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EU Parliament approves interchange fee caps

10 March 2015  |  18277 views  |  21 Woman shopping with credit card

The European Parliament has voted overwhelmingly in favour of a bill to cap the interchange fees charged by card schemes for payments using credit and debit cards.

The European Commission welcomed the outcome, estimating that the rules when implemented could lead to a reduction of about €6 billion annually in hidden fees for consumer cards.

The Regulation, which will come into force in October, will cap interchange fees at 0.2% of the transaction value for consumer debit cards and at 0.3% for consumer credit cards. For consumer debit cards, it also gives flexibility to Member States to define lower percentage caps and impose maximum fee amounts. It additionally addresses licensing issues and other conditions that it says have restricted the freedom of choice of retailers.

In its MasterCard judgment of September 2014, the European Court of Justice made clear that such interchange fees are a violation of EU antitrust rules.

Commissioner Margrethe Vestager, in charge of competition policy, says: "This legislation will put a cap on interchange fees, make them more transparent and remove a hurdle to rolling out innovative payment technologies. It is good for consumers, good for business and good for innovation and growth in Europe. As cards are the most widely used means of online payment, this Regulation is also an important building block to complete the European Digital Single Market."

The legislation was passed by 621 votes to 26, with 29 abstentions.

The new rules will 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 to pay business expenses will also be exempt.

After three years, the rules will also apply to three-party card schemes that licence other parties to issue cards and thus circumvent the law by effectively operating as four-party ones.

Comments: (21)

Craig Lawrance
Craig Lawrance - Starkspur Ltd - Chalfonts | 10 March, 2015, 12:44

This should help to drive down the Merchant Service Charge, unless of course the market is already ahead of the regulators.

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Bill Thomas
Bill Thomas - UNFCU - Long Island City | 10 March, 2015, 12:52

It will be interesting if this has actually any benefit to the consumer.  In the US, where there have been some limited restrictions placed on debit interchange, the merchants just reduced their costs but savings were not passed onto consumers.  In fact, consumers ended up paying more because issuers (banks) needed to find ways to make up for that lost revenue stream.

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A Finextra member
A Finextra member | 10 March, 2015, 12:52

Someone will have to pay for these changes !?

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Stephen Hart
Stephen Hart - Cardswitcher.co.uk - Manchester | 10 March, 2015, 13:15

The group with most to benefit are acquirers.  Recent events in UK re Visa debit rates demonstrate that lower interchange doesn't automatically translate to lower Merchant Service Charges because acquirers use it as an opportunity to drive more margin from businesses on "blended pricing".  Same thing happened in US re the Durbin Act debit caps - acquirers pocketed the profit.  Benefits to merchants on blended pricing will be drawn out over a prolonged period.

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Kevin Smith
Kevin Smith - Kevin Smith Consulting Ltd - Reading | 10 March, 2015, 13:39

So significant reduction in costs to be realised by merchants, with no guarantee that these benefits will be passed onto the consumer. Other market developments demonstrate this. Reduction in interchange and loss of revenue to card issuers begs the following questions, where and how will issuers make up at least some of the difference/shortfall - from the customer? What will happen to innovation? Is there sufficient bandwidth in these rates to incentivise security and innovation best practices? As acquirers are increasingly more transparent and interchange becomes a lower figure as a value, will it not just highlight their own ineffiencies by exposing acquirer processing costs? Is it true that only large merchants understand the ramifications of interchange reductions, therefore smaller merchants will continue to subsidise? It is worth noting that as it stands today, Visa debit rates in the UK are temporarily higher than previously, before they are reduced again.

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George Pace
George Pace - GPO Consulting Ltd - Headcorn | 10 March, 2015, 17:22

This is a bad move for consumers. Card issuers are losing a large chunk of their income. How can they provide the security and inovation needed AND provide other benefits to their cardholders? Acquirers will pass the lower rates on to the large merchants but they will not reduce their prices, as in many countries much of this is still cash. So as a merchants will I reduce my prices as I've gained 0.5% in lower costs? Not a hope... also there is no such thing as a 3 party model only a 4 party model where one party plays 2 roles. So Diners and Amex with traditionally the highest MSC get to keep it all when the issuing banks that are members of MCW and Visa suffer... and Visa and MCW make\lose nothing from this at all, just their members...

Not sure the EU really understand this.

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Nigel Walters
Nigel Walters - RSM 2000 Ltd - Bedford | 10 March, 2015, 20:20

This will have little or no effect on retail prices, where acquirers opt to pass on the changes in retail MSC charges it will be the retailer that will benefit in seeing his cost of processing payments by card reduce, in the casr majority of cases the consumer will see no benefit what so ever.

