Key legal challenges – what happened?
Five years ago, EU regulators devised the controversial Interchange Fee Regulations (IFR), capping Mastercard and Visa consumer-card interchange fees.
The EU Regulators cited their experience in regulating anti-competitive practices: to fuel innovation and change. The EU now needs to assess what has been achieved against its 2015 aspiration. The regulatory review process is underway, but what has it concluded to date including next steps?
How will the EU regulators act with interchange in a post IRF / PSD2 Europe? Here comes IRF2?
What did the IFR review achieve?
Initially, the IFR quelled concerns of EU and national Regulators and those of key merchant lobbying groups across Europe. It challenged the interchange rate levels, the methods of calculation, and it simplified the complex card scheme qualification criteria in place at that time.
Mastercard and Visa brought legal challenges but struggled to present robust defences. Some believe they missed the opportunity to explain more eloquently that even cash has a cost. But in the end, some common-sense prevailed, leading to interchange fee rate reductions.
Consumer debit (and prepaid) rates decreased to 0.20%, even in markets where typically this had been a fixed fee. Consumer credit rates lowered to 0.30%. But there were challenges:
- Mastercard and Visa presented different timelines for fee reduction.
- Acquirer systems were not ready, which led to manual workarounds.
- Merchants were concerned by the changes (fixed fee to ad valorem and in how caps and different cards were treated.
- Merchants were not prepared for ‘interchange plus plus’ pricing and did not like manual workarounds.
- Issuers across the EU were not prepared for the revenue reductions.
- Commercial cards and other consumer card brands were excluded.
These challenges were compounded by other high-profile legal actions against the schemes by the EU and national regulatory bodies too, as well as from merchant groups.
An additional change for merchants in October 2019 seemed positive when Mastercard and Visa reduced interregional rates for consumer POS transactions to 0.2% and 0.3%, and additionally inter-regional CNP transactions accepted in Europe down to 1.15% for consumer debit/prepaid and to 1.50% for consumer credit. Again, commercial cards were excluded.
Has it worked?
As with Schrödinger’s work, the IFR review has ‘worked’ and also ‘not worked’ depending upon your perspective. It has undoubtably introduced unintended consequences and controversy.
Yes, it worked….
IFR debates have led to global changes in the approach to interchange fees; and led to greater scrutiny of acquirer and scheme fees. It contributed to the PSD2/Open Banking initiative and evolved greater trust and transparency and new payments thinking. More recently, it led to the UK Payment Systems Regulator (PSR) undertaking a market review of card acceptance costs (reporting H1 2020) along with other EU National Competent Authority reviews.
But in reality…… no, it really has not worked….
The IFR review has led to years of delays and destructive legal cases between the EU regulators, major merchants and the international payment networks. The result appears to be a reduction in interchange fees but has been largely ‘cancelled-out’ by increased scheme fees and ergo acquirer fees. As these were outside the IFR scope, these many ‘new fees’ have been passed onto the merchant. Merchants blame acquirers, as their card processing costs increased, as have the revenues and profits of some acquirers and the card schemes.
Card issuers lost revenues as the result of lower interchange rates, replacing these in many cases with card fees, account fees and transaction fees, higher borrowing rates and reduced ‘free borrowing / repayment periods’; along with removing or weakening many cash-back / reward programmes.
We now need to complete and assess the findings of another regulatory review:
- What price changes have consumers seen from any Merchant cost changes?
- Has competition, choice and innovation in European payments been realised, as originally sought by EU regulators?
- Has the reduction in interchange rates, as part of the overall merchant commission, been simply replaced by other fees, that were and remain out of scope of the original IRF?
- Have regulatory bodies learnt any more about the true costs of cash and other non-card payment methods?
- Have the IRF reductions undermined the European Regulator promotion of PSD2 initiatives and alternative payment methods? Is there viable competition to cards now, e.g. account to account payments / credit transfers and PISPs?
- Is there greater transparency on merchant fees?
- Has individual country National Competent Authority (NCA) enforcement/ guidance been seen and sufficient?
- What have we learnt from loopholes, vagueness and omissions in EU IRF regulatory language?
Impact on card usage?
- Has IFR led directly to increased consumer card spending?
- What has the effect been upon displacing cash at merchants?
- Has the prohibition of surcharging on cards been simply replaced by discounts for cash, merchant steering of consumer payments and/or minimum purchase amounts?
- Where surcharging on cards outside of scope is permitted, how has this been performed and what was the effect?
- Has interchange fee reduction derived benefits such as increasing contactless payments across Europe?
Regulator next steps?
- The EU regulator should now see a clear way to make further sweeping changes.
- A cap should be considered for the total fees (including interchange) paid per transaction, especially poignant for higher-value card transactions?
- The regulator should rule also on commercial card rates
- Further regulation, including broader review of acquirer pricing and scheme fees to issuing and acquiring clients should now be proposed?
We should not be satisfied with the EU regulator actions of five years ago either. The European Commission was tasked in 2015 to assess the IFR effectiveness by 2019, They struggled to find and appoint research consultants, only appointing Ernst & Young (EY) in late 2018. The long-awaited review and publication of results has been delayed until 2020.
Back in 2015, when EU regulators pulled this programme together, they and we did not know what we know, see and experience now. We still have uncertainty, lack of clarity on what benefits have been achieved, the unintended consequences of these changes and continued marketplace evolution.
The EU regulators really must act. They have no choice. What we can be assured of though, is that we WILL be surprised, changes will be significant, complex and ever more impactful, and as ever stakeholders will fight and then find ways around restrictions. The payments marketplace will both continue and evolve. So, let’s have some fun with the journey!
Riskskill.com is a leading Europe-based payments and risk management consultancy, with an impressive international track record of helping payments businesses to find and mitigate payments challenges and risks, competing in a fierce world and dealing with regulatory and scheme changes. Riskskill.com works with clients to put in place strategies and programmes of work to make payments businesses or functions more profitable, less susceptible to losses, risks and regulatory issues and compliance problems. Its people are widely accepted as some of Europe’s leading payments and risk experts and they are frequent commentators on the issues involved. The key team have a wide experience in banking, insurance and the financial services and payments sectors and are thought leaders at the forefront of many industry wide and international debates.
Riskskill.com is an approved Visa Inc. GARS Reviewer.
Bill Trueman and Kevin Smith
Principal Consultants, Riskskill