Accommodating International Payment Cards in the U.S. As Global Travel Expands a Mercator Advisory Group Research Brief, Adapted for Discover Financial Services

Accommodating International Payment Cards in the U.S. as Global Travel Expands A Mercator Advisory Group Research Brief, adapted for Discover Financial Services

ACCOMMODATING INTERNATIONAL PAYMENT CARDS IN THE U.S. AS GLOBAL TRAVEL EXPANDS

©Mercator 2010 Mercator Advisory Advisory Group, Inc. Group Research Brief, adapted for Discover Financial Services

Clock Tower Place, Suite 420 | Maynard, MA 01754 phone: 1(781) 419-1700 | e-mail: [email protected] April 20151 www.mercatoradvisorygroup.com

Accommodating International Payment Cards in the U.S. as Global Travel Expands A Mercator Advisory Group Research Brief, adapted for Discover Financial Services

Contents

Introduction ...... 3

The U.S. Inbound Travel Market ...... 3

Monetary Impact of Inbound Travel to the U.S...... 4

Beyond the Traditional Networks ...... 5

Japan’s JCB ...... 6 China’s China UnionPay ...... 6 Further International Expansion ...... 7

The Value of Facilitating International Payment Card Acceptance ...... 7

Endnotes ...... 7

Introduction

It has been 102 years since the Wright brothers took to the sky over North Carolina and in the years since, the aviation industry has rapidly evolved to the point where hundreds of millions of consumers travel each year to visit far off locations. The boom in air travel globally has allowed for the number of tourists to increase significantly year over year The United Nations World Tourism Organization estimates that the number of tourists who traveled abroad in 2014 reached 1.13 billion, which represents a 4.7% increase over 2013 and 15% of the world’s population.i

Leading global cities like New York, Washington, D.C., Los Angeles, and Chicago make the United States the destination of a large number of international travelers each year. Whether for business or pleasure, the tens of millions of consumers from other countries who visit the U.S. each year increasingly prefer to pay for their purchases with electronic payment cards rather than cash or other traditional payment instruments like traveler’s checks. Countries around the world are creating their own national payment networks either to compete with or to work with traditional networks like American Express, Discover, MasterCard, and Visa. For the traveler, paying by card provides greater convenience than paying by cash and can alleviate the security risk of carrying large sums of cash. For the merchant, however, the prospect of accepting international payment cards may seem daunting. The cards presented by international visitors to the U.S. may appear unacceptable, and the point-of-sale (POS) payment experience for the customer may be less than seamless. Non-acceptance of the card may result in the loss of the transaction entirely.

While some concern may be justified, not all of the international payment networks should be viewed as a risk for payment acceptance. Some well-established networks have partnered to support global payments. For example, Discover, Visa, and MasterCard have partnerships in place with some of the leading alternative international networks which allow merchants in the United States to accept international network branded cards as easily as they can accept American-issued and branded debit and credit cards.

This Mercator Advisory Group Research Brief examines the U.S. inbound travel market and international payment network alternatives and shows that it will become increasingly important for U.S.-based merchants to become comfortable accepting international visitors’ payment cards or risk losing transactions to other retailers.

The U.S. Inbound Travel Market

According to the Office of Travel and Tourism Industries, the estimated number of international visitors to the United States in 2014 was 73.9 million, an increase of more than 4 million from 2013 and nearly 19 million from 2009. This strong year-over-year growth is expected to continue as the global economy regains strength following the drawn out economic and financial malaise in wake of the 2008 crisis. According to the same source, the number of visitors to the United States will have increased to nearly 90 million per year by 2019.

Figure 1 shows the number of visitors to the U.S. between 2013 and 2019 as well as the forecasted regional share by the visitors’ country of origin.

Figure: 1: The U.S. Inbound Travel Market, 2013 to 2019 (Forecast)

Number of Regional Share of Visitors to U.S., 2014F Visitors to U.S. 1.5% 1.5% 1.2% (in millions) 0.7% 2% 100 88.3 7.3% 90 85.4 79.1 82.3 80 76.6 69.8 73.9 70 13% 60 50 54.5% 40 30 18.3% 20 10

0 North America Europe Asia 2013 2014F 2015F 2016F 2017F 2018F 2019F South America Oceania Caribbean Middle East Central America Africa

Sources: National Travel and Tourism Office, Mercator Advisory Group The majority of visitors to the United States come from our nearest neighbors, Canada and Mexico, and this pattern is unlikely to change anytime soon. But travel to the U.S. from other countries is growing at a robust rate. For example, the U.S. Department of Commerce projected inbound travel from China and India to have increased by 24% and 9%, respectively, from 2013 to 2014.

