What is the interchange regulation trying to solve?
The regulatory actions of the Commission regarding Interchange Fees (several agreements with MasterCard and Visa in the recent years) were justified by legal arguments. Multilateral interchange fees (MIF) were considered as cartel price agreements between the two sides of the card payment market, an infringement of European law. Based on the principle of subsidiarity, the Commission was focused on MIFs of cross-border card transactions, set by the international card schemes, by entrusting the national competition authorities to regulate domestic MIFs in the local markets.
The main driver behind the proposed IF-regulation of July 24th 2013 with caps for all consumer card transactions (cross-border and domestic) in the EU is the target of a common card payments market and the assumption of a sub-optimal market. In the recitals of the proposed IF-regulation you will find keywords like “fragmented market”, “sub-optimal market outcomes including inefficient prices”, “ineffective competition”, “limited market integration” etc. Based on this view on the card payment market, the Commission takes out the heaviest weapon out of the regulatory gun cabinet: price setting by regulation to realise identical caps for IFs in all Member States, turning the key screw in a four-party scheme. Until now, only MIFs were tackled by the Commission. The extension to bilateral IFs and other remunerations between the two market sides, which are undisputed from a legal point of view, show the shift in emphasis from legal concerns to market regulation.
How will we know that we will be successful?
I would suggest modifying your question: How does the Commission know that it will be successful? The Commission seems to be sanguinely without doubts. This is not surprising. Regulators should be optimistic. As economist I know that in most cases regulation, especially price-regulation, will not hit the ball because you cannot anticipate the unpredictable (by-passing?) reactions of all the relevant players in the market. By the way, how does the Commission know that the outcome today is sub-optimal with “inefficient” prices? It waived a clear comprehensible definition of “optimal”. If you are re-balancing the two-sided market, you should clarify the outcome. Is a market with lower prices for retailers by accepting cards per definition more optimal? If card payments are more efficient than cash payments, a measurable criterion could be the volume of card payments. So the question to be answered could be: will a European-wide IF level of 0.2% respectively 0.3% trigger the card-based payments market in terms of volume, competition and innovation more than today?
What advice do you have for those involved in taking final decisions, including representatives from the Parliament, Econ Committee and Ecofin ministers?
The consequences of this European-wide price regulation will be substantially. If price regulation is the ultima ratio, it needs a sound basis and methodology, which is at the time being totally lacking ! The Commission is claiming to have applied the so-called Tourist-Test or Merchant Indifference Test (MIT) methodology to justify the values of 0.2% and 0.3% by using published (outdated!) data of three central banks (Netherlands, Belgium and Sweden). However, it is impossible to derive these two figures (0.2% and 0.3%) from published results of cost studies made by the mentioned central banks. By the way: the published figures of Sweden would imply much higher interchange fees! A recently published study of the Dutch Central Bank indicates an IF-level of 0.5% for debit cards, if the MIT-methodology will be applied. The proposed caps are definitely not based on the so-called Merchant Indifferent Test, as stated by the Commission!
Rightly, the European Parliament has asked recently the Commission for further data to justify these levels. Moreover, the Commission is currently conducting a cost-study to produce a firm empirical basis for its interchange regulation. Therefore, it is surprising that it proposes a regulation before this study has been completed. So what remains is the impression that the two values of 0.2% and 0.3% are simply the result of a ’negotiation‘ process (negotiation with the gun on his chest) between the Commission and the schemes only regarding to cross-border interchange fees, which have a much lower relevance in the market compared to domestic IF. For regulating interchange fees, the Commission obviously shifts tacitly from the MIT-methodology to a “negotiation-with-one-stakeholder-group”-methodology.
This simple approach cannot and should not be the basis for a price regulation. If price regulation in a competitive market is unavoidable, the price level should be based on a robust and thorough basis of a verifiable cost calculation (like the IF-regulation of debit cards in the US and the IF-regulation in France). How do we know that the proposed random levels are optimal? What are the consequences if the setting of the caps is much too low based on the results of the ongoing European-wide cost analysis of cash? A future increase of the IF-caps is not a realistic scenario! Let me come back to your question: I would suggest a new start based on well-done homework. As MEP, I would not support a price regulation with such a shaky basis.
What do you expect from the pre-conference session at this year`s EPCA Payment Summit on 12 March?
A more systematic discussion about the IF-phenomenon and its regulation regarding facts and economic theory. These would be helpful to find a sound regulation (if necessary!). Of course, each side of the market intends to avoid the costs which are necessary to fund a payment scheme in a two-sided market. If the regulator should set a new equilibrium, there is little point to restrict the debate in complaints of cost sharing, presented by lobbyists today or tomorrow after the regulation.
About Hugo Godschalk
Dr. Hugo Godschalk, a native Dutchman from Den Haag (1957) has been living and working in Germany for almost 40 years. He studied economics at the University of Münster/Westfalia (1974 – 1979). He then spent 5 years as research staff at the same university. Following his PhD in economics in 1982 with a dissertation on electronic money, he started his career in the payments industry at the Gesellschaft für Zahlungssysteme (GZS) in Frankfurt, last as head of business administration. From 1990 until 1993, he worked for 3 years as a senior consultant for Ordina (Germany) GmbH, covering payment and card business related topics. Since 1993 he is managing director and founder of PaySys Consultancy in Frankfurt am Main.
Since 2000 PaySys Consultancy represents the European Payments Consulting Association (EPCA) as German founding member. In 2011 Hugo initiated the Prepaid Forum Deutschland (PFD) as platform of the prepaid industry in Germany. He is representing this group as managing director. He is member of the advisory board of the German Association of the Regiogeld initiatives and since 2003 member of the advisory board of PayComm (database community of the European payment industry).
About PaySys
PaySys Consultancy GmbH, Frankfurt (Germany), is a neutral and independent consultancy firm specialising in payment systems and cards business. PaySys is the German member of the European Payments Consulting Association (EPCA). PaySys Consultancy GmbH was established in 1993 by Dr. Hugo Godschalk and Barbara Fueller. Within a few years, the company has become the leading German consultancy in the area of card payments.
Traditionally PaySys operates across all sectors of issuing, acquiring and processing of cards and other payment instruments. As a result of changes in the market PaySys has also expanded into new areas like e/m-commerce and e-money. They see their long-term experience and know-how in these areas as a competitive advantage compared with other consultancies.
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