This article is part of our special report Payments services directive II.
SPECIAL REPORT / Forthcoming European Commission proposals that are aimed at levelling the playing field for payment cards across Europe are likely to ignite disputes over new market entrants and consumer benefits.
The Commission is set to publish its update to the Payment Services Directive (PSD II) this month, with a separate regulation on multilateral interchange fees (MIFs) likely to be published simultaneously.
The new rules form part of the Commission’s broader aim to promote a single European Payments Area (SEPA) and will seek to create a more competitive payments card market that reflects the explosion in the use of online and mobile payments.
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, it is designed to share the cost of processing payment card transactions between the buyer and seller.
Interchange fees set for cap under new rules
Retailers pay the fee but usually incorporate a hidden charge within their goods for the cost of the fee. They do not like the fee and would like to see it capped, limited or even banned. Many politicians have argued that if this happens, consumers would benefit from lower prices for goods as a result.
The draft proposal, seen by EURACTIV, states that a new regulation – to be published with the PSD update – will cover “multilateral and bilateral interchange fees for all consumer debit and credit card transactions and electronic and mobile payments based on these.”
That is likely to mean stricter limits placed on such interchange fees, although there are doubts as to whether corporate cards would be covered by the new rules.
Monnet scheme collapsed when participants bailed out
Whether the new rules will genuinely open the market to new players is a point of contention.
“The MIF model distorts competition in the payment market in a way which inhibits innovation and prevents new players from entering the market,” said Ruth Milligan, the senior advisor on payment systems with EuroCommerce, the European traders federation.
EuroCommerce believes such barriers must be removed to allow merchants and consumers to fully benefit from new technologies.
Consumer groups agree, although for different motives. “MIFs thwart innovative, cheaper and more secure payment means from emerging because most banks prefer cards for their MIF-related income,” said Monique Goyens, the director-general of European consumer group BEUC.
“The fact that a few big players dominate the card market is convenient for banks, but bad for consumers,” Goyens said.
However the only tangible attempt to create a pan-European card scheme that would compete with MasterCard and Visa (see background) failed two years ago. The so-called Monnet Project involved 24 banks from seven countries.
Questions over duopoly
The Monnet partners cited legal uncertainty, the overall economic situation in Europe and doubts about the sustainability of the business model as reasons for ending the project.
Meanwhile, incumbent operators claim that treating MasterCard and Visa as a duopoly no longer rings true, and rules designed to curb their business will allow other players to jump in.
Forcing down MIFs could exclude from the new regulation very large players such as American Express and Paypal, said MasterCard Europe President Javier Perez.
“If interchange fees needs to change, the Commission could effectively give preference to the Amex card model,” Perez told EURACTIV in a recent interview.
The current draft PSDII contains no direct reference to the Amex business model, which would not be affected by changes to interchange fees.
Debate surrounding the likely impact of the regulation on consumers is also likely to ignite disagreement, not least amongst consumer representatives themselves.
“Consumers are fed up having to perk up card company and bank balance sheets. Courts and regulators have time and again ruled interchange fees unfair and so plans by the European Commission to finally regulate them would be a very welcome move,” according to BEUC’s Goyens.
New rules for existing technology
However other consumer groups are not convinced that reductions in MIFs would be reflected in price reductions.
Last month Spanish consumer group ADICAE, one of Europe’s 10 largest, called on the Commission to refrain from further reductions on MIFs if the measure is not accompanied by a regulation on the costs and interest consumers pay for using payment cards.
Spain is one of the few countries where strict curbs on MIFs have been introduced, and ADICAE claims that analysis of the Spanish experience suggests the reductions have caused “serious damage to consumers”, and showed no benefits in terms of costs.
The new directive is also designed to deal with the fast pace of change within the payments market, however, including innovations in social behaviour and product development.
The boom in smartphone and tablet use may have spurred the Commission to revisit the directive now, but if innovations continue at the rate of the last five years, the current update may itself be outdated before long.