Explanatory Memorandum to COM(2013)550 - Regulating interchange fees for card-based payment transactions - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2013)550 - Regulating interchange fees for card-based payment transactions. |
|---|---|
| source | COM(2013)550  |
| date | 24-07-2013 |
The aim of the present proposal is to help to develop an EU-wide market for payments, which will enable consumers, retailers and other undertakings to enjoy the full benefits of the EU internal market including e-commerce, in line with Europe 2020 and the Digital Agenda.
To achieve this, and to promote EU wide services, efficiency and innovation in the field of card payment instruments, and card based payment transactions in an offline, online and mobile environment, there should be legal clarity and a level playing field. In addition, business rules and other conditions should be prohibited if they prevent consumers and retailers from having accurate information on fees paid in relation to payment transactions and thereby hinder the creation of a fully effective internal market.
The regulatory and legislative framework for retail payments in the EU has been developed over the past 12 years, with the advent of the Euro acting as an accelerating factor. Regulation 2560/2001 on the equivalence of charges for national and cross-border payments in Euros prompted further initiatives on the completion of an Internal Market in payments.
The regulatory and legislative framework is complemented by a number of investigations and decisions under EU competition law by the Commission over the past years in the field of retail payments.
Secure, efficient, competitive and innovative electronic payments are crucial for the internal market in all products and services, and this has an increasing impact as the world moves beyond bricks-and-mortar trade towards e-commerce. In this context the achievement of an effectively functioning internal market in the area of payment cards has been hindered by the widespread application of certain restrictive business rules and practices. Such rules and practices also lead to a lack of information on costs and pricing of transactions to consumers and retailers that results in sub-optimal market outcomes including inefficient prices.
One of the key practices hindering the achievement of an integrated market reasons is the widespread use in four party schemes, the most common type of card schemes, of so-called Multilateral Interchange Fees (MIFs). These are collectively agreed inter-bank fees usually between the acquiring payment service providers and the issuing payment service providers belonging to a certain scheme. Such interchange fees paid by acquiring payment service providers form part of the fees they charge to merchants (the Merchant Service Charges or MSCs), which merchants in turn pass on to consumers. Thus, high Interchange Fees paid by merchants result in higher final prices for goods and services, which are paid by all consumers. Competition between card schemes appears in practice to be largely aimed at convincing as many issuing payment service providers as possible to issue their cards, which usually leads to higher rather than lower fees, in contrast with the usual price disciplining effect of competition in a market economy .
At present, no legislation regulating interchange fees is in place in the EU, except indirectly in the case of Denmark for MSCs for face-to-face transactions. However, many national competition authorities have on-going competition law enforcement proceedings, including in the UK, Germany and Italy. Also, a number of Member States are in the process of adopting legislation, including in Poland, Hungary, the UK and Italy.
The price increases caused by interchange fees are harmful to consumers, who tend to be unaware of the fees paid by merchants for the payment instrument they use. At the same time a series of incentivising practices applied by issuing payment service providers (such as travel vouchers, bonuses, rebates, charge backs, free insurances, etc.) steers consumers towards the use of payment instruments generating high fees for issuing payment service providers. Scheme rules applied by payment card schemes and practices applied by payment service providers tend to keep merchants and consumers ignorant about fee differences and reduce market transparency, for instance by ‘blending’ fees or prohibiting merchants from choosing a cheeper card brand on co-branded cards or steering consumers to the use of such cheeper cards. Even if merchants are aware of the different costs, the scheme rules often hinder them from acting to reduce the fees. Of particular importance are so-called ‘Honour All Cards Rules’ (HACRs) which require merchants to accept all products issued under the same brand, even if the merchant fees for these cards can vary by a factor of 3-4 within the same card category (i.e. credit / debit) or by a factor of up to 25 between card categories, such as premium credit card and low-cost debit cards. The result of the collectively agreed fees and transparency reducing measures is that banks are not made to compete on this element of their fees, which leads to higher retail prices to consumers, including those who do not pay with a card or who pay with low fee cards. In fact, the latter consumers are subsidising the use by other often wealthier consumers of more expensive means of payment through higher retail prices. In addition to limited choice as regards payment service providers, reduced innovation and higher prices for payment services, the interchange fees also call into question the Commission's policy to promote and facilitate the use of electronic payments for the benefit of consumers[1]. Finally, the lack of choice as regards payment service providers, including on a pan-European level, effectively prevents consumers from reaping all the benefits from the internal market, particularly as far as e-commerce is concerned.
There currently is a wide variety of interchange fees applied within national and international payment card schemes, which gives rise to market fragmentation and prevents retailers and consumers from enjoying the benefits of an internal market for goods and services. Even considering only the international payment card schemes, interchange fees differ up to a factor of 10, which gives rise to substantial cost differences between retailers in the respective countries. As a consequence of the wide differences in fees between Member States, retailers also have difficulty formulating an EU wide price strategy for their products and services, both on-line and off line, to the detriment of consumers. Retailers cannot overcome the fee differences by making use of card acceptance services offered by banks in other Member States; specific rules applied by the payment schemes prescribe the application of the interchange fee of the Point of Sale (country of the retailer) for each payment transaction. This prevents acquiring banks from successfully offering their services on a cross border basis and retailers from reducing their payment costs to the benefit of consumers.
