The new report, "Payment Card Processing in Western Europe", reveals that 'true' credit cards in the US sense - a plastic-based revolving line of credit on a 36-month cycle - remain essentially a niche product in Europe.

While Western Europe represents a consumer credit market potentially one-third larger than the US, issues such as a traditional reliance on debit products and the predominance of country-by-country card processing networks remain barriers to sweeping change in both European payments habits and infrastructure.

The research examined payment behaviour in the United Kingdom, Portugal, Spain, France, Italy, Germany, Scandinavia, Belgium, Netherlands and Luxembourg.

Findings of the research show Western Europeans continue to favour debit cards, specifically the deferred debit type of card which allows issuers to deduct purchases made on a 30-day cycle directly from a cardholder's pre-established account. Seventy-three per cent of all cards in the European Union (not including the UK) are debit cards, versus only 27% that are revolving credit cards. The UK represents a 'mid-point' between the US and Western Europe, with 57% of UK cards debit versus 43% that are credit cards.

Culturally, Western Europe has tended to be a savings-oriented society, in contrast to what observers have termed the US' borrower mentality. This has resulted in slower adoption of revolving credit products for payments.

In addition, bank secrecy legislation has made it difficult for financial institutions to execute the kind of direct-mail marketing campaigns that have driven credit card growth in the US, because those laws impede comprehensive statistical account scoring.

The report shows country-by-country credit card processing and proprietary national systems predominate in Western Europe. This has led to consistently higher processing costs for European financial institutions, on top of less income derived from a low-margin, debit-heavy mix of products.

However, according to TowerGroup, progress is being made towards the adoption of common technical standards. First Data Europe has begun card processing for three of the largest German banks, just as one of the largest German issuers, DeutscheBank, is gearing up to process cards for other banks using a US-sourced technology platform, CamSII from CSC.

Profitability may also become a driving force for change, says TowerGroup. Western Europe's total combined dollar volume for debit and US-style credit will be approximately $795 billion in 2001, versus US dollar volume for credit alone of $1.35 trillion. And though Western Europeans carry almost half the number of total cards as US consumers, European banks' IT expenditures for card processing will be 88% as much as US processing costs for the same period.

Theodore Iacobuzio, a senior analyst in TowerGroup's consumer credit practice, comments: "Despite the swift progress the region is making toward economic and fiscal integration, it's clear that the current payments infrastructure and ingrained preferences of European consumers for debit-based products will not be transformed overnight."

"By addressing technical standards relative to card processing and bringing more third-party, cross-country processors on the scene, European banks could leverage economies of scale that would reduce overall costs," he adds.