Today marks a significant date for interchange rates across the Europe as all EU countries align their domestic credit (0.3%) and debit card (no more than 0.2%) rates. Whilst several countries including Spain, Hungary and Poland reduced rates earlier
in 2015, National Regulators in other markets are now obliged to enforce the next phase of the EU Multilateral Interchange Fee legislation to align domestic interchange with EU Cross Border rates.
This phase of the regulations is designed to increase transparency of fees to merchants and lead to lower costs at the Point of Sale (POS) for consumers. However, will both consumers and merchants benefits from this festive gift?
Let's look at these two objectives in a little more detail:
Merchant fee transparency: The regulations states that merchant fees need to be unbundled, breaking out the interchange rates and other fees (including scheme fees, risk and acquirer margin). Sounds like a great idea in theory, but these changes increase
the complexities of pricing compared with historical bundled pricing. This unbundling makes merchant reconciliation harder compared with a (relatively) straightforward calculation of multiplying card volumes by a % fee or a flat fee per transaction. Despite
the regulations success at simplifying intra-EU credit, debit and prepaid products there are still a long list of unregulated card products: international (non-European) credit/debit/premium/prepaid/charge cards as well as corporate, business, and purchasing
credit/debit/prepaid. All of these unregulated products will have different interchange fees, scheme fees and acquirer margins. This complexity will only increase from June 2016 when acquirers will be required to break out other fees further by providing scheme
fees and acquirer margins. This unbundling may suit large merchants with accounting and finance specialists, but is unlikely to improve the smaller business’s ability to understand what they are paying to accept card transactions, and allow price comparison.
While the objective of increasing merchant visibility of where the costs of acceptance occur may be achieved, it is unlikely to drive competition in the market.
Cheaper consumer prices at the POS: It is too early to say how merchant’s acquirer service fees will alter in response to falls in interchange, but they are expected to drop due to market forces over the next 12 to 18 months. Many large merchant groups
will already have benefited through the Visa Europe Cross Border Domestic Interchange Programme (CBDIP) and will be able to work with acquirers who can dynamically route transactions to optimise their fees. The big question is will this reduction in interchange
fees lead to cheaper prices at the POS for consumers? I expect not. Firstly, the drops in merchant card acceptance costs are likely to be under 0.5% - just about offsetting the 0.3% inflation rate in the Euro-zone last year. The costs to merchant of repricing
goods to reflect a net reduction of 0.2% is likely to be greater than the potential saving to consumers. Secondly, in most markets cards still account for less than 50% of transactions, halving the saving on any individual basket of goods to c.0.1%, therefore
making re-pricing even less likely. International experience in markets such as Australia also indicates that merchants do not pass on reductions in their card acceptance fees to consumers. In markets such as the UK many issuers have already dropped their
rewards programmes, reducing consumers’ incentives to use their cards. The evidence seems to be that declines in interchange severely impacts issuer income, leading to increases in cardholder fees.
In summary, there are very few winners in the 4 party card model following the EU MIF Legislation with larger merchants benefiting the most:
- Issuers - less revenue, reduction in premier products, removal of loyalty solution, increases in cardholder fees and increased risk of defaults through higher interest rates.
- Acquirers – possible reduction in margins, major investment in billing/settlement engine to implement/statement/report interchange ++ pricing, increase in merchant communication and support to explain the changes
- Merchants - The main winners are larger merchants for whom interchange benefits will be passed through directly. Smaller merchants are likely to see increases in prices as acquirers respond to rising costs, reduced margins from larger merchants,
and more confusing monthly bills.
- Consumer - reduction in card related benefits e.g. loyalty schemes, increased fees, and higher interest rates with no clear reduction in acceptance costs at the POS.
The EU MIF legislation has been the single biggest change to impact the card industry over the past 20 years and will continue to present Issuers, Acquirers, Card Schemes and merchants with significant challenges during 2016 and beyond. Each party will need
to be creative and optimise costs, generate new revenue and develop new product/service offering albeit with less revenue. For many merchants, Christmas has come early, but will Consumer benefit - very unlikely!