A new Payments Services Directive and a Regulation on Interchange Fees for card-based transactions Examining key implications for end users

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1 A new Payments Services Directive and a Regulation on Interchange Fees for card-based transactions Examining key implications for end users On 24 July 2013 the European Commission adopted a legislative package in the field of payments. This package contains proposals to revise the Payments Services Directive (PSD2) and a Regulation on Multilateral Interchange Fees (MIFs). Both proposals seek to make the payments framework better serve the needs of the European payments market by facilitating competition, innovation and security. These changes will benefit all stakeholders, especially consumers. Although Visa Europe supports this objective, some of the proposals key provisions will have unintended consequences for consumers, businesses and retailers.

2 Consumers Abolishing the Honour All Cards rule (IFR art. 10) Consumers will only use payment instruments which they know will be accepted. As such, if retailers that display the Visa logo have the option to reject certain cards, consumers may lose confidence, stop using their cards and revert back to less efficient payment methods such as cash. Mandatory application selection at the point-of-sale (IFR art. 8) Many consumers carry debit cards with a domestic and an international brand. Typically, when using the card in their home country, transactions take place, by default, under the domestic brand. When using the card abroad, the international brand is automatically chosen by the POS terminal. This way of working has existed for more than 20 years and has created a seamless payment experience for both the payer and the retailer. The proposed provision would put an end to this system as the cardholder would be forced to make a choice between the two brands every time they make a transaction, whether at home or abroad. This would not only confuse consumers as the two applications on the card function in the very same way, but would frustrate them by causing longer check-out queues. Consumers 2

3 Strong authentication (PSD art. 87) Strong authentication allows the payer to identify himself by providing something he owns (e.g. a card) and something he knows (e.g. a PIN or a password). In the physical point-of-sale environment, the concept is familiar through the use of chip cards and PINs. For online purchases, strong authentication is facilitated by the 3D Secure system on which Verified by Visa is based. However, when buying online, consumers and retailers often do not see a need to apply the more complex 3D Secure based authentication. For instance, when a consumer buys a song from an online music store for 0.99, the music store already has the payer s payment details on file and does not require additional verification to authorise the purchase. For higher value goods, consumers want more security and are prepared to provide extra evidence to prove who they are. As such, a blanket approach whereby strong authentication is required for every type of purchase would significantly reduce convenience for consumers and increase the number of abandoned transactions. Instead, retailers and payment schemes should be allowed to take a risk-based approach, according to each transaction. Providing access and use of payment account information to Third Party Payment Providers (PSD art. 58 and 59) Providing consumers with more ways to access their current accounts expands the options available for them to pay electronically. However, providing third parties with access to a consumer s current account information requires a welldefined framework establishing the distribution of responsibilities and liability for payments made via third party providers. Such access must also be fully secure to ensure authentication data is duly protected and cannot be reused by a third party. In order to provide consumers and their banks with the necessary guarantees and trust in this concept, the provisions laid out in the Commission s proposals must be further enhanced. Consumers 3

4 Capping interchange rates (IFR art. 3 and 4) Card payments work best when the interests of all stakeholders are equally balanced. The reduction of MIFs will make card payments cheaper for retailers. However, as the consumer s issuing bank will see a substantial reduction of its payment related revenues, it may no longer be able to cover its cost on a growing base of card transactions. This may force banks to restructure their fee models, increasing the total bill consumers have to pay. Consumers 4

5 Businesses (SMEs and Large Corporates) Including commercial cards (IFR art. 1.3a) Commercial cards are a very efficient means for SMEs and larger corporations to pay and be paid. They are also very different from consumer cards. Commercial card users require bespoke services such as more sophisticated transaction reporting, which allows companies to integrate the transaction data into their Enterprise Resource Planning (ERP) systems, providing a more efficient end-to-end process than other payment means. Many small businesses often suffer from cash flow issues due to late payment (or non-payment) of invoices. In such instances commercial cards are a very efficient cash flow management tool. Including commercial cards in the legislation will destroy the business case for many retail banks to provide such cards, as the costs of servicing the customer would no longer be covered. In this instance retail banks may decide to stop issuing commercial cards or instead issue a three party system card which is excluded from the proposed legislation. In the first case their business customers will no longer have the product available to them. In the second case, the proportion of the more expensive three party system cards will increase, raising a retailer s total cost of accepting cards. Abolishing the Honour All Cards rule (IFR art. 10) Like consumers, holders of commercial cards will only use payment instruments which they know will be accepted. As such, if retailers which display the Visa logo have the option to reject certain cards, cardholders may stop using them and revert back to less efficient payment means like cash or invoicing. This would have a negative effect on businesses as a return to cash payments and invoicing would be more costly and less efficient for them. Businesses (SMEs and Large Corporates) 5

6 Retailers Including commercial cards (IFR art. 1.3a) Many banks may decide to stop offering commercial cards. As a result their business customers may revert back to paying only upon receipt of an invoice, which is a process that is more cumbersome and expensive for the payee. Some other banks will choose to offer more expensive three party system commercial cards instead of four party system cards. This will increase the overall cost for businesses that accept them. Mandatory application selection at the point-of-sale (IFR art. 8) Mandatory application selection will require many debit card holders to make an unnecessary choice at the point-of-sale when checking out. This is likely to confuse consumers which will ultimately lengthen the check-out process. Retailers 6