Towards basic electronic payments A roadmap for competitive and inclusive payment systems in Europe

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1 Towards basic electronic payments A roadmap for competitive and inclusive payment systems in Europe Revised position paper Date: May 2013 What do we need from our electronic payments? What Europe needs are simple, safe and low-cost methods of transferring money from a consumer s account to a retailer s account, which are not determined by the geographic location of the retailer or the customer. The current electronic payment market is dominated by cards, owned by just two major schemes and run under the multilateral interchange fee model (MIF). The two schemes compete with each other by offering the issuing banks higher MIFs and imposing anticompetitive rules: this simply inflates prices. It also distorts competition between banks, schemes and payment means, prevents innovation and blocks new players from entering the market. The MIF model imposes a complete block on evolution in the payments market. New technologies are revolutionising the way payments can be made. Consumers have new needs and expectations from their payment methods, which retailers want to satisfy. The stranglehold of banks and cards schemes must be broken and new business models must be allowed to flourish. We urge the European regulators to take the necessary steps which will enable and encourage the market to capitalise on this potential through innovation, competition and flexibility. Consumers and retailers need freedom of choice as to how they make and accept payments and the costs involved for the service they prefer. A. The basic electronic payment concept: open market conditions and financial inclusion Europe-wide In a Europe where e-commerce will become commonplace, a simple electronic method of payment should be seen as a basic service available to all, which can be provided in many ways by many operators offering products on the basis of free competition across Europe. Such a payments market should operate on the following principles: A simple electronic payment facility for all EU citizens: Payment providers should offer all EU citizens the facility to make a basic, low-cost payment by electronic means. This is the logical follow-up of the Commission s planned proposal for citizens access to payments accounts, which, we understand, is to include a facility for all citizens to use an electronic payment application linked

2 to a basic payment account 1. This would offer true financial inclusion for all EU citizens. The electronic payment device provided by the PSP (card, another chip device, mobile phone application etc.) should enable account holders to choose among payment methods by giving easy electronic access to their account information. Consumers should be able to initiate a range of different types of payment (credit transfer, direct debit, four-party card model etc.) with the same electronic device. Competition and innovation: payments should be open to non-bank payment providers. Transparency: fees for each payment application should be known by the consumer and the merchant. EU-wide: universally available across Europe regardless of which bank, mobile handset or provider you use with no national differences in cost or availability. Independent of technology: available on cards, mobile phones or other electronic devices - and any new technology that could appear in the future. Affordable: all merchants big and small - should be able to afford to accept electronic payments. Secure: security must be assured. All parties involved in the transaction process must have confidence in the product and the process. Certainty of payment: The merchant must be certain at time of transaction that an authorised electronic payment will be settled. B. New regulatory landscape: three specific requirements The Commission is planning three legislative proposals which could resolve the current problems in the payments market: a review of the Payment Services Directive, a Regulation on MIFs and a proposal for a directive on access to payment accounts for all EU citizens. This legislation needs to achieve the following: 1. Remove the MIF barrier and create transparency on costs Remove the MIF barrier: For debit applications (cards, mobile applications etc.) the current interchange fee system should be removed and charges levied through a transparent, low-cost mechanism. This will restore the cheap debit options provided by the national debit cards, which SEPA is removing. Fees for credit applications should be cost-based, unbundled from all other services (e.g. interest free period and rewards) and paid for by the beneficiary of the service. Any reintroduction of such fees by any other mechanism should be banned. Unbundle fees for different services: The fees attached to individual services involved in a payment should be unbundled and transparent, thus opening the way for fully informed consumer choice. 2. Allow new players to enter the market Barriers which prevent new players from offering a full payment service must be removed: Regulation of third party PSPs: More third-party payment service providers (TPPs) should be given full access to the market by bringing them within the revised Payment Services Directive. The level of regulation should follow risk. Access to verify account information: At present only the consumer s bank can verify whether an account holder has enough in his account at any time to cover a proposed purchase. Banks must be required to provide this information to a third party payment provider as a service. The following conditions would safeguard the consumer and merchant: The bank/tpp would only need to verify whether there are sufficient funds for the purchase price: yes/no answer. Where authorised, the bank could ring-fence those funds for a reasonable period of time pending the receipt of the payment request from the TPP/ merchant. TPP would have no further access to account information. 1 Follow up to the Commission Recommendation on access to a basic bank account (2011/442/EU) 2 of 6

