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EU to face payments shake-up as Commission proposes caps on card fees and new regulations

24 July 2013  |  12624 views  |  10 euro

The European Commission has publicly confirmed plans for a new Directive on payment services across the EU, and proposals to cap interchange fees for domestic card-based transactions.

The Commission says the EU market for cards, Internet and mobile payments remains fragmented and faces important challenges that hinder its further development and slows down the potential of a single market.

Internal Market and Services Commissioner Michel Barnier says: "Today, the payment market in the EU is fragmented and expensive with a cost of more than 1% of EU GDP or €130 billion a year. These are costs our economy cannot afford. Our proposal will promote the digital single market by making Internet payments cheaper and safer, both for retailers and consumers. And the proposed changes to interchange fees will remove an important barrier between national payment markets and finally put an end to the unjustified high level of these fees."

The revised Payment Services Directive introduces new 'payment initiation services' that operate between the merchant and the purchaser's bank, allowing for electronic payments without the use of a credit card.

"These service providers will now be subject to the same high standards of regulation and supervision as all other payment institutions," says the Commission.

At the same time, banks and all other payment service providers will need to step up the security of online transactions by including strong customer authentication for payments. By the same consequence, consumers may be required to face only very limited losses - up to a maximum of €50 (vs €150 currently)- in cases of unauthorised card payments.

The Regulation on interchange fees, combined with the revised PSD, will introduce maximum levels of interchange fees for transactions based on consumer debit and credit cards and ban surcharges on these types of cards.

The Commission is proposing an initial 0.2% ceiling on debit card fees and 0.3% cap on credit cards for cross-border transactions during a 22-month "transition period".

Thereafter the caps will also apply to domestic transactions.

The new rules only apply to cards issued by MasterCard and Visa, with three-party model schemes such as American Express and Discover exempted. In the latter case, retailers will be allowed to continue to impose surcharges for their use or refuse outright to accept them.

However, all transactions processed through AmEx's Global Network Services (GNS) business - when its brand is licensed for use by other companies - would fall within the scope of the proposed pricing caps. This applies to about nine percent of American Express' business.

In imposing the caps, the Commission points out that the level of interchange fees varies widely between Member States, "which suggests that they do not have a clear justification and create an important barrier between the national payment markets".

The EC estimates that a cap will slash total debit card fees across the EU from around €4.8 billion to €2.5 billion, and credit card fees from €5.7 billion to €3.5 billion.

While the Commission anticipates the savings to retailers will be passed on to consumers through lower prices, market commentators expect a more likely consequence for consumers will be an increase in cardholder fees and interest rate hikes as issuers look to recoup lost revenue.

Comments: (10)

Alexander Peschkoff
Alexander Peschkoff - TEDIPAY - London | 24 July, 2013, 11:39

Turnover in the EU-27’s retail trade sector was valued at EUR 2 592 billion in 2010. Average interchange rate (considering special deal for supermarkets who account for a large share of the total turnover) across EU is around 1.5%. That's €40bn, not €130bn.

Also, could the issuers and the card schemes really support all their fraud management, customer protection, regulatory enforcements, merchant certifications, etc. activities with 0.2-0.3% cap? What about the acquirers - they need to feed their children too? Or does the cap apply to the issuers only? If so, will the acquirers play ball?..

 

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Alexander Peschkoff
Alexander Peschkoff - TEDIPAY - London | 24 July, 2013, 14:32

Also, increased cash use could mean less taxes being paid... Not to mention that the consumers will not see any benefit from capped interchange as the merchants are not there to share (as Durbin clearly showed in the USA)...

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A Finextra member
A Finextra member | 24 July, 2013, 19:25

This had been a very long time coming: 25+ years …:)


It will undoubtedly move the cards market further towards debit, which already represents the majority of card transactions today, while credit card and loyalty programmes get much smaller or disappear altogether. It will also act as a spur for pre paid cards, mobile payments and cash substitution.


There are a number of additional very welcome aspects within the detail of this initiative from the EU Commission including automatic refunds and electronic credit transfers.


While there will be much nashing of teeth in the banking and payment industry, it will survive albeit with lower levels of direct profitability than it has enjoyed historically.


On the surface this is all very positive for the European citizen. The reality is that banks will increase fees for maintaining current accounts and issuing cards while retailers enjoy increased margins so consumers are likely to suffer overall. 


There are many other distortions apart from interchange. For example, UK banks don't charge consumers for debit cards today but many banks in mainland Europe charge in excess of € 12 per card per annum. 


