Eurada News nº400 - May 2020

The Hidden Cost of Card Payments – EuroCommerce Call for a Reform of the Interchange Fees Regulation

The increasing usage of payment cards in recent years – intensified by the outbreak of the Covid-19 crisis – has raised concerns over the substantial market power held by operators of payment card schemes, despite the introduction of the Interchange Fees Regulation (IRF) by the European Commission in 2015. EuroCommerce is calling for a reform of the IRF to better protect retailers and wholesalers from excessive hidden transaction costs.

The transaction costs system: an overview

In recent years, retail payments have increasingly been made using debit, credit, and prepaid cards.These transactions require the involvement of different actors, most of which operate under the ‘four party’ card scheme, shown in figure 1. The system is intuitive: whenever a consumer uses a payment card to buy something in a shop or online, the retailer’s bank pays a fee called an ‘interchange fee’ to the consumer’s bank that issued the card. Retailers generally incorporate interchange fees in the goods and services prices they charge consumers. As these interchange fees are normally set by operators of payment card schemes (such as Visa, MasterCard, or the banking community), consumers and retailers have no ability to influence the level of the fees.

The Interchange Fees Regulation

To mitigate the widely varying and often excessive hidden interchange fees, the European Commission enacted the Interchange Fees Regulation (IFR), which entered into force in June 2015. The purpose of the Regulation is to boost a single market for card payments across the EU, enhancing more transparent and harmonised costs for card-based payments and creating a level playing field that allows more competition and spurs innovation in payments. The IFR caps interchange fees for consumer debit cards to 0.2% and consumer credit cards to 0.3% of the value of the transaction, ensuring that interchange fees are limited to a level at which retailers’ average costs are not higher for card than for cash payments. One article of the Regulation also requires the Commission to review the application of the IFR and its market effect and to submit a report by mid-2020 to the European Parliament and to the Council.

The EuroCommerce call for reform of the IFR

With the Commission report expected to be published in the upcoming weeks, EuroCommerce – the principal European trade association representing European retailers and wholesalers – expressed its concerns over the growing problems of retailers and wholesalers resulting from the limited scope of the Interchange Fee Regulation (IFR). Christian Verschueren, Director-General of EuroCommerce, remarks:

 “We have consistently supported the Commission in its action over the years on interchange fees for credit and debit cards, and in producing the Regulation adopted 5 years ago. This has worked well in reducing consumer interchange fees. But its limitations are beginning to show – other fees have substantially increased, as have fees for unregulated cards, which most merchants have no choice but to accept. With strong evidence of fees rising steeply, we are today asking for the Regulation to be amended to allow the Commission to address actions which directly undermine its objectives.”

In March 2020, EuroCommerce published an economic study highlighting how Mastercard and Visa’s profitability and dominance of the European payments market have continued to grow despite the introduction of the IFR in 2015. These profits have been possible as card schemes have made large increases in unregulated fees imposed on merchants. According to the EuroCommerce study, such expensive unregulated fees have already substantially negated the benefits of the regulated interchange fee caps, while choice between and transparency of payment methods for consumers – such as access to cash – have been weakened. Overall, these developments have had the effect of reinforcing the market position of the card schemes in Europe – and of card-based payments – while hastening the demise of cash and creating barriers to new non-card-based payments.

For this reason, EuroCommerce stresses the importance of introducing amendments for the current Interchange Fees Regulation, an objective more pressing than ever as the present COVID crisis is making card payments mandatory in many situations. Moreover, the crisis is threatening the reopening of numerous retailers and wholesalers, already operating on very low margins, once the pandemic weakens. Adding pressure on the margins of those who survive will only exacerbate a very fragile economic system.

For these reasons, EuroCommerce has asked the Commission to amend and to broaden the scope of the Regulation to include:

  • regulation of the total fees charged to payment card acquirers;
  • removal of all substantive exemptions in the Regulation so as to cover commercial cards, three-party card schemes, cash withdrawals at ATMs, inter-regional cards, and virtual card transactions;
  • independent acquiring of three-party card schemes;
  • mandatory minimum interchange fees for cash withdrawals and deposits at ATMs in order maintain consumer choice and cash alternatives and
  • strong and dissuasive penalties for non-compliance with the regulation.

The publication of the Commission’s report on the functioning of the IFR, expected in the coming weeks, will help to understand the European Union position on the issue and the future development of the Interchange Fee Regulation.

More information

Written by Andrea Carini, Intern at EURADA.