The European Commission tabled proposals yesterday (24 July) aimed at reducing the cost of using payment cards for consumers, setting new fee limits at 0.2% and 0.3% of the transaction value for debit cards and credit cards respectively.
The new Payment Services Directive, with a separate regulation on multilateral interchange fees (MIFs), could see €6 billion annual savings for retailers, according to the proposal presented by Michel Barnier, the EU's Internal Market and Services commissioner, and Joaquín Almunia, competition commissioner.
Under the proposals the new MIF caps will apply from the date of entry of the new rules on cross-border transactions, with domestic transactions within member states to follow suit within two years.
MIFs are charges paid by a retailer to a cardholder’s bank as part of an electronic payment card transaction, whether through a debit or a credit card. Nominally, they are designed to share the cost of processing payment card transactions between buyers and sellers.
"The interchange fees paid by retailers end up on consumers' bills," Almunia said in announcing the measures.
The Commission hopes that the estimated €6 billion each year that it believes will accrue to retailers will translate into price cuts for consumers.
In addition the new rules will prohibit surcharging on internet transactions such as additional charges levied for paying by card for airline flights purchased online. The EU executive believes that this prohibition will save consumers €730 million annually.
Big card companies will be most affected
"Retailers will make big savings by paying lower fees to their banks, and consumers will benefit through lower retail prices," said Almunia.
The rules will primarily affect Visa Europe and MasterCard, but branded commercial cards issued by retail outlets will not be covered, nor will commercial transactions, and American Express, which operates differently from its rivals, will also be largely unaffected.
If lawmakers in Brussels hammer out final details of the rules before European Parliament elections next year, the law could be in place in 2015.
The proposals also include data protection, security and liability requirements for non-bank companies that offer online payment services, in an attempt to capture new internet payment systems within the regulatory framework.
An unconditional refund right for direct debit payments will offer consumers the right to demand refunds from banks where a company does not fulfil its contractual obligations.
Stakeholder disagreement over who benefits
A European Retail Payments Board is also to be established to put consumer representation on an equal footing with banks regarding the Single Euro Payment Area (SEPA).
The new law would mark the end of a long battle between the Commission and card firms Visa Europe and MasterCard (see background), and a hard-fought dispute over the potential benefits to consumers.
Consumer group BEUC welcomed the end of what they called "shameless" surcharges. The retailer association Eurocommerce welcomed the proposals, but said that – in respect of debit transactions – the cap did not go far enough and should have been total.
Meanwhile, many smaller consumer associations contend that the proposal would not result in lower prices for consumers, but would rather benefit larger retailers (see positions below).
Barnier dismissed such claims, reprised previous criticism of MasterCard over its lobbying, and indicated that if the proposals become law a review would follow after four years to determine the real effects on retail prices.
-- CARD COMPANIES --
“While we support the Commission’s goals, we are concerned that some of the legislative proposals introduced today, such as the caps on interchange fees and restrictions on the Honour-All- Cards Rule, do not support these goals and will actually harm and inconvenience consumers and small merchants, as well as hinder competition and innovation in the European payments landscape,” said Javier Perez, president of MasterCard Europe.
“We look forward to working with the Commission, the EU Parliament and the EU Council of Ministers during the legislative process to help create a regulatory framework that promotes the growth of electronic payments while preserving the value of electronic payments for both consumers and merchants,” Perez said.
-- RETAIL SECTOR --
“The package is broadly welcomed by merchants. These proposals are a very significant step to bring competition and transparency into how payments are made and paid for. They should allow retailers to pass savings on to consumers, bringing them real benefits in these times of hardship,” said Christian Verschueren, director-general of EuroCommerce.
“Claims by card schemes that retailers would not pass on cost savings to consumers are nonsensical: price competition and the elimination of inefficiencies are in the DNA of retailers. The proposed MIF caps and other measures will give merchants more control over costs, and consumers choice of payment options. However, the proposals fall short of the ideal: merchants had hoped for the abolition of the MIF as a concept, certainly on debit,” Verschueren added.
“We welcome the proposed changes to make the European card payments market more competitive and the cap on the interchange fee,” said Dennis Kredler, the director-general of the European Retail Round Table.
“However, despite the European court ruling, the MIF system is to be maintained. A move away from percentage fees to flat, cost-based transaction fees would have been more reasonable, especially for debit cards.”
“We strongly welcome the European Commission’s proposal on Multilateral interchange fees which addresses a long-standing issue and aims to ensure a fair, transparent and competitive payment service market,” said Ian Cheshire, chief executive of Kingfisher PLC, Europe’s largest home improvement retail group.
“A coherent approach on interchange fees will create a level playing field and benefit consumers while supporting small and medium sized retailers. There are wider benefits for growth in the European digital single market; by resolving the problem of interchange fees, Europe will be better able to realise the ambition of a single online market for Europe, with a fair payments infrastructure at its core,” according to Cheshire
“Regrettably for the eight million people running online businesses from home, the European Commission’s proposals on interchange may prove to be extremely detrimental. SMEs are reliant on business credit cards as a source of finance, yet these proposals are likely to result in escalating charges for card transactions, hampering the UK’s profits and future competitiveness,” said Andrew McClelland, the chief operations officer of IMRG, the UK’s industry association for online retail.
“Businesses will be disappointed with the European Commission’s 'one-size-fits-all approach' to interchange regulation. The UK has the most mature card payments economy in the EU and these proposals fail to take this into account. Any regulation must be undertaken by the UK government and parliament, not a body that does not directly represent or understand our best interests,” according to Matthew Elliot, chief executive of NGO Business for Britain.
