card ü The risk with regard to fraudulent transactions is much higher when magnetic stripe cards are being used ü This risk will be shifted to them who do not support the EMV functionality ü Points of sale ü Card Issuers The International EMV Software Market

Research Problem ü How can target market characteristics be measured? ü What are the key factors that make the target market suitable for EMV software products ? ü When should market entry take place? When is the shift from magnetic stripe cards to EMV cards going to happen? ü What strategy should be applied at market entry? ü Which markets should be targeted? The International EMV Software Market

EMV Payment System Model ü Issuer (ex. g. banks, oil companies) • Issue chip cards to the payment system ü Acquirers (ex. g. Luottokunta) • Release payment accepting terminals to merchants • Process the terminal transactions • Pay the merchants for the transactions ü Merchant • Obtain terminals that accept EMV Payments üCardholder The International EMV Software Market

EMV Security Mechanisms ü The actual EMV functionality for authorising transactions resides with the issuing bank • Authorisation requests ü Asymmetric algorithms • Authenticate the card as valid to the terminal üSymmetric algorithms • Generate and verify transaction cryptograms based on key shared between the card and the issuer bank The International EMV Software Market

Payment Applications ü EFTPOS • PC POS / standalone terminals ü Mobile EFTPOS • Uses the GSM or GPRS networks ü Contactless Payment (RFID, bluetooth, infra red) • Contactless cards • Mobile phones • Payment tokens The International EMV Software Market

Foreign Market Entry Modes There are several methods of foreign market entry including ü Exporting ü Licensing ü Joint ventures ü Direct Investment The chosen method depends on a variety of factors… The International EMV Software Market

Conditions Favouring This Mode Advantages Disadvantages Exporting • Limited sales • potential in target country; little product adaptation required • Minimizes risk and investment. • Maximizes scale; uses existing facilities. • Distribution channels close to plants • High target country production costs • Liberal import policies • High political risk • Speed of entry • Trade barriers & tariffs add to costs. Transport costs • Limits access to local information • Company viewed as an outsider

Conditions Favouring This Mode Advantages Disadvantages Licensing • Import and investment barriers • Minimises risk and investment. • Legal protection possible in target environment. • Speed of entry • • Low sales potential in target country. • • • Large cultural distance Licensee lacks ability to become a competitor. • Lack of control over use of assets. • Licensee may become competitor. • Knowledge spillovers • License period is limited Able to circumvent trade barriers High ROI

Mode Conditions Favouring This Mode Advantages Disadvantages Joint Ventures • Import barriers • Large cultural distance • Assets cannot be fairly priced • High sales potential • Some political risk • Government restrictions on foreign ownership • Local company can provide skills, resources, distribution network, brand name, etc. • Overcomes ownership restrictions and cultural distance • Trade barriers & tariffs add to costs. • Combines resources of 2 companies. • Dilution of control • Potential for learning • Viewed as insider • Less investment required • Difficult to manage • Greater risk than exporting & licensing • Knowledge spillovers • Partner may become a competitor.

Mode Conditions Favouring This Mode Advantages Disadvantages Direct Investment • Import barriers • Trade barriers & tariffs add to costs. • Small cultural distance • Higher risk than other modes • Greater knowledge • Requires more of local market resources and • Assets cannot be commitment • Can better apply fairly priced • May be difficult to • High sales potential specialised skills manage the local resources. • Low political risk • Minimises knowledge spillover • Can be viewed as an inside

Selecting Foreign Markets Target market indicators: - Not yet fully mature - Credit card liability shift - Number of independent payment terminals vs. PC POS software The International EMV Software Market

Credit Card Liability Shifts Visa Asia Pacific 2006 Canada 2010 Central/Eastern Europe, Middle East, Africa 2006 Europe 2005 Latin America / Caribbean 2 years after 50% of regional credit card sales volume is chip-based. Critical mass expected in 2008. The International EMV Software Market

Credit Card Liability Shifts Master. Card Asia/Pacific January 2006 Canada Indefinite Latin America / Caribbean January 2005 Europe January 2005 South Asia & Middle East Africa January 2006; January 2005 for South Africa U. S. No current plans to support EMV The International EMV Software Market

