EU considers new interchange fees regulations
The European Union (EU) is considering new regulations that could result in significant changes to the payments card market as interchange fees could vanish. According to the EU, the current payment card system is “unknown to consumers and often opaque for merchants,” and the organization hopes to pass new regulation to make the market more competitive (cf. Smart Insights Weekly #12-49).
The move would follow years of litigation between the European regulators and payment card networks Visa and MasterCard, which process the majority of transactions across Europe. With businesses struggling in the region, regulations removing interchange could reportedly benefit retailers. For example, in the UK, every time a customer pays with a debit card, the merchant pays GBP 0.09 (EUR 0.11) on average to the networks and 0.7% on credit card transactions.
Consumers and the card networks are coming out against the move following changes in fees in other markets that scrapped interchange. Richard Koch, a senior executive at the UK Cards Association explains, “Regulation of interchange fees in Australia has been great news for retailers and bad news for banks, but it is consumers who’ve had the worst deal.” Australia is not the only market to see consumers not benefit from change. Following the Durbin Amendment and the interchange cap in the US, the Electronic Payments Coalition found 76% of merchants did not pass on the savings of the cap to consumers (cf. SIW #12-37 and #12-41).
Meanwhile, Richard Braham of the British Retail Consortium said it was impossible for a retailer to know exactly what he or she would be charged before putting through a card transaction, and that retailers should pay a “transparent and fair price” for card payments. “In areas where interchange fees have been capped the money goes into innovation, lower prices for customers and service,” he said. “Otherwise, it goes into pure banking profit.”
Keith Douglas, the general manager of MasterCard in the UK and Ireland, said the interchange fee helped to compensate card issuers for the added costs from issuing plastic cards and the risk they took, particularly with credit card transactions. If a cardholder pay for a product on a credit card, the issuer is liable to pay when things go wrong, as well as the retailer. Card issuers also lose out if a transaction is carried out fraudulently.
He said card issuers would stop giving out cards to many people, especially those who were considered more of a risk, if they were not compensated with fees. He added that retailers benefited from their customers paying by plastic card, not just because the customers found it convenient but also because in many cases the interest-free period allowed customers to spend more in their shops.
At the same time, the European Commission (EC) is expected to issue a White Paper with decisions about capping the fees. The move follows prolonged litigation between MasterCard and the EU over whether fees currently charged are anti-competitive. MasterCard is currently appealing a decision in favor of the EU made in May 2012 (cf. SIW #10-50, #12-22 and #13-16).
In France, following the decision of GIE CB’s (Groupement des Cartes Bancaires, an Economic Interest Consortium) to reduce interchange fees in the state, MasterCard and Visa have already decided to engage in the same way for their interchange fees related to the use of their cards in France. In the wake of the decision of July 7, 2011, the Competition Authority has obtained a substantial cut of GIE CB’s major interchange fees associated with CB card transactions: -36% on interchange fees for payment transactions, and -21% for cash withdrawal transactions.
Visa and MasterCard have proposed to lower their interchange fees by 38% and 34% respectively in France. MasterCard is to reduce the fees by 38% to 0.34% of the amount of the payment transaction, and by 8% for cash withdrawal transactions to 0.55 euros. In turn, Visa has proposed to reduce its interchange fees by 34% on payment transactions and to fix them at 0.33%. The group does not, however, intend to change the fees that apply for cash withdrawal transactions made with Visa-labeled cards.