Interchange fees also restrict market entry as their revenues for issuing payment service providers function as a minimum threshold to convince issuing payment service providers to issue payment cards or other payment instruments, such as online and mobile payment solutions, offered by new entrants. Also, market entry for pan-European players remains difficult, as domestic interchange fees in EU Member States vary widely and new entrants would have to offer interchange fees at least comparable to those prevailing in each market they want to enter. This has an impact on the viability of their business model i.a. affecting potential economies of scale and scope. This also explains why in a number of Member States, national (normally cheaper) card schemes have tended to disappear. The entry barriers interchange fees thus created for online and mobile payment solutions also result in less innovation.
As said, no legislation regulating interchange fees is currently in place in the EU, except indirectly in the case of Denmark. However, many national competition authorities have on-going competition law enforcement proceedings. Also, a number of Member States are in the process of adopting legislation. The different time paths of the national proceedings and the intended legislation risk leading to an even more fragmented market.
The present regulation therefore proposes to create common rules for interchange fees in the European Union by introducing maximum fee levels for transactions with payment cards that are widely used by consumers and thereby difficult to refuse or surcharge by retailers. This will create a level playing field which will take away the market fragmentation currently existing as a consequence of diverging fees. It will also allow for the successful market entry of pan-European newcomers and for innovation based on an infrastructure existing of a level playing field. Consumers and retailers will thus benefit from a wider choice of payment service providers (new as well as incumbent), including on a pan-European level. The regulation will in addition propose transparency measures to allow retailers and consumers to make better informed choices of payment instruments.
This initiative will complement the existing legal framework for payment services within the EU, in particular with respect to the completion of an Internal Market in payments, and migration to pan-European payment instruments.
Directive 2007/64/EC of the European Parliament and of the Council of 13 November 2007 on payment services in the internal market (the so called Payment Services Directive or PSD)[2] aims to establish standardised conditions and rights for payment services offered in the market for the benefit of consumers and companies across the Union. This Directive, which is under revision at the same time the present proposal is prepared, creates the general framework for payments in the EU. It is complemented by several Regulations such as Regulation (EC) N°924/2009 on cross-border payments or Regulaton (EC) N°260/2012 which sets migration deadlines for the transition of all credit transfers and direct debits in euros in the EU from national schemes to pan-European schemes. Regulation (EC) N° 260/2012 also clarifies that no Multilateral Interchange Fees can be charged for each direct debit transactions.
In addition to the legislative framework, over the last 20 years, the European Commission and national competition authorities have conducted a number of antitrust proceedings addressing anti-competitive practices in the card payment market. The General Court judgment of May 2012[3] confirmed the Commission's finding in its MasterCard Decision of December 2007 i that MIFs restrict competition as they inflate the cost of card acceptance by merchants without leading to benefits for consumers. The Court rejected the argument that MIFs were indispensable for the functioning of a payment card system. To address the competition concerns, the Commission has accepted commitments by Visa and MasterCard to charge lower MIFs for cross-border (and some domestic) transactions: the MasterCard undertakings of 2009 (caps for cross-border consumer MIFs to 0.2% for debit cards and 0.3% for credit cards and changes to the rules it imposes on retailers through the acquiring payment service providers), and the Visa Europe commitments of 2010 (along the lines of those of MasterCard, with caps limited to debit but also covering domestic MIFs when these are fixed by Visa Europe itself and not the national banks). In 2013, Visa Europe also offered commitments for credit card transactions cross-border regarding certain countries where these charges are set by Visa Europe, and on cross border acquiring rules. Competition proceedings are on-going in a number of other Member States, including in Poland, Hungary, Italy, Latvia, the UK, Germany and France. The French Competition Authority for instance made binding the commitments from the Groupement des Cartes Bancaires – the domestic card scheme – on 7 July 2011 to reduce its interchange fees to levels equivalent to the ones agreed by MasterCard and Visa for their cross-border transactions.
While no legislation is in place on interchange fees in the EU, except indirectly in Denmark[5], a number of Member States are in the process of adopting legislation, including in Poland, Hungary, the UK and Italy. In Poland, the Parliament is considering draft legislation regulating interchange fees, with MIFs caps progressively falling to 0,5% by the start of 2016, abolishing the Honour All Cards Rule and allowing surcharging (for credit cards only). In Hungary, a legislative proposal is under discussion that would cap domestic credit and debit interchange fees at their respective cross border level, with the Hungarian Central Bank in charge of calculating these fees. In Italy, a draft Decree by the Ministry of Economy and Finance has been published for consultation in December 2012, focusing on limits to blending, comparability of interchange fees and merchant service charges, as merchant service charges should take into account the volume of transactions and should be lower for low value payments. In the UK, the Government is proposing to bring payment systems under economic regulation, establishing a new competition-focused, utility-style regulator for retail payment systems[6].
The objectives of the proposal are consistent with the policies and objectives pursued by the Union. First, they will improve the functioning of the internal market for payment services and more broadly for all goods and services to the benefit of European consumers and companies. Second, they broadly support other Union policies, in particular competition policy (by establishing equal obligations, rights and opportunities for all market players and facilitating cross-border provision of payment services, thus increasing the level of competition). The impact assessment accompanying this proposal concluded that the proposed measures would promote market integration for consumers and merchants, favour pan-European market entry and result in more legal certainty on business models for existing card schemes and new entrants,. They would also address the threat of exporting models based on anti-competitive practices to new, innovative payment services.