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Peter Robinson
Peter Robinson - Liberti Consulting - Northampton | 11 March, 2015, 11:31

Given how competitive retail is, how realistic is it to expect a customer to notice a £5 reduction in a £1,000 TV and believe it's directly attributable to a 0.5% reduction in card charges when prices are changing on almost a daily basis as competiton between retailers hots up? Of course it won't be that obvious and it's unlikely that the savings retailers make will be shared in that way.

The market in which retailers operate is highly competitive. They compete on price and value every day and put their customers at the heart of everything they do (unlike some of the banking practices we've seen to date!). Any savings in a reduction in card interchange fees will create capital to enable a range of investments to be made such as, investing in new store designs; improving customer service propositions; extending the range of products available; investing in technology to improve the customer shopping experience (multichannel, mobile); expanding their commercial footprint through new stores; and crucially, enabling small businesses to compete more effectively. How do you monitor a pass through like that? That's were the savings will go. That's what competiton in retail forces them to do. Either that or wither on the vine and die.

It's not a bad move for consumers at all. Banks have been making excessive profits from interchange fees for years. The EC was absolutely right in their aproach - and solution (for credit anyway). The reduction in fees will also (hopefully) result in many more cards being accepted by small merchants as the costs become more bearable. 

Also, don't lose sight of the fact that, following the ruling and once implemented, any retailer with an average transaction value of more than £40 will be paying MORE for debit than they do now. I'm sure this wasn't the intention (for the UK anyway) and hope this will be an anomaly picked up by the Payment Systems Regulator in due course. 

Stephen H is right. It will be the unscrupulous Card Acquirers that have the potential to be the biggest winners - at the expense of the small merchants, by failing to pass on the savings achieved. Merchants need to be astute to the changes taking place and demand interchange plus pricing from their acquirers and demand much more transparency in their fees than they currently do.

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Mark Hirst
Mark Hirst - Thomas Cook Group PLC - London | 13 March, 2015, 16:23

Agree 100% with @Peter Robinson. I can't think of a more competitive industry than retail, especially grocery retail in this country.

The great shame in all this is the inability of SME merchants to throw off the shackles of blended pricing.

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Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 13 March, 2015, 18:37

Maybe it's only me but failing to pass on the reduction under the pretext that the customer won't notice it sounds patronizing. If retailers really "put their customers at the heart of everything they do", they'd discount the  £1,000 TV by £4 and spend the balance £1 on advertising the rationale of the price drop.

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George Pace
George Pace - GPO Consulting Ltd - Headcorn | 13 March, 2015, 18:42

But if they drop the price because their card costs have reduced they would have to do the same for their cash customers. I dont think that is good business sense.

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Nigel Walters
Nigel Walters - RSM 2000 Ltd - Bedford | 13 March, 2015, 18:48

I agree with both Peter and Mark, in reality most retailers do not differentiate between the price of a product dependent on the method of payment you use. As such any reduction in cost that retailers may see will be absorbed into the infrastructure of running the  business.

It should be remembered that the figures of 0.2% debit and 0.3% credit only relate to the interchange fee payable between the Acquirer and the Issuer, it is not a cap on the rate the retailer pays to the Acquirer.

In reality given that Visa Debit is the predominant card in use in the UK at the moment, many retailers could actually see their cost of card processing increase.

 

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Stephen Hart
Stephen Hart - Cardswitcher.co.uk - Manchester | 13 March, 2015, 19:00 Yes Nigel, many retailers/SME 's have seen their visa debit rates increase. Some are now paying MSC of up to 0.9% whilst their acquirers have interchange costs of only 0.2% (+1p). What's happening is that because interchange on credit cards is being slashed, acquirers know this will expose their premium margins which will have to come under pressure and they are seeking to prop up profits by increasing margins on debit cards.
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Mark Hirst
Mark Hirst - Thomas Cook Group PLC - London | 13 March, 2015, 19:53

@Ketharaman Swaminathan I think it's just you. It's equally patronising for you to be telling retailers how to run their businesses. How diligent, for example, has your bank been about driving down its fees over the years?

Retailers and merchants should be agnostic about payment types. We wish to allow customers to pay in any way they choose. The reality is that a global duopoly has chosen to anti-competitively stitch up the market.

Fixed, non-negotiable, superprofit-maximising, opaque and completely inconsistent MIFs. What's not to like...

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Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 14 March, 2015, 18:34

@MarkH: 

I'm merely pointing out one course of action from retailers that's consistent with their claims of being customer-centric, not telling them what to do. 

Boku, Zong and other direct carrier billing payments began with the threat to disintermediate card rails but eventually had to embrace the same rails to ensure their own survival (more in Banks Have Nothing To Fear From TELCOs). A US MNO consortium came up with its own payment ISIS eschewing card rails but it has shut down. IMO, there's no other payment rail that provides the reach of card networks at a cost of 2-3%. That's why V/MC is a duopoly, not because of any divine intervention or regulatory edict. If retailers think otherwise, nothing is stopping them from creating their own payment network, as CurrentC is trying to do in USA.

