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EU agrees interchange reforms

18 December 2014  |  11276 views  |  12 EU building, Brussels

The fees that banks charge retailers to process shoppers’ payments should be capped under uniform rules across the EU following a deal struck by Economic and Monetary Affairs Committee and EU Council negotiators.

The cap would apply to both cross-border and domestic card-based payments with the avowed aim of eliminating national differences in interchange charges. The move sees the EU states resort to legislative reforms following protracted battles with MasterCard and Visa in anti-competitive courts.

For cross-border debit card transactions the agreed cap is 0.2% of the transaction value. For domestic transactions, member states can apply the cap of 0.2% to the "annual weighted average transaction value" of all domestic transactions within the card scheme, says the EU Parliament.

The system of applying the cap on a weighted average basis will apply for five years only. Thereafter, interchange fees for domestic transactions will be subject to a simpler, more transparent regime where the ceiling for a domestic transaction is 0.2% of the transaction value, or set at a fixed fee of at most five cents per transaction.

For credit card transactions, the parties agreed to cap the fee at 0.3% of the transaction value.

The rules will also allow more freedom for retailers to choose which cards to accept, unless they are subject to the same interchange fee.

Says the memorandum: "Though the shopper’s freedom to choose which payment card to use could be restricted if retailers exercise this right, lower fees should translate into in lower prices for everyone."

It's an argument vigorously disputed by Visa and MasterCard, who say that retailers will just pocket the change and not pass on any savings to consumers.

The negotiators also agreed that the new rules should not apply to so-called three-party card schemes such as Diners and American Express (involving only one bank) provided the card is both issued and processed within the same scheme. Commercial cards used only for business expenses would also be exempt from the new rules.

In three years, the rules will also apply to three-party card scheme that license other parties to issue cards and thereby operate as four-party schemes, in order to avoid unfair competition in the long run.

The deal still needs to be endorsed by EU member states and by the Economic and Monetary Affairs Committee, before being put to a vote by the full Parliament next year.

Comments: (12)

Michael Hoffmann
Michael Hoffmann - Danske Bank - Copenhagen | 18 December, 2014, 11:24

Sorry - BUT isn't it the INTERCHANGE FEE that is capped and not the Merchant Service Charge - and by that a fee paid from acquirers to issuing bank (for offering and servicing cards)  and NOT from merchant to acquirer ??

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David Brunsdon
David Brunsdon - First Rate Exchange Services Ltd - London | 18 December, 2014, 11:34

Yes Michael you're correct.  Also, it is not accurate to describe these fees as capped - it is a fixed percentage not a cap.  So merchants with high transaction fees will actually end up paying considerably more - than the fixed debit fee currently.  Whilst most merchants will benefit from this measure it is certainly not all. 

I'll be happy to hear from other merchants that will be adversely affected.

Regards, David

david.brunsdon@firstrate.co.uk  

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A Finextra member
A Finextra member | 18 December, 2014, 12:58

Hi David Brunsdon ,

why would merchants with high tr fees pay more because of these changes ?

Thx ,

Eric

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A Finextra member
A Finextra member | 18 December, 2014, 13:27

This works only for the lowest interchanges , not for example for corporate cards intchs ?

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Michael Hoffmann
Michael Hoffmann - Danske Bank - Copenhagen | 18 December, 2014, 13:35

@Eric Corporate Cards are not covered by the regulation, but you may in that case most likely surcharge the merchant service charge to the consumer - according to PSD2 - present compromisetext

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Lu Zurawski
Lu Zurawski - ACI Worldwide - London | 18 December, 2014, 13:39

Eric - I Suspect David meant high transaction "values" (not "fees"). If you're a merchant with regular transaction values of, say, GBP250, used to paying a debit card transaction fee that includes only a fixed 8 pence interchange component, then it will get painful if that component is now to be calculated at 0.2% (i.e. 50 pence) per transaction. 

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David Brunsdon
David Brunsdon - First Rate Exchange Services Ltd - London | 18 December, 2014, 16:04

Hi Guys,

Lu is absolutely correct - I meant high transaction values.  Lu's example is a good illustration of the magnitude effect of this change.  Whilst we recover the credit card fees from customers we absorb debit fees - so this is going to be painful. 

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Arjeh Van Oijen
Arjeh Van Oijen - IBM GBS - Amsterdam | 19 December, 2014, 09:28

Lu, David,

I subscribe your conclusions. Bear in mind that with NFC coming up the average value of a transaction will significantly decrease. A debit card transaction of 5 euro will result in an interchange fee of 1 cent. I wonder at the end of the day what will result in the highest average interchange fee (incorporated in the merchant fee) for the merchant, a percentage 0f 0.2% or a fixed fee of 5 cent. May be someone else has a view on this?

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Peter Robinson
Peter Robinson - Liberti Consulting - Northampton | 19 December, 2014, 10:35

The key here is that individual Member States may set lower fees if they wish. I don't think anyone is disputing the enefits of a cap of 0.3% for credit cards. Debit card pricing is more of an issue, particularly as has already been pointed out, for the higher average transaction value merchants. I'm sure that the intention is not for merchants to have to pay more, as all that will do is transfer income from MasterCard who are predominantly credit in the UK, to Visa who have over 90% of the UK debit card market. The hope is that the UK regulator will, in addition t implementing the 0.2% value, also adopt the 5 cent cap, i.e. 0.2% OR 5 cent maximum. It's disappointing that Commercial Cards are excluded, though Merchants can now surcharge those cards (where Member States allow) to recover the (higher) interchange fee they have to pay.

Contrary to what the Card Schemes say about retailers pocketing the money, all consumers will benefit from these lower fees. Competition is extremely fierce in the retail sector.

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A Finextra member
A Finextra member | 19 December, 2014, 10:43

Hi ,

Thanks all for your comments .

Can someone send me the PSD2 compromise text ; eric.vandenbergh@me.com

thx ,

Eric

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Michael Hoffmann
Michael Hoffmann - Danske Bank - Copenhagen | 19 December, 2014, 11:18

I think I need to corect myself: Corporate Cards are not covered by the regulation BUT the definition of commercial cards has changed during the 4 technical meeting.  A commercial card is a card that is booked directly on a  corporate account (corporate liability) is excluded from the regulation  but a card that is booked indirectly (Personal liability) is incluced.

 

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Peter Comben
Peter Comben - C2 Consultants Ltd - Tunbridge Wells | 19 December, 2014, 12:25

As Michael said at the beginning of this thread, the regulation applies to interchange fees. Before the consumer benefits there are two entities between: the acquirer and the merchant. There is no guarantee these two entitiies will pass-on anything. Of course market forces should prevail and I am sure that is what the regulator is expecting. However since the regulator does not control the MSC and whether it is % or fixed or blended there will always remain some doubt as to whether the retailer has benefitted or lost - I am sure we will see even more imaginative pricing schemes develop. The key thing for me out of this is that there will be a more uniform pricing base accross the EU states and that has to be better for new companies establishing themselves accross EU.

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