In spite of the General Court judgement confirming the Commission’s assessment that MIFs as applied within the MasterCard system restricted competition and did not lead to efficiencies outweighing their harm to merchants and consumers, international and national card schemes operating in the EU currently do not seem willing pro-actively to adjust their practices to comply with the European and national competition rules. Although National Competition Authorities, in close cooperation with the Commission, are addressing this situation, competition enforcement according to different timelines and procedures may not lead to sufficiently comprehensive and timely results to unlock the market integration and innovation that are necessary to ensure the competitiveness of the European payments market at a global level. Taking into account the EU competition rules and the Commission’s experience in competition cases in payments, the present proposal therefore aims at providing legal clarity to ensure effective integration and competition, thereby improving economic welfare for all relevant stakeholders and in particular consumers. By facilitating economic transactions within the Union, this will also contribute to the attainment of the wider objectives of the EU 2020 strategy.
Contents
- RESULTS OF CONSULTATIONS WITH THE INTERESTED PARTIES AND IMPACT ASSESSMENTS
- LEGAL ELEMENTS OF THE PROPOSAL
- Budgetary implications
- Grounds for and objectives of the proposal
- General context
- Effects on consumers
- Effects on the internal market
- Effects on market entry
- Existing provisions in the area of the proposal
- Consistency with the other policies and objectives of the Union
- Consultation of interested parties
- Summary of responses and how they have been taken into account
- Impact assessment
- Summary of the proposed action
- Legal basis
- Subsidiarity principle
- Proportionality principle
- Choice of instruments
- 5. OPTIONAL ELEMENTS
- European Economic Area
- Detailed explanation of the proposal
Consultation methods, main sectors targeted and general profile of respondents
On 11 January 2012, The European Commission published a Green Paper Towards an integrated European market for cards, interent and mobile payments[7] which was followed by a public consultation. The Commission received more than 300 replies to its public consultation. The comprehensive feedback by stakeholders[8] provided relevant information on some recent new developments and on possible requirements for changes to the existing payments framework.
A public hearing took place on 4 May 2012 and was attended by some 350 interested stakeholders.
On 20 November 2012 the European Parliament adopted a resolution 'Towards an integrated European market for card, internet and mobile payments’[9] which is a report on the Green Paper.
The consultation process has allowed the identification of some key messages related to the scope of this Regulation. Stakeholders from all categories consistently agreed that there was a need to provide further legal clarity on multilateral interchange fees (MIFs). This was seen by payment service providers as particularly relevant in view of the on-going competition cases launched at European and national level. Secondly, merchants in particular but also stakeholders from other categories pointed to obstacles for cross border acquiring, to be remedied for a genuine Single Market for payment services to emerge. There was also a high level of interest in discussing business rules, although views tended to be divided along the stakeholder categories.
Payment service providers and card schemes considered that the fact that MIFs differ substantially from one country to another and for cross-border payments under the same card scheme were not problematic and did not in their view hinder market integration. On the other side, merchants, consumer organisations and some non-bank payment service providers considered that such differences are not justified and that the same MIFs should apply for national and cross-border transactions, and across Member States. Public authorities considered that MIFs should be harmonised to achieve an integrated market. Payment service providers seemed opposed to a regulatory initiative on interchange fees claiming that it would lead to higher cardholder fees, and that retailers would not pass on benefits to consumers. On the other side, retailers took the view that MIFs result in inverse competition favouring the most expensive means of payment and raise barriers to market entry, whilst creating a risk of spill-over effect from cards to mobile and internet payments. Most consumer organisations supported the merchants’ analysis of the negative impact of MIFs on competition and consumers welfare but expressed concerns that reducing MIFs could lead to higher card fees and other consumer charges. Competition authorities supported the need for action to lower MIFs, in particular for mature four-party schemes. Other public authorities were divided.
As regards cross-border acquiring, most schemes and payment service providers saw the need for harmonisation of local standards and rules, whilst merchants and consumers concurred on the existence of many local obstacles to cross-border acquiring. Contrary to payment service providers and schemes, merchants favoured regulatory solutions to self-regulated standardisation. Schemes and payment service providers favoured the MIF of the country where the sale is made to apply whilst most merchants and non-bank PSPs favoured a common MIF to apply across the internal market. The need for mandatory prior authorisation for cross-border acquiring was favoured by payment service providers and incumbent card schemes only.
On business rules, there was no consensus on the benefits and the need to regulate steering and the Honour All Cards Rule (HACR) which obliges merchants to accept all cards within the same brand if they accept one category of cards in this brand. Most schemes and payment service providers were in favour of the status quo whilst merchants, consumers, competition authorities and most public authorities were in favour of allowing merchants to steer consumers towards the use of cheaper means of payment through regulation – although consumers were against surcharging. An abolition of the HACR was rejected by payment service providers and schemes but supported – through regulation – by other stakeholders as enabling the merchant to accept only cheaper means of payment and having a positive impact on competition, with consumers striking a more cautious note. A ban on the blending of merchant services charges towards retailers was supported by most stakeholders – with payment service providers and schemes of the opinion that unblending was already implemented after the MasterCard Undertakings and Visa Commitments.
