Europeans fear they'll pick up tab for lower interchange fees

Europeans fear they'll pick up tab for lower interchange fees

Most Europeans think that they will pick up the tab if the EC forces card firms to reduce interchange fees, according to a survey commissioned by MasterCard.

MasterCard and its rival Visa have been battling European authorities for years over the fees that they charge for processing card payments. In may an EU court dismissed MasterCard's challenge against a European Commission ruling that the firm's cross-border interchange fees violated competition law.

The firm has long argued that any reduction in fees will go into the pockets of retailers, without savings being passed on to consumers, and has now commissioned a survey from Hall and Partners of 21,000 people in 21 EU countries to gauge their opinions.

The research shows the prevalence of cards in Europe, with 84% of respondents saying that they use them. Of these, 83% pay with debit cards and 51% credit cards while the main reason for using plastic - cited by 63% - is convenience.

Asked who will make up the "shortfall" if the "retailers' contribution for accepting cards" is reduced, 79% think it will be them, the consumer, compared to 15% who think it will be the merchants and 14% the banks.

Meanwhile, 44% do not think that retailers will pass on any reductions to customers in the form of lower prices, compared to 32% who think they will.

If fees go up, 70% of Europeans say that they will use more cash and 63% think that they will reduce their number of cards. More than half say that they would also still use cash even if they were shown that it is more expensive than plastic.

In support of its campaign, MasterCard points to research into Spain and Australia, which have both mandated reductions in interchange fees. In both cases, investigations found that cardholder fees went up and benefits down while there was no evidence that this was offset by lower retail prices.

When asked to allocate "proportions of government focus" across banks, retailers and consumers, 46% believe that if there is legislation in the area of cards it should focus its concern more on protecting customer interests.

Comments: (9)

A Finextra member
A Finextra member 12 October, 2012, 14:141 like 1 like

The statement says "In support of its campaign, MasterCard points research into Spain and Australia, which have both mandated reductions in interchange fees. In both cases, investigations found that cardholder fees went up and benefits down while there was no evidence that this was offset by lower retail prices."

There's no reason why cardholder fees needed to go up or benefits go down - couldn't the card issuers have simply absorbed these costs instead of simply passing it on to their customers? The card fees are currently being paid by ALL consumers not just those that pay by cash. Competition in retail is intense, with a constant pressure on costs and a need to keep costs down. Any cost reductions WILL be passed on over time as its the only way retailers can remain competitive.

The real question to ask is which is the more competitive industry, retailers or banks?  I know where I'd put my money!

A Finextra member
A Finextra member 15 October, 2012, 08:241 like 1 like

Indeed, banks are for profit companies, as are retailers, and expect to earn revenue from their services. If the card payment revenues from merchants are curbed by regulators, banks will seek new payers. The cardholders are close at hand to pay user related pricing. This risks press down card usage in favour of cash even though the MasterCard and Visa debit cards are cheaper than cash according to a Swedish Central Bank study in June 2012 and also credit cards are cheaper than cash  well below the present average credit card payment in Sweden. If the revenues cannot be found present issuers and acquirers may walk away as happaned to merchant cash deposits in Sweden due to long standing reluctance to pay a commercial price. Today this area is mainly managed by cash in transit companies and one of them recently went into bankrupcy with large receivables losses to merchants. Now there are merchant demands on regulatory intervention into the cash transit area. It may well be that in a future more inefficient Europe we will spend more on armoured cars, diesel fuel, guards, alarm systems and theft/robery insurance  and therefore can afford less spending on educating the young, healing the sick and caring for the elderly. But we will be in adherence of the interpretations of the competition legislation making it difficult to commercially manage electronic payment systems for Europe with thousands of banks, millions of merchants and half a billion of inhabitants.

Andrew Rothwell
Andrew Rothwell - House of Mozz - Sydney 15 October, 2012, 09:45Be the first to give this comment the thumbs up 0 likes

If card holders want fancy cards with fancy bells and whistles attached, then they should pay fancy prices for owning and using those cards, not the merchants (since acquirers pass the interchange fee through to them).

Schemes such as Visa and MasterCard still collect scheme fees, but surely these should be flat pricing only (not ad velorum), making the network much more cost effective for everyone.

Acquirers paying issuers an interchange fee for the privilege of accepting and routing issuers customers cards to them is a bit rich isn't it? After all, who is actually doing the heavy lifting in terms of technology rollouts and support? Not the issuing banks, that's for sure.

And since in the EU you have a single currency, and slowly but surely a single banking system, is there really any reason to collect cross border interchange fees?

No wonder there are new startups attempting to build alternative payment systems that reduce the cost of card transacting.

The more I look at the Canadians, and the legislative support they have introduced for Interac, around the elimination of (debit) interchange fees, the more impressed I am. Here finally, is a true "cost plus" payment network.


Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 15 October, 2012, 09:46Be the first to give this comment the thumbs up 0 likes

Although MasterCard has a vested interest in this survey, its findings do seem to resonate with practices followed by retailers after new interchange regulations were introduced in Australia and elsewhere. I remember reading that Qantas, the Australian national carrier, started slapping a 7.5% surcharge for accepting card payments even though it only incurred a 0.5% cost for processing them. I'm increasingly led to believe that Retailers Want To Have Their Cake And Eat It Too.

There are over 8K banks versus around 1K retailers in the USA. While I don't have equivalent figures for other nations, I'm reasonably sure that most of them have more banks than retailers. So, to answer @PeterR's question, banking would appear to be more competitive than retail! Still, switching costs in retail are negligible compared to banking, so retailers should be more inclined to pass on lower costs to consumers. Post Frank-Dodd-Durbin, debit card fees have dropped in the USA but there's no evidence that retailers have dropped prices so far. Only time will tell whether they do so going forward.

