Data, data, data! I cannot make bricks without clay
Confronted with a complex case, Sherlock Holmes famously warned Dr. Watson against arriving at convenient conclusions without proper evidence to back them up.
Although Holmes’ desire for data referred to a 19th century mystery, his life lesson can just as easily apply to the proposed regulation of electronic payments in Europe today.
In July 2013, the European Commission published proposals to cap interchange fees in Europe at 0.2% for debit and 0.3% for credit. Fixing any type of fees at the same level across more than 30 markets is a big decision. As such, we would expect these proposals to be backed up by robust data.
Yet, when the proposals came out there was no sign of any data to support them. In fact, despite repeated calls for more evidence, it took the Commission seven months to produce – in its own words – “preliminary findings” to justify the caps.
In the absence of any “complete findings”, MasterCard commissioned the Brattle Group to carry out an analysis of the Commission’s initial data. The Brattle Group’s analysis reveals several major shortcomings in the scope of the research:
- The study is based on interviewing only one group of retailers – large merchants from a limited range of sectors with an average turnover of €1.6 billion. It does not take into consideration the opinion of SMEs.
- It also takes into account certain costs without justifying why other fixed costs of accepting cards and cash are not considered.
- Finally, out of a total of 465 companies interviewed, over 200 responses were excluded from the final study, with no explanation as to why.
The Brattle Group concludes that these factors point to a significant overestimation of the extent to which interchange should be capped. Using Italy as a case study and applying the same methodology, but with a more representative sample and comprehensive analysis of costs, the Brattle Group calculates that interchange should be far in excess of 1%.
The reality is that it is very difficult – if not impossible – to come up with an ideal level of interchange that works across 31 very different markets. In some countries, the proposed caps may reflect market realities. In other markets it risks driving costs up for consumers – just as we saw happen in my native Spain.
Despite the political attractiveness of capping fees, there is no evidence to suggest that a one-size-fits-all approach is the right way to promote electronic payments in Europe. We shouldn’t try to make bricks without clay.