|
|
A number of hurdles remain for the development and integration of cards, mobile and internet payments. Since its first products became available on the 1st of January 2008, we have not seen any substantial development of new payment methods or the lowering entry barriers for new players in that field.
Europe needs to adopt a different and more comprehensive approach through regulation, self regulation, and competition enforcement. Work has already started at the European Commission. In December last year, the EC proposed a regulation that would impose an end date for the phasing-out of national systems and for the transition to SEPA credit transfers and direct debits in euros. The proposal – currently under discussion at the European Parliament and the Council – would create the clarity and predictability that the banking industry has been requesting for years.
Europe also needs to launch a reflection on the best instruments to move forward with initiatives in card payments and innovative electronic and mobile payment systems. And the Commission is also working in this area.
One central issue will be a reliance on more competition-friendly business models. At present, the payment-cards sector is dominated by the interchange-fee model. The model is profitable and expanding; worldwide point-of-sale interchange fees have been estimated at almost €50 billion in 2006; an increase of 140 per cent from 2000. In the EU, retailers estimate that interchange revenues amount to over €13 billion and the cost of total merchant fees is about twice as much.
The high profitability of this model might be hampering the development of more innovative or efficient payment methods for users. Is the interchange fee the only possible or even the best option?
First of all, it can be argued that the interchange-fees mechanism creates a distorted system of incentives. Demand in the payment-cards market is determined by the cardholder who pays with the card, but the price is charged to the merchant. In this system, the banks create incentives for consumers to use high-fee cards which retailers are reluctant to turn down for fear of losing business.
In addition, because consumers and merchants value the most widespread cards, credit card companies compete primarily for the number of cards issued rather than on merchant fees and attract issuing banks by offering higher interchange fees. These are then charged to merchants who, in many instances, cannot refuse card payments in their stores.
On top of this, there is a wide geographic variation of fees, which suggests low market integration. For instance, in Belgium the interchange fee for a debit card transaction of €50 is likely to be 10 cents; but in Poland it can be as much as 80 cents. The difference may seem small, but for an average retailer it can easily add up to more than €200,000 per year for the same transactions. It is hard to see any justification for this added cost.
Of course, this does not mean that collective interchange fees are unjustified in themselves; it is rather their level which is a matter of scrutiny. As a matter of fact, the Commission has accepted the pledges and commitments offered by MasterCard and Visa Europe to cut interchange fees while still maintaining them. The principle the EC has applied is that fees can be set up to the amount of the cost savings that retailers make when they accept cards instead of cash payments. This is a reasonable benchmark, and one that prevents banks from taking advantage of the fact that retailers effectively cannot refuse cards.
Eliminating unwarranted rents also reduces the incentives to protect a system against new and potentially more efficient payments for users. In fact, new players – and particularly non-banks players – are finding it difficult to enter the European market for cards.