If the EU Commission really intends to deliver sustainable benefits to the wider economy and consumers, it will need to be much faster in regulating current account and card fees in a market that experiences little real competition now that so many banks are fully or partly owned by member governments. 

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Mike Fromant
Mike Fromant - Contis Group Ltd - Skipton | 25 July, 2013, 09:15

Banks and the EU should think more creatively about how they can offset the transaction fees that are needed to keep the payments system moving. Some innovative debit cards from e-Money providers, for example, enable consumers to earn rewards on purchases which are paid onto their card, and far exceed the couple of pounds a month charge that the cardholder bears to use the card and accompanying e-account. As the high street, personal finance and online shopping worlds continue to collide, banks and the EU should be thinking collaboratively about how they can use this problem to enhance the cardholder’s banking experience, instead of squabbling over fee caps.

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Alexander Peschkoff
Alexander Peschkoff - TEDIPAY - London | 25 July, 2013, 11:16

I disagree with Mike. That's not too dissimilar to saying that the governments should be more creative about tax collection or running their countries without taxes, instead of making a fuss around tax evasion...

There is a huge difference between market forces and regulatory ones. Most of us pay, without wincing, 10-15% tips at restaurants and to taxi drivers. In fact, many restaurants (in the UK) automatically add 12-15% "discretionary service charge" to the bill. Do we cry "Wolf!" and run to the EY mummy?.. Do we even care?.. Why so much fuss about 1.5-2% charge? Because it's the banks who get that money?..

It is not clear what objective EU is really pursuing - punishing banks or improving our lifes (or making retailers more profitable).

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Peter Robinson
Peter Robinson - Liberti Consulting - Northampton | 06 August, 2013, 13:25

Alexander - what the EU is doing is curbing these extraordinarily high costs that are unilaterally set by the card schemes and totally non negotiable, while at the same time increasing transparency, introducing competition and creating a level playing field for new entrants into this market.

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Alexander Peschkoff
Alexander Peschkoff - TEDIPAY - London | 06 August, 2013, 20:41 Peter, I agree with the theory, but what about the real life?.. Will consumers benefit? Durbin in the US gave us the clear answer. As for competition, why did retailers have to wait for that EU regulation to consider using alternative payment providers? Will retailers use any competing solution until it gains wide acceptance? (Can any solution gain wide acceptance without retailers adopting it first?)
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Peter Robinson
Peter Robinson - Liberti Consulting - Northampton | 07 August, 2013, 08:38

Bear in mind that card fees typically cost retailers (in the UK anyway) about 1% of the product value. Will you see an immediate drop in the cost of products at PoS by 1%?  If it were, would you notice it? I doubt it. Despite constant claims to the contrary by the card schemes, I think consumers will benefit overall. Perhaps not in the short term, but the reduction in costs that retailers will see following the implementation of this decision will eventually flow through to cheaper prices at PoS - that's the competitive nature of retailing, which coincidentally I think is more competitive than the banking industry who (largely) take their customers for granted!

To answer your second point, given the market dominance of the two major card schemes and the fact that there are so many customers wanting to purchase with these cards, retailers are obliged to accept them. They have little choice. This is further evidenced by some of the 3 party schemes where card fees are high and retailers are choosing not to accept them on that basis. This was a point picked up by the Commision. If you think about it, if for example, acceptance of American Express were lower than Visa or MasterCard, would more retailers want to accept Amex?  I think they would. Lower fees could result in greater acceptance and not necessarily result in a loss of interchange income to the Card Issuers. This was another point picked up by the Commission.

Retailers will accept competing solutions provided (a) there is a consumer demand for them i.e. customers increasingly want to pay that way or they risk losing that customer to a competitor, and (b) it's cost effective for retailers to do so. I accept it's a bit of a Catch 24 situation, but bear in mind that retailers are predominantly there to sell goods & services and satisfy the requirements of their customers. For most of them, payments are simply deemed a utility.

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Alexander Peschkoff
Alexander Peschkoff - TEDIPAY - London | 07 August, 2013, 09:04 Good points in the last paragraph, Peter, that hit many nails on the heads. As to 1%, I do agree that every penny counts, but for a typical consumer it's hard to appreciate importance of that saving from the perspective of retailers who routinely offer 30-50% off...
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Peter Robinson
Peter Robinson - Liberti Consulting - Northampton | 07 August, 2013, 09:13

You're right Alexander. A 1% saving can be seen as derisory, however imagine the customer reaction if retailers tried to pass that 1% charge on to the consumer at the time of purchase through a surcharge! They'd certainly notice it then .......and probably go to one of the merchant competitors, which is why surcharging wouldn't work where competition is intense - another point recognised by the Commission!

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