Beyond the Transaction: Every Transaction Has a Story

Building a stronger Europe with payments and technology

Taking a look back at the impact of the EU’s Interchange Regulation

Yesterday, I was invited by the European Commission to discuss, along with a number of stakeholders, the impact of the European Interchange Regulation which was adopted in 2015. That Regulation in essence set a cap on those fees that a retailer’s bank has to pay to the issuer of a payment card. These fees are a fundamental part of our card-payments structure to balance the costs of providing the best and safest payment solutions to consumers, businesses and governments.

Mastercard has been actively engaging with all stakeholders over the years, including the European Commission and retailer organisations, on this topic. We are a key European player and have been part of the European landscape for over five decades. What we do in Europe influences what happens globally. Security standards and technology (e.g. EMVco, Chip&Pin) as well as GDPR-compliant initiatives among others were all spearheaded in Europe and have become global standards for us. No doubt the same will happen over time with the PSD2 provisions on Strong Customer Authentication.

Thanks to our 6,000+ colleagues in 49 offices across Mastercard’s European region, which is larger than the EEA, we work tirelessly to bring the best, the safest and the most convenient payment solutions to the people, businesses and communities we serve.

Today, retailers and people everywhere derive real benefits from faster, more convenient and more secure payment transactions than ever before. This allows them to take full advantage of today’s global and digital economy thanks to a thriving competitive European payments market.

For businesses, the EU’s Interchange Regulation has led to significant cost decreases. As outlined in a study by EDC at the beginning of this year, card issuers received €5.14Bn less in interchange in 2018 than in 2014 despite an increase in transaction value of €749Bn and card acquirers (retailers banks) had to pay less to card-issuing institutions. At the same time, the study also found that large retailers have benefited from the reduction of Interchange fees, given their negotiating powers and contract with their financial institutions which had to pass through those savings to them. Smaller businesses, however, seem to have benefited much less from those reductions.

These findings concur with the European Commission’s own findings published last June. The Commission also looked at whether market players were circumventing the interchange caps imposed by Regulation but concluded that no significant circumvention had been identified.

Against this background, I would like to address a point that was raised during the discussion and which often leads to confusion. It has been suggested that the savings that the Interchange Fee Regulation has brought to retailers might be eroded by a significant increase in other fees (e.g. network fees which are paid by card issuers or retailers’ banks directly to the card schemes, such as Mastercard). Perhaps it would help to take a step back and explore why these fees even exist.

A card payment only works when an issuer, an acquirer and a scheme jointly provide a service – which benefits both the retailer and the cardholder. All three parties provide a value and all three incur a cost – this is a commercial service. Network fees fund fast, safe, secure, convenient and reliable electronic payment solutions.

The Commission found that there has been a limited increase over the years. Again, I would agree with that, but this very limited increase is due to a variety of drivers. For one, there is less cash and more electronic transactions, but there is also a changing mix of electronic payments: cross-border commerce and e-commerce have increased. There are more contactless transactions, in particular since the pandemic hit, with 80% of card-present transactions in Europe now being made via contactless. There are also various regulatory requirements, for instance strong customer authentication mandates. These drivers lead to different solutions which deliver different types of value. For instance, changing payment habits, when consumers increasingly shop online or cross-border, can lead to such limited increases as such transactions have a greater value.

As a result, the Commission concluded that no further regulation was needed at this stage. Given that the objectives of legislation have largely been met, and that there is no evidence of circumvention, I very much agree with the Commission’s decision not to put forward any new legislation on this at this stage. As the Commission stated, competition in the payments market has increased and the evidence shows that the total cost of card acceptance has decreased, leading to significant savings for retailers.

Europe’s market is very dynamic, not least because of innovation that another piece of legislation, PSD2, takes into account with the rise of digital. As such, I would expect this trend of increased competition and lower costs to continue in the years to come.