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Ian Bowen - PayX Iinternational Ltd

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MIFs vs Bilaterals - The Good The Bad or The Ugly?

26 November 2012  |  4533 views  |  2

The regulatory position on interchange fees in Europe over the last 5/10 years has shifted significantly.  Whereas in the 1990’s and as late as 2002 the competition authorities gave the international card schemes clearance when they filed their interchange fee arrangements (albeit the latter one with conditions) now the regulators seem to be very much of the opinion that the MIF rate setting arrangements of the card schemes are anti-competitive.

So are bilateral ICF rate agreements the answer?  I am told that the Swedish regulators ‘like’ the bilateral ICF rate process that is mandatory under Swedish local country MasterCard rules.  The now defunct Switch Card proprietary debit card scheme in the UK was characterised by all members having to agree bilateral rates between each other.  I understand that some of the Eastern European countries are more and more favouring the bilateral rate setting route.

So let’s dig a little into the pros and cons of MIFs and Bilaterals and then, for bilaterals, consider the principal negotiation strategies scheme member pairs employ.

If I take MIFs first the major plus point is that it creates a level playing field for all players operating in the card issuance and acceptance space and, believe me, that is an important consideration.  MIFs are supported by detailed cost studies either directly conducted for the product rates to be set or are relevant in proxy terms, with appropriate cost/risk adjustments, where different product rates are implemented.  Cost studies calculate the weighted average costs included, exclude outliers with unexplainably high costs and, therefore, provide a robust and fair basepoint (in my view) on which to construct MIFs.  The component parts of interchange fee rates is a subjective and emotive subject but again, in my view, the components elements are appropriate and reasonable.

The only downside I see on MIFs is the expense of, and time consumption of members participating in, the cost studies. 

In terms of bilaterals, pros, cons and negotiation strategy;


Properly conducted, they satisfy regulatory requirements.

Properly or improperly conducted they provide a sense of regulatory comfort to the bilateral parties


They are resource intensive

Invariably they are highly iterative

They are impractical beyond a relatively small number of domestic players

They create an uneven playing field that, more often than not, is not based upon real costs

ž   Agreement may not be reached, leading to arbitration and the further costs that involves

ž  Unless a completely independent arbitrator is used the arbitration process could be flawed, with commercial considerations clouding the judgement of a non independent arbitrator.

ž  Market changes require the process to be repeated on a regular basis

Negotiation Strategy

In my experience the single component of the negotiation strategy centres around the size and scale of the parties involved with the larger, higher volume, party expecting to receive a better rate for the proportionately ‘higher value’ they bring.  Is this meritorious or disingenuous?

Individuals will draw their own conclusions but it could be argued that a high volume player will benefit from economies of scale with a contrary position applying to the smaller player and perhaps, therefore, that negotiating on the basis of size and scale is flawed.

An alternative method of determining a fair set of rates might be to consider the relative cost positions of the two parties involved in the negotiation relative to local cost study outputs, where these are available.  If they are not available, and this is increasingly the case as the card schemes keep their member banks disconnected from the interchange fee rate setting process, it does make this strategic approach more difficult ......... but not impossible, and it could be a fairer method of cost apportionment.

So, on balance, I personally lean more towards MIFs as being the better, more efficient approach to interchange fee arrangements.  I think some of the arguments in favour of bilateral rate agreements are specious;  Bilaterals can conceivably operate as a protectionist tool for scheme members.


Comments: (3)

A Finextra member
A Finextra member | 28 November, 2012, 09:27

Why not both?  Under current scheme rules any pair of members can set their own bilateral rate, as required in Sweden, and this approach has been executed in other geographies.  That way the MIF becomes the default when new members enter a scheme and then Bilateral agreements can be applied  when the particular impacts can be analysed by the various parties. The transaction volume data then be the basis for the agreement for a bilateral rate. 

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A Finextra member
A Finextra member | 28 November, 2012, 22:28

The regulators really need to work out what they want. Bilaterals are only workable at a domestic level; it is not feasible for cross-border acquirers to get such rates. They get locked out...this used to be the case in Spain where domestic bilaterals were lower than the cross-border and it's still the case in Sweden. Foreign acquirers cannot compete effectively because they have to pay higher interchange. So the regulators want bilateral interchange and more cross-border acquiring....brilliant!! 

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Ian Bowen
Ian Bowen - PayX Iinternational Ltd - London | 20 December, 2012, 13:13

Got it in one:-)

Scheme rules, as I recall, require x-border acquirers to utilise domestic ICF rates for locally issued cards (i.e. domestic txns in the territory they are x-border acquiring in).  In Sweden local rules require scheme members to agree bilaterally, the MIF (in theory) should only be a temporary rate until bilateral negotiations have been concluded.

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