Spending boom on the cards for the euro

Credit and debit cards will be the best way to spend the EU currency from next year, writes Juliana Ratner

CREDIT CARD executives are hoping the switch to a single currency by 11 members of the European Union next year will be a bonanza for plastic money.

Consumers are expected to use credit cards more after the move to the euro on 1 January, because the single currency will encourage cross-border spending as price comparisons between the 11 countries become easier. And until the new coins and bills become available in January 2002, credit cards will be one of the easiest ways to make purchases in euros.

Larry Chimerine, an economist at MasterCard, said conversion "will be a boon" to European card spending, resulting "in greater usage than what would normally be expected". He said the increased charges from the euro will add to the growth already expected as a result of normal business expansion.

Industry executives and analysts aren't specific about how much of a boost they expect the euro to give to card use. Visa International expects "a stepped increase" in spending on its cards in EU countries next year. A spokesman for Visa's EU region, Peter Halliday, said growth next year would exceed this year's 25 per cent projected increase, though he wouldn't say by how much.

Spending on all cards in all of Europe - excluding the euro effect - is on track to rise 15 per cent this year, said US firm RK Hammer Investment Bankers, a consultant to the industry.

The euro will be introduced in January as an accounting unit when the exchange rates of the first 11 member currencies are locked together. The value of the German mark, for example, will be fixed at 3.3539 French francs and 990.002 Italian lire.

Those marks, francs, lire and eight other currencies will continue to exist as subdivisions of the euro for three years. Shoppers at a Munich boutique will still hand over German bank-notes when paying in cash. Euro banknotes and coins will not appear until January 2002. Until then, anyone wanting to pay in euros will have to use plastic or personal cheques.

Euro notes and coins will circulate in parallel with national banknotes for up to six months. In July 2002 all national notes will be pulled from circulation and the euro will become sole legal tender in the monetary union.

Travel between member countries will increase as consumers find spending money in other countries easier, said Eric Sagerman, an American Express senior vice-president in charge of international product development.

"We think people will put it on plastic," Mr Sagerman said. American Express will introduce new card products after the conversion in countries where consumers are likely to increase card use, he said.

Of the 1 billion general purpose cards worldwide, Visa cards account for 58 per cent, MasterCard has 33 per cent, American Express and Japanese Credit Bank each represent 4 per cent of cards, and Diners Club accounts for 1 per cent.

Purchases on credit, debit and smart cards which contain a computer chip that stores "money", are sure to increase because they are "the only way to use the euro in the first three years," said Mr Halliday.

Visa hopes that the first three years of the euro when coins and notes won't be available will be a "habit-forming period" Mr Halliday added. Purchases on Visa cards accounted for 53 per cent of worldwide purchases on credit and debit cards.

Even after 2002, some analysts expect card spending to increase as consumers and merchants use cards more as a familiar form of payment to avoid the new bills and coins. "From practicality on the merchants' side and the ease of use on the consumers' side, it all points to higher spending on credit cards," said the chairman of RK Hammer, Robert Hammer.

In the EU region spending on all Visa cards, which include credit, debit and smart cards, was $392bn (pounds 240bn) last year, up 24 per cent from 1996, Mr Halliday said. Spending on MasterCard products in all of Europe was $145.1bn last year, up 21 per cent from 1996, a spokeswoman said.

The euro will make comparing prices from country to country easier for consumers, said Ian Coles, director of business relationships at Household International. A cardholder in Germany who buys something from another member country will know exactly how much his credit card will be billed. Currently, a consumer in Germany will not know what conversion rate he is charged on a purchase in France until the bill arrives, which will include a foreign exchange surcharge.

Europeans will be quicker to buy items from other countries after the conversion, said Mr Sagerman of American Express. "If you're sitting in Germany now, you don't really think about buying something in France," he said. After 1 January 1999, though, it will be easy to see if something in France is cheaper than the same item in Germany. If it is cheaper, the consumer in Germany can "call them up and have them deliver it, like you do from New York to California," he said. "And he's not going to spend cash."