The ongoing Covid-19 crisis has underscored the importance of card payments. Regulators have responded by, for example, raising contactless payment limits and delaying the implementation of some regulatory policy. The EU has recently assessed the effectiveness of a major piece of legislation on card payments – the Interchange Fee Regulation – and concluded that it has been broadly successful and should not be amended until more data can be gathered.

What the IFR does

Interchange fees are charged by card issuers to payment acquirers on card transactions. Acquirers, in turn, charge fees to merchants, who may pass these costs on to consumers.

With a view to fostering the EU internal market and competition in EU card payments, the IFR was introduced to harmonise and regulate those fees charged by EU card issuers. The main aim was to lower interchange fees and, ultimately, reduce transaction costs for consumers. Most notably, the IFR caps interchange fees at 0.2% of the value of a transaction for debit cards and 0.3% for credit cards. 

Five years since the IFR was introduced, the Commission has produced a report on its successes and the areas which require further work.

If the cap fits: IFR successes

Areas where the Commission believes that the IFR has had “major positive results” so far include:

• Increased volume of card payments: According to the Commission, lower interchange fees have meant increased card acceptance by merchants, resulting in greater numbers and value of domestic and cross-border card payments.
• Lower costs for merchants and consumers: The report notes that the reduction in interchange fees has redistributed revenues from card issuers to acquirers and merchants, each respectively gaining and saving €1.2 billion per year. Merchant service charges (MSCs) for consumer cards should continue to lower as long-term acquirer contracts gradually adjust.
• More transparency for merchants: 60% of merchants have taken the default option of seeing a breakdown of their MSCs (e.g. into interchange fees, scheme fees and the acquirer’s margin). The Commission hopes that price transparency will empower merchants to decide which cards to accept and so enhance competition.

Put on one’s thinking cap: More analysis needed

Areas where the Commission wants to focus future work include: 

• Whether there is circumvention of fee caps: While no circumvention has been identified so far, the Commission says that it needs to continuously collect data on alternative flows (such as any remuneration which has the same effect as interchange fees). 
• Whether small retailers have benefited from better price transparency: Smaller retailers may have limited administrative capacity to process a large number of fees or analyse complex fee structures and may therefore be tempted not to opt for a breakdown of their MSCs. The Commission notes that merchant surveys have so far elicited limited responses from small retailers.
• Increased use of co-badging: The IFR gives consumers the right to integrate two or more payment brands into their payment cards. This may allow consumers to switch between card schemes or between debit and credit payments on a single card. The Commission believes that co-badging will become more important with the rise of e-wallets and so this requires further monitoring.
• Separation of scheme and processing entities: Technical standards requiring the separation of payment card schemes and processing entities started to apply in February 2018. The Commission felt it did not have enough information to judge the success of these standards due to their relatively recent implementation and the long-term nature of processing services contracts. As such, the Commission will “enhance its monitoring” of how the separation rules are applied.

To cap it off: What happens next

The report concludes that more data is needed over a longer period before any changes are made to the IFR, including any adjustment to the maximum cap for interchange fees.

In the meantime, the Commission emphasises the need for continuous monitoring and robust enforcement, and the need to improve competition in the EU card payments market. As firms increasingly explore integrating payment services with smart devices, they can expect regulatory scrutiny on co-badging and the extent of consumer choice at point of sale. 

The Commission also hopes that new, innovative means of payment – such as the recently launched European Payments Initiative to be developed for SEPA Instant Credit Transfers – will facilitate market entry for new competition.

With thanks to Jason Wong for writing this post.