On January 27th, the European Parliament’s Economic and Monetary Affairs Committee voted to support the draft rules prepared by the Council of Ministers during 2014 on the capping of the fees charged by banks in the EU to retailers for processing shoppers’ card payments. As merchants across the EU pay banks about EUR 13 billion annually to handle transactions – 70% of which is accounted for by so-called interchange fees – another key revenue stream for banks has been cut short by regulatory pressures. But, is this all – or is there more to come in the card payments area? For banks, certainly yes.
Background: Creating a Single Euro Payments Area (SEPA)
Over the past decade, the integration of the European retail payments market has been high on the agenda for legislators, regulators, central banks and payment service providers – a project known as Single Euro Payments Area (SEPA). The focus has been on the three most common cashless payment instruments – credit transfers, direct debits and card payments. SEPA aims to overcome the technical, legal and geographic barriers that persist from the time prior to the introduction of the Euro.
As card payments are vastly gaining in importance, these have been specifically targeted. Retailers have long complained about paying what they see as excessive interchange fees for card payments, ranging from 0.1-3.0% on a EUR 10 transaction and from 0.01-1.5% on a EUR 100 transaction. Germany and Poland are known to have the highest average fees levels for debit card transactions at 1.8% and 1.6% respectively. More generally, interchange fees are considered non-transparent, differing between EU countries and being subject to sometimes legislation, sometimes national competition authorities.
In the mid-2000s, the European Commission started conducting antitrust investigations in the payment card market, pinpointing interchange fees. Technically, the fees charged by a cardholder’s bank (issuer) to a merchant’s bank (acquirer) for each sales transaction made at a retail outlet with a payment card. The interchange fees were suspected of restricting competition between the acquirer banks, ultimately increasing prices of goods and services for final consumers.
The EU payment card market is dominated by MasterCard and VISA (both controlled by banks), at 48.9% and 41.6% market share respectively. In 2007, a decision was issued against MasterCard, leading to a reduction of their cross-border interchange fees to 0.2% of transaction value for debit cards and 0.3% for credit cards. A similar decision was issued against VISA in 2010 and 2014, leading to the same lowering of cross-border interchange fees.
The Tip of the Iceberg – Less Than 6 Months Away
Under the draft rules endorsed at the end of January, all domestic (with transitional rules) and cross-border debit card transaction fees are limited to 0.2% of transaction value. The corresponding ceiling for domestic and cross-border credit card transactions is 0.3%. These rules mainly apply to so-called four-party schemes, featuring a cardholder, a merchant, a bank issuing the card to the consumer and another bank acquiring the payment for the merchant. Three-party schemes like Diners Club and American Express are exempt (as they don’t use interchange fees) as are business cards used only for business expenses. No doubt, the annual revenue of about EUR 13 billion will be reduced to a fraction of its former glory, severely hitting the P&Ls of banks.
The Rest of the Iceberg – Still to Come, Watch out!
Further to capping interchange fees, more measures are highly likely be undertaken going forward to increase competition and transparency in the EU card payments market:
Driving increased choice for retailers and consumers
For retailers, the traditional “honour all cards” rule will come to an end, making them free to choose which cards to accept from consumers. This is thought to create a further downward pressure on interchange fees. Similarly, interchange fees will be made transparent to consumers, helping them select the card scheme that offers the best terms and conditions.
Assessing the way cards are sold to consumers
In parallel to increasing choice and transparency, regulators are looking into the way cards are sold to consumers as concerns are voiced that relatively poorer customers are trapped in unhealthy spirals of debt on their cards. Such a review is already underway in the UK, where 70% of the EU’s credit cards are held.
Promoting emerging payment solutions
Although still increasing in popularity, payment cards will face growing competition from alternative payment solutions based on technological innovation – in particular mobile payments. These new intermediaries are rarely born out of the traditional banks, but rather the buoyant FinTech space. There is willingness within the EU institutions to promote and support the most cost-efficient and safe solutions, potentially leading to a relative penalization of payment cards through surcharges.
Although the capping of interchange fees probably is the most painful change in the short-term from a revenue perspective, the road towards increased choice for retailers and consumers as well as the promotion of alternative payment solutions probably ensures that there will be equal amounts of discomfort for EU banks in the longer term. Adapting to the new rules through lower cost structures, the acquisition of FinTech start-ups and looking at alternative sources of revenue connected to payment cards – like affinity schemes – are probably all part of the remedy.