The European Commission (EC), the executive arm of the European Union (EU), is to cap interchange fees for domestic card transactions across Europe, confirmed the Internal Market and Services Commissioner Michel Barnier as he outlined a new Directive on payment services designed to shake-up the payments sector.
The “fragmented” EU market for cards, Internet and mobile payments is being hindered at present and its growth adversely impacted because the single market that is supposed to ensure a harmonised and fair market across the entire 28 nation European Union is not being properly implemented at the moment, believes Barnier.
Commissioner Barnier, who came to London on 12 July to debate financial services regulation and the future of the UK and the single market in Europe [see the bobsguide blog here], said that the payment market in the EU is fragmented and expensive costing more than 1% of EU gross domestic product (GDP) or €130bn a year. “These are costs our economy cannot afford,” he added. “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 cap will cut total debit card fees across the EU from around €4.8bn to €2.5bn, and credit card fees from €5.7bn to €3.5bn, estimates the EC.
The proposed changes will be implemented under an interchange fees regulation and will be part of a wider payments shake-up in Europe under the revised Payment Services Directive (PSD) II regime. This introduces a new 'payment initiation services' rule that operates between the merchant and the purchaser's bank, enabling electronic payments to be made without the use of a credit card. In future these new payment service providers (PSPs) will be “subject to the same high standards of regulation and supervision as all other payment institutions", said the EC. Under the PSD II banks and PSPs will also need to increase the security of online transactions by introducing stronger customer authentication procedures for payments and consumer liability for unauthorised card use will fall from €150 to just €50 in future.
Card Fees Capped: News Analysis
Surcharges on consumer credit and debit cards in Europe will be banned under the proposed new regulatory environment and a maximum level of interchange fees enforced. The EC is proposing an initial 0.2% cap on debit card fees and 0.3% ceiling on credit cards for cross-border transactions for a two year transition period. After that the caps will only apply to domestic transactions as an encouragement to the desired single market.
The EC is unhappy with the divergence in card interchange fees across the different countries in the 28-member EU citing this as one reason for their move and stating that “there is no clear justification” for this and adding it is “an important barrier between the national payment markets".
The Commission’s capping proposals should be seen in the light of the EC declaration that interchange fees are anti-competitive last year and mirror US legal action against card fees by retailers and others, following the $7.25bn Antitrust Settlement made by Visa and MasterCard last year in the US.
The aim of this latest EC move is obviously to create savings for retailers, which have increasingly been exploring their own card, mobile and other payment options via digital wallets or lower down the corporate scale via mobile point of sale (MPoS) programmes. There is no guarantee, however, that lower prices will be passed on to consumers either because of regulatory or market-based moves. One consequence could instead be that cardholder fees and interest rates will simply go up as issuers try to recover lost revenue elsewhere.
Mike Fromant, managing director of Contis Group, a European electronic e-money provider of debit, e-account and rewards solutions, not surprisingly responded positively to the news about the EU cap on transaction fees, pointing out that: “As the high street, personal finance and online shopping worlds collide, banks and the EU should be thinking collaboratively about how they can enhance the cardholder’s banking experience, instead of squabbling over fee caps.”
“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,” he continued. “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.”
In other words, target the value-add data and customer services stream instead of the focusing on the transactional volume fee. It is an argument banks, card schemes and others have heard many times before of course, especially in the mobile m-commerce and payments arena, but it is none the less truthful for its repetition. Banks must stop just relying on the tracks and signalling of payments infrastructures and become masters and controller of the traffic instead of solely infrastructures providers.
According to Phil Davies, managing director of PSI-Pay, he does not see the theory of a lesser retailer charge being passed on down to the consumer as necessarily a fair assumption. “Merchant and interchange fees are largely misunderstood and the decision to regulate them could have major implications,” he said. “If you look at the example of Australia where a similar proposal was already carried out, it was initially hoped that by accepting a reduction in card payments, these savings would be passed on to the customer – this did not happen. In fact, the loss of revenue caused card issuers to hike up direct costs to cardholders.