Payments Industry Update: European Commission announces regulation of Interchange Fees and a ban on Surcharges

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On July 24, the European Commission unveiled its legislative package to adapt the EU payments market to the opportunities of the single market and to support EU economic growth. The package includes a proposal for a cap on multilateral interchange fees (MIFs) for card-based payment transactions. MIFs are set by credit-card companies and collected by banks each time a consumer makes a purchase on a card. Fees across Europe vary widely, from less than 0.2% in the Netherlands to more than 1.5% in Poland. In addition, surcharges on consumer debit and credit cards will be banned by the new Payment Services Directive (PSD2). Surcharges are the extra charge imposed by some merchants for payments by card and, according to the Commission, are common notably for purchases of airline tickets online. In 95% of cases, merchants will no longer be allowed to surcharge consumers for using payment cards, whether for domestic or cross-border payments. This measure alone is set to save consumers 730m euro each year. So called 'three-party schemes' such as American Express and Diners, as well as commercial cards issued to businesses, which together account for the remaining 5%, are not covered by the surcharging prohibition. Retailers will be able to surcharge for these cards or refuse to accept them.

Introducing the legislative package, Michel Barnier, Internal Market and Services Commissioner, said "...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." Vice President Joaquín Almunia added "...interchange fees paid by retailers end up on consumers' bills. Not only are consumers generally unaware of this, they are even encouraged through reward systems to use the cards that provide their banks with the highest revenues... the regulation capping interchange fees will prevent excessive levels of these fees across the board."

MIFs have long been under regulatory scrutiny, with laws adopted in the United States, Australia and other countries, and several EC decisions under EU competition laws including the 2007 MasterCard case. Although included in a merchant's cost of receiving card payments, regulators are concerned that interchange fees are ultimately passed through to consumers through higher prices amounting to tens of billions of euros each year. With Visa and MasterCard's market share estimated at 96.8% in value, and with interchange fees already banned in countries such as Denmark and the United States, the Commission believes that regulation is required. This is despite the MasterCard case, the proceedings against Visa Europe (which lead to undertakings for consumer debit cards in 2010 and consumer credit cards in 2013) and a rash of other national competition proceedings.

Although the Commission does appear to recognise that interchange fees might be beneficial in encouraging banks to incentivise increased card issue and use (e.g. through air mile and other rewards schemes), the Commission sees even greater drawbacks. A key concern is that market participants may promote high-fee cards, with card companies competing to attract issuing banks through the highest interchange fees, leading to increased merchant costs which are then passed on to consumers in the form of higher retail fees. As the Commission FAQ puts it, "consumers paying with debit cards or in cash...'subsidise' the air miles of the users of expensive cards." Furthermore, new entrants (e.g. providers of mobile or online payment services) and low cost domestic operators are arguably shut out of the market because the banks demand the same high revenues that they achieve on normal card payments, meaning that European companies are disadvantaged compared to their global competitors.

The proposed Regulation will cap interchange fees at 0.2% for debit and 0.3% for credit card transactions. The 0.3% cap is below the interchange fee levels prevailing in all Member States. The impact on credit card acceptance is therefore likely to be significant. In some countries such as Poland and Hungry where the current level of interchange fees is well above the caps, the impact will likely be substantial with a big uptick in merchant acceptance as compared to current levels. Card payment is only possible in an estimated 30% of retail outlets in Poland and Hungry at present.

At a press conference to preview the package held in Brussels last week, Commissioner Barnier went on the offensive, describing MIFs as a "cash cow" for card companies. In response, MasterCard and Visa Europe question the Commission's stance and deny that MIFs operate in an anti-competitive manner. Peter Ayliffe, president and chief executive of Visa Europe, said that there was "little evidence" that the plan would benefit consumers. Javier Perez, president of MasterCard Europe, said that the proposal might "actually harm competition and inconvenience consumers" as well as preventing competition and hindering payments innovation in Europe.

The Regulation may signal the end of the Commission's decades-long anti-trust battle against MasterCard and Visa Europe. But the plan has a good way to go before it becomes law: it will be discussed and likely modified by EU member states and the European Parliament in a process which could take several years. The debate is far from over.