Target Market The total number of cards Number of Issued EMV-cards The total number of PC POS systems and standalone terminals Number of EMV certified PC POS systems and standalone terminals Finland 2, 9 million 1, 8 million (5 %) 54000 2700 (5 %) Sweden 8, 1 million 4, 9 million (5 %) 190000 9300 (5 %) Norway Unknown Denmark 4, 0 million 40 million(100 %) 90000 4500 (5 %) Estonia 1, 3 million 0, 5 million (40 %) 11000 4400 (40 %) Latvia 1, 2 million 0, 5 million (40 %) 15000 9000 (60 %) Lithuania 1, 6 million Unknown 1000 Unknown Poland 16, 9 million Unknown 112000 Unknown Hungary 7, 0 million 1, 4 million (20 %) 36000 14400 (40%) United Kingdom 141, 1 million (100 %) 899000 Ireland 3, 3 million (60 %) Unknown Poland 16, 9 million Unknown 112000 Unknown Germany 114 million (40 %) 500000 (5 %) Netherlands 26 million (5%) 180000 0 (0 %) Belgium 12, 7 million (40 %) 73000 (60%) Czech Republic 5, 8 million Unknown 25000 Unknown Slovakia 2, 4 million Unknown 12000 Unknown Austria 8, 7 million (80 %) 109000 (5 %) Slovenia 3, 3 million (5 %) 35000 0 (0 %) France 49, 1 million (53 %) 850000 (73 %) Spain 61, 6 million (5 %) 915000 (20 %) Portugal 15, 5 million (0 %) 151200 (20 %) Italy 53 million (5 %) 950000 (5 %) Greece 9, 9 million (5 %) 183700 (20 %) Malta 400000 0 (0%) 6600 (5 %) Cyprus 700000 0 (0%) 11000 0 (0%)

Software Entry Strategies Most interesting target markets can be divided into two groups: 1. Group: ü Percentage of PC POS systems and standalone terminals capable of EMV payment 0. . 50 % ü Total number of PC POS and standalone terminals: 0. . 100000 2. Group: ü Percentage of PC POS systems and standalone terminals capable of EMV payment 0. . 50 % ü Total number of PC POS and standalone terminals > 100000 The International EMV Software Market

Group 1 Country Terminals Capable of EMV payment Cards capable of EMV payment Total number of PC POS and standalone terminals Finland 5% 5% 54000 Denmark 5% 100 % 90000 Estonia 40 % 11000 Hungary 40 % 20 % 36000 Slovenia 0% 5% 35000

Group 2 Country Terminals Capable of EMV payment Cards capable of EMV payment Total number of PC POS and standalone terminals Sweden 5% 5% 190000 Poland Unknown 112000 Germany 5% 40 % 500000 Netherlands 0% 5% 180000 Austria 5% 80 % 109000 Spain 20 % 5% 915000 Portugal 20 % 0% 151200 Italy 5% 5% 950000 Greece 20 % 5% 183700

Suggested Strategy Target Market Entry MOde Estonia Indirect exporting / EMC Hungary Indirect exporting / EMC Slovenia Indirect exporting / EMC Poland Indirect exporting / EMC Sweden Joint venture Germany Indirect exporting / piggyback exporting Spain Indirect exporting / piggyback exporting Portugal Indirect exporting / piggyback exporting Italy Indirect exporting / piggyback exporting

Software Entry Strategies ü The design of a market entry strategy is actually iterative with many feedback loops ü The strategy proposed in thesis can be used as a starting point for iterative development of the international marketing plan ü As some of the markets are entered, more detailed information of the EMV situation is inevitably collected ü Further research for more detailed information should excercised so that target markets can be included or limited out of the marketing plan ü Finding useful data for the internationalisation plan will be an ongoing challenge ü No literature study can replace the information and data that can be obtained through a visit to a potential foreign market The International EMV Software Market

The International EMV Software Market Thank You!