The Regulation on Interchange Fees for Card-based payment transactions entered into force in June 2015. According to the European Commission, the regulation is aimed at addressing the widely varying and excessive hidden interchange fees which are an obstacle to the Single Market and a barrier to innovation. The Regulation caps the interchange fees for the most widely-used cards and imposes transparency obligations on banks and retailers to improve the functioning of the payment market for all cards.
The Study on the application of the Interchange Fee Regulation published by the European Commission in 2020 in partnership with EY and Copenhagen Economics shows that the IFR has reduced the interchange fees for card-based payments and generated a decline in merchants’ costs of accepting card payments. This has in turn led to higher acceptance of card payments and is in the longer run expected to lead to lower consumer prices. However, acquiring margins and scheme fees from international card schemes have increased, reducing some of the benefits. If they continue to increase, it may further reduce or eliminate the benefits of the IFR.
Following the European Commission publishing its report on the impact of the Interchange Fees Regulation (IFR), Payments Europe welcomed the decision of the European Commission not to review the existing legal framework of the Interchange Fees Regulation at this stage.
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From all the geographies covered by the IFR, can you offer us some use-case examples of this turning out as expected. A story that merchants can look at for learning points?
The decision by the European Commission not to review IFR is in line with Payments Europe’s research and assessment. Since the IFR was adopted in 2015, the European payments market has seen profound changes and continues to evolve at a faster pace than ever before. These changes are not only the result of IFR, but also due to changing market dynamics, i.e. increased digitalisation and change in consumer behaviour. Moreover, other legislation such as PSD2, of which the effects are still not fully seen, had a significant impact.
A number of the objectives set by IFR are today a reality in Europe. We see more electronic transactions and more competition in the market. Moreover, several studies have evidenced that the cost of card acceptance for retailers is low and has decreased in recent years. The capping of interchange fees by IFR is one potential element which has contributed to this but other issues such as competition and innovation in acquiring are also key drivers for low card acceptance costs. As this trend continues, we encourage merchants to make full use of the competitive and innovative market by comparing and selecting the payments (acceptance) solutions that fit their needs most. By doing so, retailers will be able to get most value out of electronic payments that outweigh the cost. This recommendation was also recently given by the Belgian Minister of Economy after a government study concluded that the cost of acceptance is in line with the value provided.
How does the situation in Europe compare with other regions?
Every region in the world has its own characters when it comes to payments. There are various reasons for this, including different consumer habits, degree of digitalisation, culture, etc. Even within Europe we see differences, for example if we look at the use of and preference for cash. Regulation also determines how a payment market evolves. Europe’s payments market is strictly regulated, via IFR, PSD2, GDPR (data protection), among others. While every region has its own characters and rules, we also see similar trends, in particular in relation to increased digitalisation, more competition, security, etc.
Policy makers across the world have to take into account the specific characters of their markets when assessing the need for (further) regulation. One important conclusion of the European Commission in its IFR Impact Report is however consistent for other regions: the payments market is changing at a very fast pace and adapting the needs of today’s society. Generally, we therefore believe it is important to let the market evolve and take a cautious approach towards further regulatory intervention.
Reports in PaymentsCompliance underlined dissatisfaction among retail communities in the UK and Europe with regards to how regulators are reviewing current interchange fee legislation. How can card issuers balance things out with the end consumer’s best interest in mind while also keeping stakeholders happy?
While the capping of interchange by IFR has saved billions for retailers, it has squeezed the margins of card issuers. The members of Payments Europe are satisfied that the Commission concluded to keep the interchange levels unchanged as any further reduction is likely to result in the revenues from interchange falling well below the cost of servicing a card user. This would have detrimental effects for consumers who are likely to have to pay more for their banking and payment services. There are examples of issuers who have been forced to raise consumer fees or decrease benefits linked to cards due to the interchange revenue losses.
One of the debates circulating around the IFR is that consumers continue to experience surcharging on card transactions post-IFR and PSD2. Moreover, that Investment in product innovation by issuers has slowed since the IFR. How can you explain this and what could be done?
