04 November 2013

EBF Position Paper on the European Commission Proposal for a Regulation on Interchange Fees for Card-Based Payment Transactions

The EBF supports the proposal as it is fully in line with the long-standing call of the European banking industry to be able to set up modern and innovative e-payment systems, allowing a quicker and more secure payment processing as an alternative to cash payments.

However, EBF seriously wonders whether the means proposed by the EC – namely capping interchange fees and imposing some structural changes to the cards business – will really help in achieving those objectives. The proposal would interfere unnecessarily in the market which has ensured huge benefits for both consumers and retailers in the shift to electronic payments.

The experience shows that in countries where interchange fees have been reduced or capped by legislative or other intervention (Spain, Australia) the intended benefits were finally not brought to the consumers. More importantly, in some countries such initiatives may even discourage the use of electronic payments in favour of cash, which is by far the most expensive means of payment, as demonstrated recently also by the ECB.

The current caps imposed on MIFs in four party schemes are based on the so called “merchant indifference test” (MIT, see Impact Assessment), which considers neither the relevant investment costs borne by issuers, especially in terms of security (migration to EMV, contact-less technologies, etc.) for both proximity and remote payments (e.g. in the context of e-commerce), nor the benefits for consumers and merchants of card usage (substitution of cash and credit extension for the former and payment guarantee for the latter).

More importantly, the MIT does not consider the actual cost of cash for society as a whole3 and for merchants specifically: the “hidden” cost of cash is not factored in by most retailers, especially small ones, and therefore the “indifference level” is very frequently biased towards cash.

The Regulation also imposes a number of other rules (the so called “flanking measures” such as mandatory co-badging, separation of scheme and processing, unblending, Honour All Cards Rule, choice of application) which would totally change the operating model of current schemes. While the stated goal of such measures is to enhance competition, the investment that some of the proposed rules will require from all stakeholders in the cards market seem huge and would greatly outweigh the intended benefits. Furthermore, some of the proposed measures are not accompanied by an appropriate impact assessment which identifies particular problems and assess the implications in the market of the proposed measures.

Of course, such an overhaul cannot be achieved in the 20 days the Regulation provides for between publication and entry into force.

Finally, some of the identified “market failures” are already addressed by innovation in the market (e.g. prepaid cards which can be used of online payments both domestically and cross-border) and by activity put in place by the PSPs (e.g. the EPC SEPA Cards Framework already stipulates an obligation of separating scheme and processing.): those aspects are not duly taken into consideration by the Regulation proposal.

Full position paper

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