The countries with the next largest numbers of inbound visitors to the U.S. annually, after Canada and Mexico, are the United Kingdom (4 million), Japan (3.6 million), and Brazil (2.2 million). The Department of Commerce believes that a new set of countries will also provide many visitors to the U.S. by 2018, estimating that the number of inbound visitors from China, Colombia, India, and Taiwan will grow by 138.6%, 56.3%, 53.7%, and 51.9%, respectively, between 2013 and 2018.

Monetary Impact of Inbound Travel to the U.S. The growth in international travel to the United States has a profound impact on the market and the domestic economy. According to the U.S. Travel Association, in 2013 (the latest year for which data is available), 1 in every 9 jobs in the U.S. was dependent on travel and tourism, which means that spending initiated by inbound visitors, supported about 1.2 million U.S. jobs, with wages of $29.5 billion.ii

According to the same source, international visitors to the U.S. spent approximately $4,500 each and stayed on average 17 nights. For visitors from China, the average spending was much higher. The U.S. Travel Association indicates that the average spending per Chinese visitor was $7,200 in 2013, the highest average spend by inbound visitors from any country.

The high spend by Chinese travelers to the U.S. as well other international visitors highlights the importance to merchants of ensuring a seamless payment experience whether visitors wish to use traditional payment instruments like cash or their own domestic network branded debit or credit cards. The global shift away from cash as the default travel payment option means that merchants in areas that attract a high rate of foot traffic from international visitors or that appeal to the tourist segment should be knowledgeable about international payment networks that are alternatives to the traditional payment networks (American Express, Discover, MasterCard, and Visa) and they should at least consider methods for implementing acceptance of these international visitors’ payment cards.

Beyond the Traditional Payment Networks

While the traditional payment networks remain leaders in the payments industry and often top of mind among consumers, there is a growing trend around the world for countries to create domestic or national networks to either rival or work with the traditional payment networks. Countries’ motivations for the creation of their own networks vary considerably, from increased leverage in negotiations with traditional networks, to greater control over outreach efforts like financial inclusion, to concern over the safety and security of the sensitive personal data of their citizens.

Figure 2 is a map indicating which countries have their own domestic or national payment networks in addition to the traditional international networks. The map also illustrates an example of the strategic alliances mentioned above between traditional international network and alternative international networks, in this case Discover’s strategic alliances with two major national networks, China’s CUP and Japan’s JCB, which are discussed in more detail below the map.

The number of countries colored gold in Figure 2 demonstrates the broad deployment of alternative international payment networks. Given the large travel volumes anticipated today and in the near future from China and Japan, the two most significant international networks for U.S. merchants considering facilitating payment acceptance are China UnionPay (CUP) and Japan Credit Bureau (JCB).

Figure 2: A Map of International Payment Network Alternatives

= Countries with domestic payment network in addition to traditional networks (American Express, Discover, MasterCard and Visa). maps a Discover Strategic Alliance/Partnership. Discover has Strategic Alliances/Partnerships with Japan Credit Bureau (JCB), BC Card (South Korea), Serbia (DinaCard), China UnionPay (CUP), and RuPay (India).

Norway

Canada Russia

4 2 1 3 China Iran Japan Saudi India Arabia Vietnam

Nigeria

Angola

Australia

New Zealand 1 = Spain, 2 = France, 3 = Italy, 4 = Germany. Countries difficult to discern that have domestic networks include Singapore, South Korea, Serbia, Bulgaria, Croatia, Slovenia, Switzerland, Denmark, and Malta.

Source: Mercator Advisory Group Japan’s JCB Perhaps the first international payment network encountered by U.S. merchants was Japan’s JCB. The credit card network has been actively expanding its business overseas since the early 1980s. In 2006, it entered into a strategic partnership with Discover Financial Services (DFS) that enabled the acceptance of Discover Network brand cards at JCB point-of-sale terminals in Japan and acceptance of JCB brand cards at Discover Network Merchants in the United States. With Japan expected to be the origin of around 3.6 million tourists to the United States annually according to the U.S. Department of Commerce, participating in the Discover Network can enable U.S. retailers to service Japanese tourists in a convenient manner.

China UnionPay Founded in 2002, China UnionPay has a virtual monopoly on issuing payment cards in China. Much of the country’s 1.35 billion population holds a CUP debit, credit, or prepaid card. Chinese tourism to the U.S. is expected to grow from 2.2 million visitors in 2014 to nearly 5 million by 2019, according to the Department of Commerce. A strategic alliance formed in 2005 allows transactions made with UP cards in the U.S.to be processed on the Discover Network. Thus by participating in the Discover Network, merchants located in the U.S. can ensure they will not miss out on CUP-issued card transactions of Chinese travelers to the U.S. For U.S. merchants, the direct result of such a strategic alliance is that cardholders from China or any other market in which Discover Financial Services has a partnership with a local network enjoy the same seamless payment

experience that consumers using U.S.-based cards enjoy and thus are more likely to complete their transactions rather than use cash or abandon a transaction entirely.

