Beware the Unintended Consequences of New EU Interchange Payments Legislation
Javier Perez | December 5, 2012As the European Commission considers which route to take to achieve its objective of advancing electronic payments throughout the EU, including the possibility to introduce new interchange legislation, it needs to tread carefully…
It is widely recognized that electronic payments make our lives easier. Merchants, consumers and governments all see benefits in speed and in greater security and safety. In fact, it is widely known that electronic payments minimize fraud, reduce the black and grey economy and are more efficient than cash.
There has been a lot of activity at EU and national level in discussing electronic payments. We welcome the discussion, but feel that the Commission is setting a course towards new payments legislation without considering the full implications. You only have to look to the United States, Australia or even Spain to see the unintended consequences of government intervention. Recent experience has shown that this type of legislation could inhibit rather than encourage the very growth in electronic payments that the Commission wishes to stimulate, and stifle the benefits that electronic payments bring to society:
- The reduction in interchange by more than 55% in my native Spain between 2006 – 2010, had a negative im pact for consumers. According to recent academic research, Spanish cardholders had to bear a hefty increase of € 2.35 billion in annual card fees, so this was hardly a win for the consumer, was it?
- Recent MasterCard research among European consumers showed that 75% are worried that they will pay more for their cards if interchange fees are reduced, and almost half of them feel retailers won’t pass on card acceptance fee reductions in the form of lower retail prices.
I completely agree that the EU payments industry must stay as competitive as possible, but the Commission must carry out a thorough and robust economic impact assessment of the consequences of the measures it intends to introduce, and use this to inform its thinking.
MasterCard fully shares the Commission’s vision for a secure, efficient, competitive and innovative European electronic payments industry. However, we hope that it ‘looks before it leaps’, and fully assesses the implications of its plans, before making a decision it – and European consumers altogether – could later on regret.
Categories: News and Views
Tags: Card benefits, Cashless Conversations Blog, electronic payments, European Commission, Innovation, Interchange, mastercard, Payments Legislation
2 Comments
It is true that various regulatory reviews have tended to count the cost of card acceptance for retailers whilst not counting the cost savings in handling less cash – for cash is an expensive commodity to accept , transport, and have accepted at the bank.
It is also true that if banks and card networks had not got greedy then there would be no proposed legislation.
I suspect the cost to the customer from lower interchange fees will not come from annual card fees in countries such as the UK. That would be a real customer losing strategy. Instead it will come from increasing further the hidden fees. The extraordinary high FX charges, and further ‘refinements’ on how interest is calculated are examples.
Some banks now charge further fees if you are so naive as to select a POS cost in your own currency whilst travelling abroad arguing ‘cost of risk’ . Such excesses, tricking the consumer out of a further 2-3% for such ‘service’ can only lead to yet another regulatory review and yet more legislation.
In summary perhaps if card issuers are more reasonable so they might get more reasonable legislation.
It is also true that the current system is designed to ensure that everyone pays his/her fair share for the benefits he/she receives from paying or accepting card payments. And as you rightly point out, merchants derive substantial benefits from accepting card payments.
If legislation imposes a mandatory cap on interchange, issuers find themselves in a position where they continue to face the same costs as before but where they have insufficient funds to cover these. Therefore, they have no choice but to recuperate some of the costs elsewhere.
There is empirical evidence that in countries, such as Spain, which have seen a mandatory reduction of interchange, cardholder fees have been raised. But indeed, a rise in consumer costs can take different forms. In fact, many Europeans believe that the increase may also come from a rise in general banking or bank account fees. It can also take the form of a reduction in awards and loyalty programmes.
At the end of the day, the question of how consumer costs are increased is less relevant than the fact that they have to foot the bill for legislative presents given to big merchants.