The European Commission’s IFR Impact Report indeed found that certain retailers have continued to surcharge on card transactions for which interchange has been capped. This is concerning as it is not only a circumvention of the rules, but it also undermines consumer trust in cards and offsets any potential consumer savings by IFR. Another example where we have seen circumvention of the rules is the provision around consumer choice at Point of Sale (POS). The aim of this provision was to put the choice of payment brand in the hands of the consumer and retailer, but it is most often the retailer alone who decides which payment brand is to be used. The European Commission and National Competent Authorities should work together to monitor the market and consistently enforce the legislation in order to avoid these violations.
The capping of interchange has significantly reduced interchange revenues for issuers, reducing their ability and incentive to innovate. Nevertheless, we have seen further innovation, including by other players in the value chain. Schemes and acquirers have continued to innovate in order to meet high consumer and retailer expectations in a growing digital market. Collectively, the different actors that enable a card transaction will continue to invest in delivering benefits to European consumers and retailers, achieving this through ensuring quick and guaranteed transactions, delivering cost efficiencies and security in an increasing competitive environment.
If we look into broader cost of payments for merchants (service fee, cost for PSD/SCA), how do you predict this develop over the next years, especially with lines between online and offline getting more and more blurred?
Digitalisation and technical innovation have changed, and will continue to change, the way Europeans shop and pay with a significant growth in e-commerce and cross-border commerce. Payment providers will continue to invest and provide value to end-users, including merchants, in this increasing complex and challenging environment. At the same time, the cost of card acceptance has decreased. One of the potential reasons behind this could be the decrease in interchange fee levels brought about by the IFR. However, there are other factors which have impacted, and will continue to impact card acceptance costs. For smaller retailers, fees set on a per transaction basis (such as interchange) are less impactful than other costs to the overall cost of acceptance.
The underlying reason for this is that payments in general are characterized by economies of scale. Therefore, the size of the retailer/transaction volume is a key driver of acquiring pricing, which is why the larger retailers have benefited the most from interchange fee capping. Acquirers are also likely to set merchant pricing based on several other carefully calibrated factors, including merchant risk, complexity of integration and other value-added services provided. The acquiring market is changing at a fast pace and innovation and competition has increased and is continuing to increase. This will be particularly important for smaller retailers who are benefiting from these innovations.
Increasing competition between payment methods will also ensure cost is fair and in line with the value provided. Consumers and retailers have access to numerous electronic payments solutions such as cards, mobile wallets and instant payments. In recent years, the use of mobile wallets and instant payments has increased significantly and most consumers in Europe have access to and use several payments methods. With the application of new legislation such as the open banking requirements in PSD2, the number of providers and solutions is set to increase even more.
Finally, at the beginning of July 2020, The European Commission welcomed the agreement reached by 16 major Eurozone banks from Belgium, France, Germany, Spain and the Netherlands towards the creation of a unified payment solution for consumers and merchants across Europe (EPI) based on SCT SEPA Credit Transfer. How do you envision this complimenting the landscape in the context of the IFR and beyond?
The entry of new players highlights that the European payments market is becoming more competitive and dynamic, offering a broad range of options to consumers and merchants. We believe that a competitive payments market is key for fostering innovation and creating value for consumers and retailers – by giving them more choice and better solutions. Any solution should be built on a sustainable business model that recognizes the commercial drivers of participants and ensures that the solution can be developed to meet the demands of future growth and innovation. At the same time, any payment solutions deployed in Europe should offer European payment users a secure, reliable and sustainable solution meeting the standards they have come to expect from existing payment methods.
About Robrecht Vandormael
Robrecht is Secretary General of Payments Europe. Together with the founding members, Robrecht set up and launched the association in 2019. He is responsible for setting the strategic direction, the day-to-day management and external representation of the association. Robrecht fulfils this role as Managing Director at FTI Consulting, a global business advisory firm. Robrecht has more than 10 years of experience in EU advocacy, communications and coalition building, in particular in the field of financial services, fintech and payments policy.
About Payments Europe
Payments Europe is an association of global and European card-based payment solutions providers created to strengthen the voice of the industry. Our mission is to promote a better understanding of the complexity of card payments and the inherent value it brings to society. We support a vibrant, innovative, and competitive European payments market, that is based on a balanced regulatory framework and puts consumers and consumer protection at the heart of everything. Payments Europe’s members are active throughout Europe representing card issuers, card acquirers, four-party card schemes and other stakeholders active in the ecosystem that offer card-based payment solutions. More information can be found here: www.paymentseurope.eu
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