Further International Expansion The traditional networks are forming partnerships with other international networks beyond the largest markets, for example in France, Visa works with the domestic Carte Bleue network to enable international use. Discover Financial Services has entered into similar strategic alliances with BCcard in Korea and DinaCard in Serbia and is working to build other new partnerships globally to provide value to merchants and cardholders domestically and abroad. In 2012, DFS entered into an alliance with the newly created Indian RuPay network that will allow Indian consumers to use their RuPay cards internationally anywhere that Discover cards are accepted. This service went live in January 2014 and with Indian consumers are increasingly visiting the U.S. and posting high spend levels (according to the U.S. Travel Association, the average spending per Indian visitor was $6,165 in 2013). So this alliance will further benefit U.S. merchants participating in the Discover Network, since acceptance of Discover will enable them to provide a seamless payment experience at the physical point of sale for the myriad visitors holding RuPay-issued cards.

The Value of Facilitating International Payment Acceptance

Globally, consumers are shifting away from the use of cash for payments at the point of sale in favor of spending through debit, credit, and prepaid cards. This shift differs by market and is at different stages depending on each market’s economic development. For example in Western Europe, the use of payment cards is widespread, and cash use declines year over year, whereas in developing markets, large sections of the population are unbanked and or underbanked and still use cash for the majority of their transactions.

Many international travelers visiting the United States want to make purchases using the same electronic payment card they use to make purchases in their home countries. A difficult or failed transaction if the card is not accepted forces many to resort to cash payment or abandon the transaction. Merchants miss out if they cannot accept these consumers’ international payment cards. All the pieces have to be in place to ensure that cardholders receive the same seamless payment experience whether they are abroad or at home.

By participating in a network that has alliances with international payment networks, U.S. merchants can leverage the strategic alliances and be able to easily accept Chinese or Indian branded cards as millions of Chinese and Indian tourists come to the country each year. Although consumers from these countries are not the majority of inbound visitors to the U.S. today, in the very near future they will be among the most numerous visitors. For the merchant, this makes the decision to accept Discover, which enables acceptance of international network alternatives like China UnionPay, a smart investment. The alternative is to risk losing out on part of average $7,200 spent by Chinese consumers when they visit the United States.

Endnotes

i http://media.unwto.org/press-release/2015-01-27/over-11-billion-tourists-travelled-abroad-2014 ii https://www.ustravel.org/sites/default/files/page/2013/08/US_Travel_AnswerSheet.pdf

Copyright Notice External publication terms for Mercator Advisory Group information and data: Any Mercator Advisory Group information that is to be used in advertising, press releases, or promotional materials requires prior written approval from the appropriate Mercator Advisory Group research director. A draft of the proposed document should accompany any such request. Mercator Advisory Group reserves the right to deny approval of external usage for any reason.

About Mercator Advisory Group

Mercator Advisory Group is the leading independent research and advisory services firm exclusively focused on the payments and banking industries. We deliver pragmatic and timely research and advice designed to help our clients uncover the most lucrative opportunities to maximize revenue growth and contain costs. Our clients range from the world's largest payment issuers, acquirers, processors, merchants and associations to leading technology providers and investors. Services include Banking Channels, Credit, Commercial and Enterprise Payments, Debit, Emerging Technologies, Global Payments, and Prepaid practices, which provide research documents and advice; CustomerMonitor Survey Series, which report and analyze primary data collected in our biannual consumer surveys; and Consulting Services, which enable clients to gain actionable insights, implement more effective strategies, and accelerate go-to-market plans; offerings include tailored project-based expertise, customized primary research, go-to-market collateral, market sizing, competitive intelligence, and payments industry training. Mercator Advisory Group is also the publisher of the online payments and banking news and information portal PaymentsJournal.com. Visit www.mercatoradvisorygroup.com.

About Discover Financial Services Discover Financial Services (NYSE: DFS) is a direct banking and payment services company with one of the most recognized brands in U.S. financial services. Since its inception in 1986, the company has become one of the largest card issuers in the United States and has grown to become the third-largest payments network in the world. The company issues the Discover card, America's cash rewards pioneer, and offers home loans, private student loans, personal loans, home equity loans, checking and savings accounts, certificates of deposit and money market accounts through its direct banking business. It operates the Discover Global Network, which includes Discover Network, with millions of merchant and cash access locations; PULSE, one of the nation's leading ATM/debit networks; and Diners Club International, a global payments network with acceptance in more than 185 countries and territories. For more information, visit www.discover.com/company