A detailed overview of stakeholder and Member States views on interchange fees can be found in the Feedback Report to the public consultation on the Green Paper[10].
The European Parliament in its own-initiative report on the Green Paper acknowledged the objectives and integration hurdles identified in the Green Paper and called for legislative action in a number of areas concerning card payments, while suggesting a more cautious approach regarding internet and mobile payments due to the lesser maturity of those markets. Moreover, the Parliament took a firm position in favour of providing clarity on interchange fees to market participants and expressed itself in favour of a gradual approach leading to a ban on interchange fees through regulation.
The Commission carried out an impact assessment listed in the Work Programme. This impact assessment has been prepared in consultation with the ECB. The impact assesment adressed at the same time options for revision of the Payment Service Directive and for regulating Multilateral Interchange Fees.
The impact assessment discusses the issue of ineffective competition in card payment and card-based payment markets, resulting in sub-optimal market outcomes and relatively high fees which are being passed on to merchants and in turn to consumers. Limited market integration, reduced possibilities for new pan-European players to enter the market, disappearance of national (in general cheaper) card schemes and limited innovation are also highlighted in this context. Interchange Fees are identified as an important explanatory factor behind these developments. The widely diverging levels of Interchange Fees between Member States also constitute an obstacle for market integration. These effects are reinforced by a number of business rules, which impact transparency, the ability of retailers to choose an acquirer in another Member State ('cross-border acquiring'), and the ability of retailers to steer their customers towards more efficient means of payment or to refuse expensive cards (the HACR).
The impact assessment considers six scenarios for interchange fees: (i) No action from the Commission, (ii) Regulating cross-border acquiring and the level of interchange fees for cross-border transactions, (iii) Mandating Member States to set domestic IFs on the basis of a common methodology, (iv) Regulating a common, EU-wide maximum level for interchange fees (a) whether the maximum IF cap – of a different level for debit and for credit cards- covers both debit and credit cards or just debit cards and (b) whether the IFs for debit card transactions are to be forbidden altogether or just reduced to a low level, (v) Whether or not to exempt (normally more expensive) commercial cards and cards issued by three party schemes from the regulation of interchange fees and (vi) regulating Merchant Service Charges i.e. regulating the fees paid by the retailer to its acquiring bank
The 0.2% and 0.3% caps examined under the scenarios (ii) and (iv) for debit and credit card transactions respectively. These levels are based on the so-called Merchant Indifference Test developed in economic literature, which identifies the fee level a merchant would be willing to pay if he were to compare the cost of the customer’s use of a payment card with those of non-card (cash) payments (taking into account the fee for service paid to acquiring banks, i.e. the merchant service charge). It thereby stimulates the use of efficient payment instruments through a promotion of those cards that provide higher transactional benefits, while at the same time preventing disproportionate merchant fees, which would impose hidden costs on other consumers. Excessive merchant fees might otherwise arise due to the collective interchange fee arrangements, as merchants are reluctant to turn down costly payment instruments for fear of losing business. They also take into account the levels proposed by schemes (Visa Europe, MasterCard, Groupement Cartes Bancaires) in competition proceedings and accepted by the competition authorities as not requiring further action
The assessment concludes that the most beneficial option appears to be a combination of:
· a series of measures to enhance effective market functioning including the limitation of the HACR and allowing merchants to determine the choice of card brand at the point of sale for all cards and card-based transactions based on four party scheme models; and
· capping the level of interchange fees for cross-border transactions with consumer debit and credit cards (in the first stage) and, in a second stage, capping the level of interchange fees also for domestic transactions with consumer credit cards and consumer debit cards.
The impact assessment and its annex also provide a detailed explanation of other measures proposed in the Regulation to ensure market transparency and effective market functioning, including the abolition of no-steering measures, allowing card identification, co-badging, the obligation to provide invoices to payees by their payment service providers, and imposing the unblending of fees.
These general transparency measures proposed in the Regulation should lead to a more effective market for all payment cards and card-based transactions based on four party (card) scheme models.
However, since certain categories of cards have become so widely used by consumers that merchants find themselves generally in a position that they cannot refuse such cards or discourage consumers from using them without the fear of ‘losing business’, further measures are necessary to ensure an integrated market, effective market functioning and the removal of anti-competitive business practices in these areas. This applies with respect to consumer debit and credit cards.
Importantly, in a first phase, allowing merchants to choose an acquirer outside their own Member State ('cross-border acquiring') and regulating the level of cross border interchange fees would provide legal clarity. Although its impact could be limited to large merchants, it would be conducive to market integration, and could, similarly to the equivalent provision in the SEPA End Date Regulation, have a disciplining and converging impact on the level of interchange fees applying in a purely domestic context.