-- CONSUMER ORGANISATIONS --
“Payment methods which are now commonplace, did not exist only a few years ago. When laws do not keep pace, shoppers can lose out. For consumers the equation is easy – they want secure, cheap and simple means of payments. These new laws pave the way for this in the future,” said Monique Goyens, director-general of European consumer federation BEUC.
“Interchange fees are a convenient income for banks and card companies. But they prevent new players offering cheaper and more secure solutions from entering the market as it would mean less revenue for banks. Slashing the level of interchange fees should boost innovation and competition. That unfair surcharges are to become a thing of the past is good news. Companies have shamelessly used them to reap extra profit from people paying by card. Such practices rightly annoyed Europe’s consumers as they essentially punished them when making a payment,” Goyens added.
“The European Commission’s plan to regulate interchange fees is purely mechanical, since the costs of the system will not be reduced – so far the interchange fees have been divided between merchants and consumers, but according to the regulation interchange fees would need to be covered fully by card owners. Hence limiting and unifying interchange fees will instead bring an increase in costs for consumers, forcing card issuers (financial institutions) to increase prices for consumers,” said Enn-Toivo Annuk, the chairman of the Estonian Consumers Union.
“The Estonian Consumer Protection Association’s position is that reduction and fixation of interchange will in the end harm the interests of consumers, increasing costs and decreasing benefits. Estonian Consumer Protection Association does not consider that regulating interchange fees is substantiated,” Annuk said.
“We have always supported the use of e-money, but we are definitely against any potential rise of the cards’ fees at the expenses of users,” said Sergio Veroli, vice-president of Federconsumatori. “We are facing a particular historical and economic phase. Consumers are burdened with taxes and fiscal charges, salaries and pensions are lower and lower: it would not be fair to charge them with additional costs.”
“Our call is that the EU Commission legislate taking into account the following issue: every new measure has to simplify and lighten the lives of the users. In this particular case, the new measure should promote the development of e-money in an incentive and not penalising way. It is important to remember that traceability is the first step to fight black economy,” said the vice-president of Federconsumatori, a non-profit association focused on information, consumers and users’ protection.
“Reducing fees is not the right way to go because this will severely impact consumers. We've already seen this in Spain, in the USA and in Australia,” remarked Antonio Longo, the president of the Italian consumer group Movimento Difesa del Cittadino, Antonio Longo.
“We are indeed convinced that the costs of annual credit card fees will rise, to a large extent, for consumers. We are not the ones saying it, but rather the failed experiences of Spain, Australia and the United States: countries where national laws brought down interchange fees. The result was an imbalance in costs to the detriment of citizens, who not only did not benefit from any price reduction, but even had to spend 50% more for holding their cards as was the case in Spain between 2006 and 2010,” Longo added.
-- BANKING SECTOR --
“Experience indeed shows that merchants do not pass fee reductions on to consumers as expected by regulators and consumer organisations. We have seen this in countries like Australia or Spain where Multi-lateral Interchange Fees have been capped. Moreover capping interchange fees is likely to have a negative impact on future innovation,” said Sébastien de Brouwer, the European Banking Federation’s (EBF) executive director, responsible for economic and social policy.
Taking into account on-going proceedings and the judgment of the European Court in this area, de Brouwer said the EBF argues that legislative intervention is not required.
“This issue has been under the scrutiny of competition authorities since 1984, which in a consistent manner, at national and European level, require full transparency and disclosure on the levels and methodologies used for calculating interchange fees in markets,” de Brouwer concluded.
The Spanish Banks, Saving Banks and Insurance Users Association (ADICAE), a non-profit association focused on information, consumers and users’ protection, claimed in a statement that the European Commission’s recast of the payment services directive and the regulation on interchange fees will only favour large merchants and banks and not consumers and small merchants. In this context ADICAE will oppose to both proposals at the different European institutions that will debate and adopt such legislation.
ADICAE’s statement continued: “The objectives of the European regulation are similar to the reduction proposed by the Spanish Government in 2005: decrease prices, increase convergence and competition, favour efficiency and innovation of electronic payments, etc. But ADICAE’s study shows the Spanish experience had the opposite effect in all of the aforementioned objectives e.g. excluding third party schemes from the regulation such as American Express or Paypal as well as automatic teller machines. ADICAE also considers that the public consultation on the green paper on electronic payments was not complete and transparent since it only lasted for one month and could not participate in it under such short period of time.”
The executive director of the Fair Banking Association of Lithuania, Kęstutis Kupšys, said that the Commission’s ambition to reduce the tax burden for consumers is to be welcomed, but the chosen technique raises doubts whether the desired result will be achieved.
"The European Commission does not explain nor guarantee that these savings will actually be passed on to consumers," Kupšys.
-- EUROPEAN PARLIAMENT --
“Retailers and consumers have been waiting for this proposal for too long already. The ongoing rip-off with card payments must stop. Merchants charge €10.5 billion of transaction fees annually. €4.9 billion goes to debit card providers, credit card providers do even receive €5.7 billion. In an internal market it is not acceptable that credit card payments in Germany are charged with a 1.8% fee, while in France only 0.5% are charged. Ultimately, it will be the consumers paying those fees,” said MEP Sven Giegold, the Greens’ spokesperson on economic and monetary affairs.
“The European Parliament and the European Council now have to swiftly pick up the legislative work on the dossiers in the interest of European consumers. The Greens will keep pressing for more democratic procedures to implement rules for payment transactions. Until now the European Payments Council (EPC) adopts standards for the industry without any involvement of retailers, merchants or consumers. More democracy and competition are urgently needed,” Giegold said.
- Sept 2013-March 2014: Payment Service Directive and Multilateral Interchange Fee regulation to be discussed in the European Parliament and the European Council of Ministers.