Subscribe to our email alerts

Beyond the Transaction: Every Transaction Has a Story

Are Some Payments Schemes More Equal Than Others?

We have written a few blogs in the past on our concerns about the likely impact of draft EU legislation on interchange fees on consumers  and small businesses  – as well as the absence of any data to justify a one-size fits-all approach to capping fees at the same level across Europe.

But just because we have issues with some of the routes the European Commission is going down, it doesn’t mean we don’t share the same target destination of a thriving, competitive European payments landscape. And it also doesn’t mean we disagree with all aspects of its proposals – especially when it comes to equal treatment of all players.

EU_legislationThe Commission has rightly identified that legislation on interchange should not be limited to four party schemes like Visa, MasterCard, PagoBancomat, CB and other domestic schemes. It should also cover three party schemes where they operate “implicit interchange” mechanisms. As a result the Commission’s original proposal included three party schemes where a license is provided to a bank or other stakeholders. This is where e.g. Diners’ or American Express pays a fee to payment service providers who issue its cards –i.e. interchange in all but name.

This is perhaps the most glaring example of a three party scheme behaving like a traditional four party model. But, in reality the way a three party scheme is set up means that internal transfers of revenues from the acquiring side of their business to their issuing arm have exactly the same balancing effect as interchange.

There are also a number of other ways that companies like Diners’s and American Express can circumvent the rules on interchange to their advantage as you can see in this infographic.

The European Parliament has gone further than the Commission in trying to close some of these loopholes. In April this year, it voted to include the agent model in the scope of the legislation.

The ball is now in the court of the EU Member States to have their say on what goes into the final regulation.

Member States effectively have the choice between treating all players equally or adopting new rules that play directly into the hands of the most expensive player on the market.

Clearly MasterCard favours the first option. The second option would be bad news for retailers – most of whom think that that legislation should cover three party schemes – and even worse news for consumers, who are likely to be hit the hardest.