3 Full and informed prior consent by the account holder. If payment is approved, merchants will have an assurance of final settlement through a guarantee or other form of security. A payment guarantee should always be available from the bank but a merchant may opt out of this service. Real-time processing, clearing and settlement: Regulation should ensure that all European banks upgrade their systems to allow real-time transaction processing and, following this, prompt clearing and settlement. Separation of card authorisation services from processing, clearing & settlement: This would allow competition in both areas: (i) authorisation, which could be provided by the card issuer, a third party PSP or omitted (where a merchant elects to bear the risk) and (ii) processing and clearing could be done as a SEPA card transaction, SDD or SCT and by the retailer s processor of choice. Separation of schemes from processing: The practice of schemes imposing the use of a processor which is a scheme subsidiary should be explicitly disallowed. (The current rule in the SEPA Card Framework has been ineffective.) This would increase competition between card schemes and processors. Access to clearing and settlement mechanisms: Third party payment providers duly regulated and licensed under the revised payment services directive (PSD) should have access to clearing and settlement mechanism. This will provide competition and promote price reduction. 3. Remove restrictive anti-competitive rules A number of highly restrictive contract-based rules currently prevent true competition in the payments field. These must be removed: Honour all cards rule: Retailers should be free to decide which specific types of payment card they wish to accept and not be forced to accept premium or very expensive cards. Ability to identify card at point of sale: Terminals must be able electronically to identify the fee associated with any specific card, to help retailers decide whether they wish to accept that card or not. Account information access: In addition, electronic chips (on cards or other applications) must carry information on the consumer s account which can be read by the merchant. This is to allow alternative schemes (like the ELV 2 ) to continue to operate within SEPA. Regulation should mandate open IBAN access and the IBAN number should be printed on all debit cards. Pan-European (cross-border) acquiring: A retailer which operates in a number of member states could save money by centralising its acquiring in one bank in one member state: there are no real technical barriers to this process. However, card scheme rules insist that the MIF should be charged at the rate of the member state in which the transaction takes place. This rule must be removed. Choice of payment application at the terminal: Currently, if a number of different applications appear on a card, it is generally the issuing bank which chooses the first default application to be used. It should be the consumer who chooses. The retailer should be able to configure the terminal to present the options to the consumer in the order of their choice but the consumer will have the final say. Restrictions on consumer freedom: Many standard banking contracts prohibit consumers from giving their account details to third parties. Such restrictions should be removed, as consumers must be free to authorise a third party payment provider to initiate a payment on their behalf. Restrictions on cost information: Many retailers are not allowed to publicly state how much any payment methods costs for them to accept (they may not divulge their merchant service charge). This means a consumer has no information on the different costs of each type of payment. This rule must be removed so that the retailer can inform and thereby steer the consumer. 2 The ELV is a direct debit-based application, currently used in Germany and Austria, where customer authentication is done through the card. This system will be SEPA compliant and could be used throughout the EU. 3 of 6