A Finextra member
A Finextra member 15 October, 2012, 10:40Be the first to give this comment the thumbs up 0 likes

The 79% of respondents who believe that they, as consumers, will pick up the tab, along with the 44% that don’t think retailers will pass on any MSC reductions, can safely be entered into the ‘Realism’ column (albeit that some merchants may decide to use some of the savings to compete more vigorously for business).

I’m not making a column for the respondents with a contrary view as I’m sure they will be quickly rounded up and returned to the secure unit they escaped from.

If we’re going to continue on the path of realism then I think the 1st question we must ask ourselves is, when did I last hear a Bank executive say to a revenue centre head “Don’t worry old boy, I appreciate that one of your revenue streams has been decimated so next year you only need to generate 80% of this year’s revenues”.  Now I’ve been in Banking and Finance for over 40 years and do you know, I’ve never heard that.  I suspect, on his side of the fence, Peter hasn’t either.

As for retailers passing MSC savings on, well, for the larger merchants (where the bulk of the savings will be enjoyed from lower interchange fees) it would be one hell of an exercise to truely establish if they were, or were not, being passed on to consumers (uniformly) – you’ve got loss leaders, BOGOF & other multiple offers that are constantly changing along with new and ‘falling off’ product price challenges all muddying the waters.

Two things are clear though, MasterCard’s final appeal of the EC negative decision of December 2007 promises to be a major crossroads for the industry, and may have far reaching consequences, making life in the Cards Industry even more exciting than it already is.  The second is that any diminution in card issuers revenues will be addressed, whether immediately, or over time, is the only (semi) indeterminate.

A Finextra member
A Finextra member 16 October, 2012, 16:01Be the first to give this comment the thumbs up 0 likes Reducing Interchange Fees - whilst making life easier for the Acquirer and Merchant - will likely add to the revenue concerns of the Issuers as they will see an immediate reduction in Interchange Income. As a result some products may see monthly fees or per-transaction fees - which will still cost the consumer at the end of the day. The current charges are hard for the consumer to determine as the MSC is blended into the price they pay at the till.
A Finextra member
A Finextra member 12 November, 2012, 21:49Be the first to give this comment the thumbs up 0 likes

Andrew Rothwell - you are missing the key fact that, without card issuers issuing cards, acquirers would not have a business model.

As any educated acquiring business professional would understand, acquiring business revenues are driven by the volumes processed by the acquirer. The higher the volume, the greater the Merchant Service Fee that can be charged. 

Issuers use the interchange income that they receive to encourage customer spend, by funding rewards/loyalty programs and spend increase programs.

In light of this, I fail to understand the validity of your point that acquiring businesses should keep all interchange revenue for themselves. Investments in their networks, while necessary to the overall system, do not directly benefit consumers in any way. Card issuers, on the other hand, have the power to directly drive spend and increase overall system volumes and card transaction penetration.

In relation to the overall issue at hand, any regulation by central banks into the card transaction market is outside of their mandate and only drives up prices for consumers and reduces the benefits that they receive from their cards. THIS IS A PROVEN FACT. In Australia, the regulation of credit interchange rates to 50bps every three years encourages card issuers to reduce the benefits provided under their loyalty programs. The benefits provided under travel insurance and concierge programs has also been reduced over recent years as well.

In addition, surcharging by merchants in Australia is even more rampant than before. QANTAS and other airlines charge credit card surcharges of up to AUD 30 per transaction. Cabcharge, a company that provides payment services to a large number of taxis in Australia, charges a 10% service charge for the pleasure of using one's card to pay for a taxi. A vast number of retailers are surcharging up to 3% for VISA/MasterCard/AMEX transactions even though they have the convenience of not having to deposit the cash for the given transaction at a bank branch.

If Central Banks want to add some value, they should be working closely with governments to legislate against the cash economy and to reduce the GDP-leakage and taxation leakage that is prevalent in countries, such as Australia as a result of this. 

A Finextra member
A Finextra member 13 November, 2012, 11:02Be the first to give this comment the thumbs up 0 likes

Having worked for one of the worlds largest acquirers I can categorically state that higher volumes do not automatically result in higher MSC - take for example the case of a "very large supermarket chain" - they will be processing significant volumes through an acquirer - and unless the acquirer is in a monopoly situation - pressure is applied to margins (negotication of MSC).  Now take the example of the shop on the corner - he has a not very good negotiation position and will therefore pay high MSC regardless of who he goes with (and probably a terminal rental fee too).

I agree that MSC and Interchange rates are high for the service they provide - but any change on that side of the ecosystem will impact the Issuing side of the business as people have commented previously.

A Finextra member
A Finextra member 13 November, 2012, 11:24Be the first to give this comment the thumbs up 0 likes

I'm always being told by my acquirer that volume drives price and that the higher the volume the lower the price not the reverse.

As a merchant on Interchange plus pricing, I'm perfectly happy with the fee that I pay my card acquirer - at least I can negotiate that - unlike the MIF which is non negotiable - and which represents well over 90% of my cost of card acceptance.

I agree that smaller merchants will almost certainly pay a higher MSC - but that will in part be attributable to their decision to opt for a blended rate over an Interchange plus rate, for reasons of simplicity and so that they have confidence in knowing exactly how much they'll be paying for card acceptance. The downside of them going down that route is that the acquirer then has to build in a 'safety net' to cover themselves against changes in the mix of cards which the merchant accepts - such as can be seen by the rapid emergence of Premium cards in the UK.