Why card fee regulation is a political decision

‘Given the positive impact of the EU Interchange Fee Regulation and the need for more time to see the full effects of the Regulation, the report is not accompanied by a revision legislative proposal.’ This conclusion was made by the European Commission on 29 June 2020, when it published its long-awaited report on the impact of the 2015 Interchange Fee Regulation (IFR). Indeed, the European Commission concluded that the IFR - the European law that regulates card payments, including the capping of interchange fees – achieved its main objectives, namely that interchange fees for ‘consumer cards have decreased, leading to reduced merchants' charges for card payments, and ultimately resulting in improved services to consumers and lower consumer prices.’

The decision was welcomed by the payments industry, especially card issuers, acquirers and schemes, and those questioning the effect of price regulation on market dynamics including innovation and competition. On the contrary, it led to criticism by the merchant associations who have been leading the advocacy for cheaper card acceptance. Indeed, merchant associations, often led by large merchants, have historically been critical of card fees. Their efforts inspired anti-trust decisions as well as price regulation by the EU. 

The 2020 IFR decision by the European Commission, however, dismissed a number of claims made by the merchant community, e.g. in relation the increased scheme fees, circumvention of consumer card caps due to increased issuing of commercial cards, etc. On scheme fees particularly, the EC states that these ‘are not within the scope of the IFR, and appear to have increased to a limited extent.’

Following the IFR decision, scheme fees however came increasingly under the spotlight. In the last years, the International Card Schemes have increased their scheme fees in order to cover costs and allow for investments in security (including Strong Customer Authentication), cross border transactions, innovation (e.g. contactless), etc. Mastercard and VISA state that the increase in scheme fees are justified due to the increasing complexity of transactions in the digital economy, and only have a small impact on the total cost of acceptance. 

Scheme fees only represent the smallest component of the total acceptance cost – smaller than regulated interchange fee, the acquiring fees or other indirect costs such as terminal fees. Merchant associations, on the other hand, claim that the rise in scheme fees have eroded the savings made by the interchange regulation and are putting pressure on the margins of retailers that have suffered during the pandemic.  

These recent developments have not gone unnoticed to the regulator or competition authorities. In line with its commitment to gather further evidence about scheme fees, the European Commission has been looking into the recent evolution of scheme fees and whether there are justified concerns. 

In the UK, the analysis is being done more publicly. Following a study in the card acquiring market, the PSR concluded that some parts of the market work, while others mrequire further investigation. The PSR also concluded that there are large differences between the fees of large and small merchants, with the latter being able to benefit less from a well functioning market. The recent dispute between Amazon and VISA in the UK triggered additional political attention to scheme fees and inter-regional interchange fees (as Amazon acquires in Luxembourg) ,despite the latter being set by VISA commitments to the European Commission. 

If regulatory or competition actions will follow on one or both side of the Channel, remains to be seen. However, it is interesting to note that any decision for regulatory action sits in a broader political context. Indeed, the European Commission is striving towards a more autonomous European payment market, less dependant on foreign players. To do so, it is actively promoting the development of the European Payments Initiative. Until recently, the ambition of EPI was to create a European card scheme. Scheme fees, or some form of it, would have been required for EPI to be sustainable. Regulation of it would create legal uncertainty around its revenue model and could ultimately have posed a risk to its revenue sources, jeopardising its ability to be successful. 

EPI now abandoned it card scheme ambitions. It decided to focus on building a mobile wallet. More details, including about fee structures, need to come out – hence further assessment will need to be made about the risk of any card fee regulation and how it could set a precedent or create legal uncertainty around EPI’s fee revenue model.

In another effort to achieve more European payments autonomy, the Commission is promoting the use of instant payments in order to reduce card payments and allow for other (European) players to take market share. Regardless of politics, instant payments are and will likely grow in the future because there is a need in the market – not the least to offer a lower-cost alternative to card payments. Lower cost because it also has less features (e.g. security, consumer protection), and, for certain transactions, these are not needed. Regulation of scheme or card fees will, however, reduce card acceptance costs too, making it cheaper and, thus, undermining the unique selling point of instant payments. This will favour cards from an acceptance point of view, and hamper the uptake of instant payments.

While it is difficult to predict what the future will bring in terms of card fee regulation, one should take into account that payments regulation has become much more political than it has ever been before. Policymakers will have to weigh their decision against the consequences it may have on other strategic objectives. Objectives that may be considered more important by politicians than reducing merchants’ costs.

About Robrecht Vandormael

Robrecht is a Managing Director in Brussels, overseeing a wide range of payments and financial technology clients. He helps them understand and manage complex EU policy and legislative issues that will impact their business, as well as advise them on broader political reputation management to grow or protect their freedom to operate. Robrecht is a member of the European Commission Payment Systems Expert Group, which advises the European Commission on payments policy and legislation. He is also Secretary General of Payments Europe, the association that represents the European and global digital payments industry. 

About FTI Consulting

FTI Consulting is a global business advisory firm, providing multidisciplinary solutions to complex challenges, and with a worldwide network of more than 6,600 employees in 29 countries on six continents. FTI Strategic Communications helps companies around the world manage change, mitigate risk, and enhance their market position.