However, in the longer term also smaller retailers should be able to benefit directly from measures leading to more efficient interchange fees and a level playing field for payment service providers. After a transitional period, the regulation of interchange fees for consumer cards should therefore be extended to cover also domestic interchange fees. Currently in eight EU Member States no or very low interchange fees apply to debit card transactions with no appreciable negative effects on card issuing and card usage; on the contrary, these tend to be the Member States with the highest card issuing and usage. In accordance with trends over the last ten years it is to be expected that debit card issuing and use will continue to increase in the coming years so that after the transitional period provided for in the Regulation debit cards can be regarded as ‘omnipresent’ in the EU and there will no longer be a justification to incentivise card issuing and card usage through fees passed from retailers to issuing payment service providers. Already now it is very rare to open a payment account and not have a card, which in itself entails significant cost savings for payment service providers. In addition, the proposal for a Directive[11] on inter alia access to payment account with basic features proposes that Member States shall ensure that a payment account with basic features includes payment transactions (including online payments) through a payment card. For smaller retailers to benefit directly from measures leading to more efficient interchange fees and a level playing field for payment service providers it would be necessary also to regulate domestic consumer card fees. In order to avoid discrimination between small and large retailers, who can benefit most easily from cross border acquiring, it is proposed to extend the cap proposed for cross-border transactions during the first phase also to domestic credit card transactions in the second phase. The Commission considers however that the maturity of markets in the EEA, in particular as regards debit cards issuance and usage needs to be further investigated and the absence of a need for charging interchange fees to incentivise these must be ascertained. In the meantime, as explained above, caps of 0.2% and 0.3% for debit and credit card transactions respectively would apply.
Under the capping of interchange fees, all in all, retailers would benefit from lower fees, resulting in savings a portion of which would be passed on to consumers. Consumers already pay through the incorporation of Interchange Fees (via the MSC) in the retail prices, and banks are less likely to pass on the benefits of the Interchange Fees to their account holders than merchants to their clients, given the lower level of competition in the banking sector and the current lack of consumer mobility in the field of retail banking. Hence the pass-through by merchants should be greater in any case than the pass-through by banks. In Australia, after the intervention, 0.67 AUD reduction per purchase and 77.19 AUD reduction per account per year have been estimated. The impact may however vary from one retail sector to another, the size of the merchant, its use of payment instruments, and the basket of purchases. It will always be difficult to associate the variation of a specific economic factor to the one of a specific price for a product or service in a given retail shop.
This does not mean however that costs currently bearing on retailers would automatically be transferred to consumers by their banks. Payment systems are inherently complex: the bank of the cardholder interacts with the cardholder, the bank of the merchant interacts with the merchant, and both in principle face competition with other banks and different market circumstances in their behaviour vis-à-vis their respective consumers. Hence capping interchange fees would be expected to have a positive effect on card acceptance, which can, on the basis of scale effects, also positively influence card issuing. A decrease of high interchange fees in most countries generally seems to be associated with a higher acceptance of cards, and it seems that in countries with low interchange fees cards usage is higher. Denmark has one of the highest card usage rates in the EU at 216 transactions per capita with a zero-Interchange Fee debit scheme. This is also true of international schemes: in Switzerland Maestro has no interchange fee and is the main debit card system. In the Netherlands, there is high and increasing card usage and acceptance, replacing cash. Both Denmark and the Netherlands are characterised by low bank account fees as compared to countries with higher Interchange Fees (e.g. France even after competition enforcement, Spain). In Spain, card use increased after the intervention, with the average transaction value for card payments decreasing by 15% from 2005 to 2010. In parallel, card transactions volume and value increased, according to official figures from the Bank of Spain[12].
As shown above, domestic schemes with no interchange fees are also characterised with the highest levels of card usage (ECB data), with the UK and Sweden also having relatively low interchange fees.
The overall impact of interchange fee decreases on issuing and acquiring payment service providers revenues is difficult to estimate, as increases in the volume of card transactions (through higher acceptance) and the savings to PSPs on cash handling could at least partly compensate the losses due to the cap on interchange fees. Another costs saving may result from fewer ATM cash withdrawals and more limited Interchange Fee amounts they have normally to pay to ATM acquiring banks. Hence it is not obvious that issuing bank revenues decrease as a result. In terms of viability, a debit card scheme without any IF seems to be perfectly viable from a commercial perspective without raising the costs of current accounts for consumers. Denmark for example has a zero-IF on its domestic debit scheme while an average account holder pays current account fees well below the EU average. Similarly, in Switzerland the main debit card network is Maestro (part of MasterCard) which has no MIF.
In fact, there is no automatic linkage between decrease of Interchange Fees and increase of card annual fees. Card fees appear to be more related, for example, to the level of competition in retail banking. In the US banks tried to increase cardholder fees after IF regulation but had to back down due to consumers' revolt. In Switzerland there was a decrease in cardholder fees in parallel with the decrease in Interchange Fees .In Australia, cardholder fees were increasing fast before caps on interchange fees were introduced and after the reforms, the growth of cardholder fees slowed down (between 1997 and 2002: credit cards +218% and between 2003 and 2008: +122%). In Spain, since the intervention, average annual fees increased each year by 6.18€ for debit cards, and 11.45€ for credit cards. However, the banks' card portfolio increased with credit card growth significantly higher than debit, in spite of the economic crisis. Other trends may perhaps suggest that competition in the Spanish banking sector is relatively limited: for instance fees for maintaining current accounts doubled from 2007 to 2012, fees for overdrafts increased. Increases in retail banking fees seem widespread in in Spain without a relation with interchange fees.