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A Finextra member
A Finextra member | 16 March, 2015, 17:19

It's like the energy industry who have yet to pass on the 60% plus reduction in wholesale prices. How on earth will a regulator know if a price has fallen due to competitive conditions, supply chain benefits or due to the new regulation? Are we going to see cash customers being charged a different price because their payment method (which is still the No.1 payment method globally) hasn't changed?

Perhaps the regulator should focus on why airlines double/triple their prices during school holidays when costs remain the same but demand may have increased.

How many issuers/acquirers are going to set up shop in other parts of Europe to benefit from the new rules and therefore bypass this ruling?

In the last decade the acquiring landscape has changed so much and I am not sure the regulator has taken this into account. Furthermore the growth in contactless isn’t being considered in this ruling.

Whilst I agree the consumer needs protecting this isn’t the most important issue for them, there are other sectors which are abusing consumers (both cash and no cash customers) and I do not see the regulators facing up to them. Perhaps the retail sector and oil industry have employed far better lawyers than the payment schemes have.

 

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Christopher Williams
Christopher Williams - RTpay - Boca Raton | 17 March, 2015, 14:03

I would suggest that cutting interchange rates is not going to benefit consumers in any manner. As stated above, the processors often charge blended rates, linked to their highest costs for such as Amex and non-EU cards, at least to SME merchants, so the main beneficiary is the processor. In any event, the merchants are not going to hand on the improvement to consumers unless they see some real advantage in doing so.

That will mean the issuing banks will increase other fees to consumers, as seen in Australia when this cut in interchange happened, so the impact is going to be negative for the consumer overall.  (As with many EU initiatives, there is little external advice sought, but decisions made on what sounds good politically.)

There is, however, real change in the air on the payment front, with the big marketing companies (Apple, Google, Facebook etc.) all identifying the data value of completed transactions being far higher than links or eyeballs. As such, it is justifiable, indeed proftable, for them to cut processing fees to zero in order to get the data.

Of course, they would want to encourage the underlying settlement to be by bank transfer, as managed by PayPal, rather than paying the card association fees, no matter how low they become. So, expect more on that score, along with greater MNO interaction. But, one way or the other, the consumer will get to have much better value - and service - from the users of the data.  

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Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 18 March, 2015, 08:31

It's amazing to see justifications for why retailers are not reducing prices for card payments now because it's not practical to then administer a differential (lower) price for card and (higher) price for cash. This position completely - conveniently? - ignores the historical "Reverse-Robin-Hood-Cross-Subsidy" inherent in cash v. card payments. In this paper, author Steven Semeraro of Thomas Jefferson School of Law suggests that merchants have historically inflated their cash / check prices to cover the cost of credit card acceptance. Truly customer-centric retailers would now use the current interchange reduction to drop prices of goods for *both* cash and card payments, thereby correcting what has been perceived as a historical injustice to cash payers.

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Mark Hirst
Mark Hirst - Thomas Cook Group PLC - London | 18 March, 2015, 17:21

@Ketharaman Swaminathan From your comments you seem to have concluded the following:

1) No retailer ever competes on price.

2) Card costs are the only input cost worth considering in making pricing decisions.

3) Discounts are offered by most retailers if a customer pays with cash

4) If #3 is not the case then retail prices are adjusted for MSC and the difference is significant enough to be isolated and identified as a major benefit among all the other variables that inform input costs

 

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Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 19 March, 2015, 09:59

@MarkH:

It's good you brought this up because point #1, 2 and 4 from your list match retailers' words and actions more than my personal opinion:  

  1. Even retailers in the highly competitive travel industry never seem to miss an opportunity to bump up prices whenever they think they can get away with it e.g. (a) From personal experience and according to this FORTUNE article, OTAs regularly bump up ticket prices when customers revisit their ads by, say, clicking on retargeted ads. (b) When Australia removed its no-surcharge rule for card acceptance, QANTAS charged 7.5% surcharge even though its card processing cost was only 2.5%.
  2. I remember a retailer crying hoarse that interchange fees even exceeded its employee healthcare costs. Why make this sensational comparison unless card processing costs played a vital role in pricing and profitability?
  3. The Reverse Robin Hood Cross Subsidy I've quoted is all about how retailers don't offer a cash discount. So, I've said exactly the opposite.
  4. Now that card processing costs have reduced, why're they suddenly being projected as a not-so-significant cost?
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Mark Hirst
Mark Hirst - Thomas Cook Group PLC - London | 19 March, 2015, 10:22

@KS You clearly have no idea how retail works. I bid you farewell...

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