What really happened to FBME Card Services?

9 September 2014

The basic facts leading to the suspension of operations at FBME Card Services are well known: Just before 11 pm on 21 July 2014, the Central Bank of Cyprus citing the FinCEN notices of 17 July, invoked the Resolution Decree against the Cyprus branch of FBME. This resulted in the straightjacket ban on all FBME transactions in Cyprus that lasted until, effectively, 2 September, a measure that completely strangled FBME Card Services.

There was no possible route forward for FBME Card Services. On 7 August operations were suspended and all outstanding commitments to merchants were met. On 11 August, 72 members of the Company’s staff were made redundant; three more were put on notice, while 30 remain. Many of the people let go had many years of hard-earned and highly-valuable experience; the loss of their jobs will be felt most deeply by them and their families, but these redundancies also have serious implications for the country as a whole.

First of all, there is the cost of redundancy, serious enough in a country facing a deepening recession where thousands have been already thrown on out of work. Then there is the loss of future tax revenue from the Company and from its staff. There are knock-on effects on suppliers and many others. For every person made redundant there are many more indirectly affected.

Then there is the impact on card services generally. Maybe if we had several card companies this could have been minimised. But in Cyprus there were just two companies carrying out what is called ‘acquiring’. This means they supply the terminals and other equipment to shops, hotels, restaurants and merchants, and follow up by processing transactions between merchants’ and the customers’ banks, and arrange for the merchant to be reimbursed. For this service they charge the merchant a fee levied as a percentage on each transaction.

Prior to August 2014 the two companies in Cyprus working as an ‘acquirer’ were JCC Payments Systems and the IMSP unit of FBME Card Services – now there is only one. With FBME out of the way there are huge implications for JCC.

First, some history. JCC was founded in 1989 and was originally owned by 10 financial institutions. Today, the Bank of Cyprus has a 75% share of the business and the rest is held by a consortium comprising Hellenic Bank, National Bank of Greece, Piraeus Bank and Alpha Bank. Originally, JCC had the market to itself and the level of its fees charged to merchants reflected this monopoly situation. They were high; probably among the highest in the EU – that’s the way of monopolies. This certainly contributed to the overall price paid for goods and services in Cyprus which have been long considered to be artificially expensive.

What changed this was IMSP, which started to provide a competing acquirer service to merchants in 2008. Formed by a group of young Cyprus businessmen, IMSP was a radical start-up and made immediate inroads. It offered much better technology such as terminals at point of sale; it cut the fee charged to merchants to half of JCC’s level, and it also introduced a much better next-day settlement service, so the merchant received his reimbursement within 24 hours rather than the sluggish three days that it took JCC.

JCC responded by slashing its own rates and stepping up its service quality. Given that fees are often passed on to the end consumer, it is likely that the launch of IMSP led to the saving of millions of euros by cardholders in Cyprus.  Competition showed what competition always shows: benefits all around in a much healthier environment.

IMSP’s potential was clear. FBME Bank acquired the Company and its employees in 2012 in a friendly takeover. Since then IMSP has formed part of FBME Card Services.

JCC reacted with counter-competitive measures such as predatory prices targeting FBME clients. For the past five years there has been an investigation carried out by the authority set up to ensure that all is fair in the country – the Cyprus Commission for the Protection of Competition. The Commission found in FBME Card Services’ favour in a preliminary decision in April 2014. FBME has undertaken to support this investigation to its conclusion: it is important for the Republic of Cyprus that this is done. All markets need competition.

Since the unfathomable Resolution measures introduced by the Cyprus Central Bank forced FBME Card Services out of the market, Cyprus has reverted to a monopoly.

Now what are we hearing? Predictably, JCC’s fees to merchants are again rising, squeezing margins and, almost certainly, contributing to rising prices in shops, hotels, restaurants and other outlets.

Rising prices, people losing their jobs, and a Company forced to suspend its operations? Exactly the wrong answer for an economy in recession!

Cyprus should be doing everything it can to keep people in work so why has the Central Bank been able to get away with this? There hasn’t been a single utterance from official circles.