There is anecdotal evidence of price decreases happening in the USA, one year after the MIF regulation was introduced. In addition, from evidence in Australia, it seems that retailers would benefit integrally (100%) from lower IFs – as acquiring markets tend to be more competitive than issuing markets, whilst the potential increase in cardholder fees is limited to 30-40% of the amount of the IF decrease. In addition after interchange fees are capped and transparency measures introduced, consumers using low cost means of payment will no longer subsidise the (often wealthier) ones using more expensive means of payment as merchants cannot steer consumers, especially for the must use cards.
As competition would play its role again, consumers and retailers would benefit from new entry in the payments market. Even if cardholder fees increase – which is not a given as the impact of capping interchange fees on banking revenues is likely to be mixed - consumers are still likely to benefit from lower interchange fees through lower retail prices, even if retailers do not pass through 100% of the savings, and from new entry in the payment market. It has also to be considered that consumers are very likely to benefit from the services offered by new market entrants. A real-life example of this, for interchange fees below 0.2%, is the Netherlands, where the cheap online payment solution (Ideal) was developed largely because the low interchange fees prevailing there encouraged bank to innovate. In consequence, Dutch consumers do not have to pay high credit card subscription fees in order to shop online.
Commercial cards and cards issued by three party schemes, even though they tend to be more expensive, would not be covered – as proposed under option v - under the various caps proposed for consumer cards as they have limited market shares in the EU and different fee structures and this is not expected to change in the future. However, the measures proposed for consumer card transactions would be applied to such schemes to the extent that they issue such cards and make use of licenced payment service providers in a way that causes their scheme to effectively function in a similar way as a four party scheme. In addition, the transparency enhancing measures would apply to such schemes under all conditions.
Regulating merchant service charges as under option vi would imply covering not only interchange fees but also the other fees imposed on merchants. This would amount to de facto controlling prices for merchants, and to retail price regulation. By contrast, capping inter change fees would mean regulating wholesale prices to align them with the analysis in competition cases to achieve an internal market, as interchange fess are not final prices to retailers and even less to consumers.
Transparency and steering measures would remain key to prevent heavy promotion of cards with unregulated Interchange Fees. Anti-circumvention measures would also need to be included.
The proposal is divided into two main parts.
The first part introduces rules on interchange fees. With regard to such fees the proposal creates a regulated and a non-regulated area. The regulated area consists of all card transactions that are widely used by consumers and therefore difficult to refuse by retailers, i.e. consumer debit and credit card, and card based payment transactions. The non-regulated area consists of all payment card transactions and card based payment transactions based on those that fall outside the regulated area including so called commercial cards or cards issued by three party schemes.
In the regulated area, during a transition period of two years following the publication of the Regulation, maximum levels of interchange fees are imposed for cross-border transactions (where the card holder uses their card in another Member State) or cross-border acquired transactions (where the merchant uses an acquiring PSP in another Member State) only.
Although the Impact Assessment identified a ban on interchange fees for debit cards as part of the most beneficial option, the Commission considers that the maturity of markets in the EEA, in particular as regards debit cards issuance and usage needs to be further investigated and the absence of a need for charging interchange fees to incentivise these must be ascertained before interchange fees for debit cards are entirely abolished. It is therefore proposed that after the transitional phase of only liberalising and regulating cross border acquiring, the same maximum fees that apply to cross border acquired transactions will also apply to domestic transactions. After two years following the complete entry into force of the legislation, the Commission will present to the European Parliament and to the Council a report on its application, assessing in particular the appropriateness of the level of interchange fee, taking into account the use and cost of the various means of payments and the level of entry of new players and new technology on the market.
After the transitional period all (cross border and domestic) consumer debit card transaction and card-based payment transaction based on such a transaction will have a maximum interchange fee of 0,20% and all (cross border and domestic) consumer credit card transactions and card based payment transactions based on those will have a maximum interchange fee of 0.30%. These caps, since they have been accepted by competition authorities as not requiring further action, appear as reasonable benchmarks that have already been implemented without calling into question the operation of international card schemes and payment service, providers, and retailers and consumers' welfare while they also provide legal certainty.
The second part of the regulation reflects rules regarding business rules that will be applicable to all categories of card transactions and card-based payment transactions based on those. As of the entry into force of the regulation, for instance:
· The application of the Honour All Cards Rule will be limited. No discrimination will be nonetheless allowed on the basis of the issuing bank or the provenance of the card holder and between the cards carrying the same interchange fee level.
· the application of any rule preventing or limiting merchants from steering customers to more efficient payments instruments ('no steering rules') will be prohibited.
· acquiring Payment Service Providers will provide at least monthly statements of fees to merchants, in which the fees paid by the merchant over the relevant month concerning each category of cards and each individual brand for when the acquirer provides acquiring services is specified;
· the application of any rule withholding merchants from disclosing to their customers fees they pay to payment services acquirers will be prohibited.
The Impact Assessment has been modified following the Impact Assessment Board meeting of 20 March 2013. Notable changes include the provision of supplementary information on the card market, its functioning and on the EU case law related to interchange fees, together with a summary of the economic litteraure related to interchange fees. The possible impact of imposing maximum interchange fees on cardholder fees, overall consumers' welfare and bank revenues was presented more prominently, to streamline the presentation of impacts of the most important options in the main text. The interdependencies between different options and packages was better explained, together with the rationale for an all-inclusive package including interchange fees, substantiating the reasons for regulating interchange fees through legislation.
Article 114(1) of the Treaty on the functioning of the EU.
