The EU’s attempt to moderate card charges, levelled by merchants for retail transactions, could have the perverse result in pushing up the cost of using debit cards in the UK and elsewhere, say analysts.
The comments come as the European Commission’s revised Payment Services Directive, announced on Wednesday, proposes a cap on the interchange fees charged on Visa- and MasterCard-branded cards to 0.3% and 0.2% respectively for credit and debit cards.
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| Internal market and services commissioner Michel Barnier |
Internal market and services commissioner Michel Barnier hit out at card companies, insisting the interchange fees were contributing to the EU’s economic malaise. “The payment market in the EU is fragmented and expensive, with a cost of more than 1% of EU GDP or €130 billion a year,” he says. “These are costs our economy cannot afford. Our proposal will promote the digital single market by making internet payments cheaper and safer, both for retailers and consumers.”
In a directive that will make grim reading for the card issuing banks, “the proposed changes to interchange fees will remove an important barrier between national payment markets and finally put an end to the unjustified high level of these fees”, says Barnier.
And although consumers have, in theory, been shielded from the interchange fees, which are footed by the retailers, EU Commission vice-president Joaquín Almunia argues the consumers do ultimately bear the cost. “Not only are consumers generally unaware of this, they are even encouraged through reward systems to use the cards that provide their banks with the highest revenues,” he says.
Cards are big business in the EU, with around 9% of all European payments made by card. The fee cap could save EU merchants up to €3 billion per annum for credit and €1.7 billion for debit cards, says Peter Jones, managing director at PSE Consulting, a payments consultancy. That money will come directly from card issuers’ profits.
The directive will also encourage “the use of low-cost internet payment services by including within its scope new so-called payment initiation services”, says the Commission in a statement.
“These are services that operate between the merchant and the purchaser’s bank, allowing for cheap and efficient electronic payments without the use of a credit card. These service providers will now be subject to the same high standards of regulation and supervision as all other payment institutions.”
The rules will come into force after a 22-month transition period, during which time they will only apply to cross-border transactions.
Once in force, their impact will be felt differently depending on where in Europe you are. Neither are they universally good news for merchants – or consumers – especially those using debit cards.
In the UK, the interchange fee for such transactions is lower than 0.2%, meaning the changes could, in theory, constitute a rise in debit-card charges. In Denmark, there is presently no charge associated with debit-card transactions.
Nevertheless, the countries at risk of such a rise are in a minority. The average interchange fee on debit-card transactions is 0.31% of its value, well above the new cap, so most countries will see a fall in charges.
For credit cards, the cap is even further below the current EU average interchange fee of 0.92%, a boon for merchants who will pocket the small saving on each transaction, rather than passing it to consumers, says Jones. In some countries, such as Germany, where the interchange fee on credit cards is 1.5%, the drop will be substantial.
The issuers will surely attempt to claw back these losses, warns Jones. This will be achieved partly through a scaling back of their reward schemes, less incentivization to displace cash, less spend on innovation and probably the reintroduction of annual card charges.
The UK Cards Association says: “All the evidence from other countries where similar laws have been introduced is that while retailers have benefited, this has not resulted in lower prices for consumers.
“The European Commission’s model brings a risk that banks and other card issuers will be forced to implement new fees, because the reduced income from retailers will mean that the substantial costs of providing cards, and the systems which enable customers to pay for things safely and speedily, will have to be funded by card-holders in other ways.”
The interchange fees are a legitimate cost that reflects the service banks provide in guaranteeing payments in an efficient fashion while incurring the risks of fraudulent payment activity and credit losses, says Richard Koch, head of policy at the UK Cards Association.
He adds: “If you start to increase fees for card-holders, you run the risk of pushing them into other forms of payment – such as cash or online payment options – which are less efficient and less secure.”
The impact of the EU’s proposals will be felt proportionately more in the UK, as 70% of EU credit cards are UK-based, he says.
Barnier’s view that reducing payment changes will boost economic activity among consumers is “bizarre”, says Koch, citing a leaked official report that suggests a maximum of €700 million of savings could flow to EU consumers.
More generally, the regulatory push to cap payment costs – interchange fees as well as default fees and other costs – means “it is difficult to see how banks will generate earnings, after the proposed interchange cap, other than levying an annual fee for credit cards and raising interest rates,” says Koch, adding that 40% of outstanding credit card balances are repaid within a given month, so without attracting interest costs.
However, at the EU it is felt annual card charges are unlikely to rise so high as to offset the reduction in interchange fees because they are more transparent and consumers will shop around for the best deals.
Card companies have been engaged in a similarly gruelling fight on a second front in the US. There, the settlement of a class action suit filed by a group of merchants, In re Payment Card Interchange Fee and Merchant-Discount Antitrust Litigation, also centred on interchange fees, looks set to unravel in the face of substantial opposition.
Some plaintiffs have argued the settlement is too complex and does not provide equitable relief.
Visa and MasterCard have been at the centre of the storms, in the EU and US, though they themselves will be unaffected by the cap, as they do not earn any money on the interchange fee.
“The terms of trade for the cards have definitely moved,” says PSE’s Jones. “Banks will be earning less revenues from cards, which means they will look more closely at alternative payments.”
The US might provide a precedent. In recent years, the Consumer Financial Protection Bureau capped debit-card fees charged by retailers. According to the FT, Daniel Henry, chief financial officer of American Express, said last month these rules had “wiped out profitability in the debit space ... causing more people to leave the banking system”.