The subsidiarity principle applies insofar as the proposal does not fall under the exclusive competence of the Union.
The objectives of the proposal cannot be sufficiently achieved by the Member States for the following reason(s):
By its nature an integrated payments market, based on networks that reach beyond national borders, requires a Union-wide approach as the applicable principles, rules, processes and standards have to be consistent across all Member States in order to achieve legal certainty and a level playing field for all market participants. The alternative to a Union-wide approach would be a system of national regulatory and competition enforcement actions, which would be less effective than EU action and with greater complexity and higher costs than legislation at European level. A possible intervention at EU level therefore complies with the subsidiarity principle. Such an approach supports the Single Euro Payments Area (SEPA) and is consistent with the Digital Agenda, in particular the creation of a Digital Single Market. It promotes technological innovation and contributes to growth and jobs, in particular in the areas of e- and m-commerce.
Moreover, in view of the cross-border nature of payments markets, any measure taken by public authorities seeking to reduce or modify the level of wholesale fees (interchange fees) in one Member State alone would disrupt the smooth functioning of the Community wide payment market and would not be conducive to market integration as it would not result in a level playing field across the EU. This would be the case for instance of different national measures aimed at regulating interchange fees or capping them, as currently foreseen in several Member States.
The proposal therefore complies with the subsidiarity principle.
The proposal complies with the proportionality principle for the following reasons:
The proposal does not go beyond what is strictly necessary to achieve its objectives, namely to help develop an EU-wide market for payments, which will enable consumers, retailers and other undertakings to enjoy the full benefits of the EU internal market including e-commerce. These enhanced possibilities of entry by pan-European players, more innovation, and increased ability for national (in general cheaper) card schemes together with more limited cash use provide opportunities for retailers and payment service providers, regardless of whether these are banks or new market entrants. Effective competition in card payment and card-based payment markets will result in efficient market outcomes, wider choice of payment service providers, including pan-European ones and innovative players, and in lower costs to retailers and consumers. These cost savings should in turn be passed on by merchants to consumers through lower retail prices.
The interchange fees as such, and their widely diverging levels constitute an obstacle to market integration and to effective competition, whose effects are reinforced by a number of business rules reducing transparency to retailers and consumers, restricting the ability for retailers to choose an acquirer in another Member State, and retailers from steering consumers towards more efficient means of payment.
On the basis of consultations of stakeholders, as summarised in the impact assessment, the Commission proposes a combination of measures to enhance effective market functioning, capping the level of interchange fees for cross-border transactions with consumer debit and credit cards (in the first stage) and, in a second stage, capping the level of interchange fees also for domestic transactions with consumer credit cards and consumer debit cards.
Not regulating would leave intact the problems of increased reliance on the two international market players with the gradual disappearance of (in general cheaper) domestic card schemes. Economies of scale and scope for potential new pan-European entrants and innovative players would remain limited, whilst merchants and consumers will continue to pay for the fragmented and expensive EU payments market (more than 1% of EU GDP or €130 billion a year, according to the ECB). Leaving these issues to competition enforcement actions, in particular on the basis of the MasterCard judgement is likely to take many years and will always be on a case-by-case basis and thus cannot provide a level playing field.
It is necessary and proportionate to cover domestic transactions and not only cross-border transactions which would mainly benefit big retailers. Cross-border transactions can be addressed rapidly, creating opportunities for retailers to seek cheaper acquiring services cross-border, and incentivising domestic banking communities or schemes to lower their acquiring fees. A similar process has recently taken place as regards direct debit. The SEPA End Date Regulation limits interchange fees for direct debit, abolishing cross-border interchange fees for direct debit while allowing domestic interchange fees to stay in place until 2017. As a result and faced with a number of merchants moving their acquirer to neighbouring countries, banks have committed to abolish their interchange fees for direct debit already by 1 September 2013[13][14].
As a consequence of unilateral undertakings and commitments accepted in the framework of competition proceedings, a large number of cross-border card payment transactions in the Union are already carried out respecting the maximum interchange fees applicable to the first phase of this Regulation. These elements can therefore be introduced rapidly. However, domestic interchange fees would need to be modified. It is therefore necessary to grant a transition period for domestic payment transactions. Moreover, the proposal does not prevent Member States from maintaining or introducing lower caps or measures of equivalent object or effect through national legislation
Furthermore, capping of interchange fees would benefit retailers, which are more likely to pass on these benefits to their customers than banks are, given the current lower levels of competition and switching in the banking sector.
At the same time, consumers already pay the interchange fees indirectly in retail prices, and consumers using cash or debit cards currently subsidise the use of more expensive cards by other consumers. It could be argued that decreasing interchange fees would encourage banks to increase card holder fees. However, there is no evidence of such a linkage. Card fees appear to be primarily determined by the level of competition in retail banking.
Although this proposal favours market integration, market entry and consumers and retailers welfare, a negative impact on incumbent payment service providers and banks is far from certain. Capping interchange fees at these levels is expected to have a positive effect on card acceptance by merchants so would encourage consumers to an increased use of cards. Increases in the volume of card transactions (through higher acceptance) and the savings on cash handling could at least partly compensate banks for the potential losses due to the cap on interchange fees. Other cost savings could result from fewer ATM cash withdrawals.
The 0.2% and 0.3% caps envisaged are based on the so-called Merchant Indifference Test, which identifies the fee level a merchant would be willing to pay if he were to compare the cost of the customer’s use of a payment card with those of non-card (cash) payments. The figures were calculated on the basis of this test, using data gathered by four national central banks. These figures have been accepted by Visa, MasterCard and the French domestic card scheme Groupement Cartes Bancaires.The proposal is therefore proportionate to the objectives mentioned above. All of the proposed rules have been subject to a proportionality test and to ensure appropriate and proportionate regulation.
Proposed instruments: Regulation.
Other means would not be adequate for the following reasons:
Interchange fees levels and restrictive business rules requires standardisation at technical level and the fullest possible harmonisation. This argues in favour of a Regulation rather than a Directive. Furthermore, due to the network character of the payment industry, most of the benefits of will only materialise once the domestic transition to Union-wide payment instruments is completed in all EU Member States. A Directive with potentially differing national implementations runs the risk of perpetuating the current payment market fragmentation. Finally, it would delay migration due to the time necessary for national transposition. It is therefore recommended to use the legal instrument of a Regulation for regulating interchnage fees and restrictive business rules in the card payments market and mobile and internet based card markets.
The Regulation complies with the fundamental rights and observes the principles recognised in particular by the Charter of Fundamental Rights of the European Union, notably the freedom to conduct a business, the right to an effective remedy or to a fair trial and has to be applied in accordance with those rights and principles.
The proposal does not have any impact on the EU Budget.
Review/revision/sunset clause
The proposal includes a review clause.
The proposed act concerns an EEA matter and should therefore extend to the European Economic Area.
The following short summary aims to facilitate the decision making process by sketching the main substance of the Regulation.
Article 1 – subject matter and scope – states that the Regulation concerns rules for the interchange fees regarding payment card transactions and card based payment transactions within the EU when the payee and its payment service provider in the payment transaction are located in the EU and business rules related to those payments.
Article 2 – definitions – aligned, as much as possible, with those used in Directive 2007/64/EC. However, given the Regulation’s limited scope in comparison with the Payment Services Directive, some of the definitions have been tailored to the needs of this proposal.
Article 3 – (Maximum interchange fee for cross-border consumer debit and credit card transactions) sets caps for interchange fees to payment service providers of 0.2% and 0.3% for for cross-border consumer debit and credit transactions, for entry into force 2 months after publication.
Article 4 – (Maximum interchange fees for all consumer debit and credit card transactions) sets caps for interchange fees to payment service providers of 0.2% and 0.3% fo the value of the transaction for all consumer debit and credit transactions, for entry into force 2 years after publication
Article 5 –(Prohibition of circumvention Fees) establishes that for the purpose of implementing the caps under articles 3 and 4, the net compensation of fees received and paid between the issuer and the scheme are integrated in the calculation of the interchange fees paid and received for the purpose of assessing possible circumvention.
Article 6 – (Licensing) sets that the licenses delivered by schemes for issuing or acquiring purposes should not be restricted to a specific territory but cover the entire Union territory
Article 7 – (Separation between scheme and processing) establishes that an organisational separation should be in place between the schemes and the entities which are processing the transactions, and prohibits territorial discrimination in processing rules whilst mandating technical interoperability of processing entities' systems
Article 8 – (Co- badging and choice of application) This article states that the issuer of the payment instrument decides whether the payment application can reside on the same card or wallet. The choice of payment application used remains with the consumer and cannot not be prescribed in advance by the issuer through automatic mechanisms on the instrument or the equipment at the point of sale.
Article 9 – (Unblending) This article clarifies that acquiring banks shall offer and charge payees individually for different categories and different brands of payment cards and not impose a single price, and provide the relevant information on the amounts applicable for the different categories and brands
Article 10 – (Honour all cards rule) This article clarifies that payment schemes and payment service providers cannot impose that a retailer accepts a category or brand if he accepts another category or brand, except if the brand or category is subject to the same regulated interchange fee as the former. For example, merchants accepting consumer debit cards may not be forced to accept consumer credit cards but can be imposed to accept other consumer debit cards
Article 11 – (Steering rules) This article clarifies that payment schemes and payment service providers schemes cannot prevent retailers from steering consumers towards the use of specific payment instruments preferred by the retailer. This is without prejudice to the rules on rebates and surcharges established under the Payment Services Directive and article 19 of the Consumer Rights Directive. Payment schemes and payment service providers schemes cannot prevent retailers from informing consumers about interchange fees and merchant service charges
Article 12 – (Information for the payee on individual payment transactions) states the informations the payment service provider shall provide to the merchant after the execution of an individual payment transaction, and provides for the possibiliy for this information to be provided periodically
Article 13 – Competent authorities regulates the procedures for designating the national authorities responsible for the application of provisions in the Regulation
Article 14 – Penalties requires Member States to establish rules on sanctions for breaches of the provisions in the Regulation, and to notify the Commission of these
Article 15 – Out-of-court complaint and redress procedures requires Member States to establish specific requirements for the settlement of disputes between payees and payment service providers.
Article 16 – (Review clause) four years after the entry into force, dealing in particular with the interchange level. This article sets out the mechanisms for assessing the effective application of the provisions in the Directive and, if needed, propose changes to it
Article 17 – (entry into force) states the date upon which the Regulation enters into force