4 Annex: Why do we need these changes? What is wrong with payments at present? In the current payments market, competition pushes prices up, not down For the commerce sector, the electronic payments field is hugely dominated by card payments; even online, most payments are still card-based. And here, SEPA has made very little progress. In fact, the opposite has happened: Commerce has seen dramatic increases in prices, no improvement in choice and a reduction in competition. National low cost debit card schemes are disappearing and being replaced with more expensive MasterCard and Visa products. The reason for this is simple: the economic model of Visa and MasterCard, based on the Multilateral Interchange Fee (MIF), makes it more lucrative for issuing banks to promote expensive MIF-based cards rather than cheaper alternatives. This distorted competition leads to higher prices for end-users. The current card market is highly inefficient and anticompetitive The MIF is imposed by Visa and MasterCard and their banks on all transactions and offers several benefits 3, many of which are not requested by card holders, but are accepted because they are considered free even if many of them are rarely used. The vast majority of customers are not aware of this. Merchants derive no direct benefit from most of these rewards but, as they are forced to pay for them through the MIF, they have no choice. Effectively this acts like a transaction tax levied on retailers, which is ultimately passed on to all consumers through the prices they pay for goods and services. Merchants can only negotiate on the acquiring processing fee, which is excluded from the MIF. Yet this processing fee only accounts for a small portion of the total merchant fee. This is particularly bad for SMEs, which have no negotiating muscle, although many such small businesses must now accept cards to retain their customers. The net result is that every consumer pays, even those who pay by cash because this transaction tax ends up as part of the final price. The card schemes are aggressively seeking to embed cards into new payment technologies, such as mobile phones. There is therefore a grave danger that the perverse effects of the MIF will spill over into new innovative internet and mobile payment solutions. It is widely acknowledged that merchants are locked-in to the card market, which makes it very difficult for them to refuse some cards: they would lose more than a simple transaction - the customer would most likely not return. The MIF is not integral to the operation of the payments card system. This was found to be the case by the European Court in the MasterCard appeal decision. The Court also found that the MIF exploits the maximum willingness of merchants to pay. Banks and schemes have never provided satisfactory or sufficient justification for the existence of the MIF, or for its cost level. Is the basic payment a new payments scheme? No. The aim of the retail sector in proposing these ideas is to describe a new payments landscape, which would be developed by a combination of regulation (to remove barriers) 3 Such as air miles, discount vouchers, free insurance on purchases. The MIF also covers fraud and unpaid balances and Issuer s processing (i.e. the costs of the relationship between the issuing bank and the cardholder). 4 of 6

5 and free market innovation. To avoid misunderstandings, a number of points should be made clear: There is no proposal to create a new scheme which will be owned or provided by any entity. We do not propose that any service or product be made mandatory. We ask the regulators only to address three specific issues (further detailed in sections 1-3 of the above position paper) i.e. remove the MIF barrier; create regulatory conditions which enable new players to enter the market; remove anti-competition contractual rules. Will consumers pay more? No, on the contrary. Today, consumers usually pay both an annual fee to their banks and also higher retail prices because merchants are constrained to pass on the MIF. All these costs are quite hidden from the consumer and they have no choice as to which extra services they pay for. The European authorities are expected to soon publish proposals for basic bank account access for every citizen, even the poorest. Providing a basic payment application linked to each bank account would not only promote competition, it would go far to assist the political objective of financial inclusion in a market where electronic payments are growing. Is the MIF the only problem? No. The anticompetitive effects of the MIF are reinforced by other rules imposed by card schemes and banks, especially the Honour All Cards Rule (HACR), the restrictions on crossborder acquiring, the lack of fee transparency and the fixing of the default application by issuing banks. Will retailers pocket the money? Retail is a very competitive market and extremely price sensitive. Most retailers fight hard to keep their customers, by providing them with the best choices, prices and services. The removal of the MIF would give retailers extra margins to use in their price calculations to satisfy existing customers and attract new shoppers into their stores. How will the banks benefit? There is currently a risk for the banking sector that their share in the payments market is eroded by changes in technology and the entry of new players: to retain their retail payment customers, they will need to modernise their business models. By engaging in a system where electronic payments are efficient, competitive and open to greater choice across Europe, banks will be able to expand their services onto a pan-european market. Their opportunities to offer services in the e-commerce field (both in payments and related services) would increase, and therefore the volume of transactions. In addition the greater transparency and choice offered to consumers and to retailers would increase trust in banking services. In our view, a more open competition model can deliver benefits to all players. What about cash? Retailers first mission is to sell goods and services. Retailers are generally neutral on payment means, which are seen as an essential facility. Retailers wish to offer as many means of payments as possible, if consumers wish to use them provided it is economically viable for them to do so. However, card payments can and should be cheaper than cash, and not, as the European Commission proposes with its Merchant Indifference Test, benchmarked to the cost of cash to merchants. Basic payment applications would solve this dilemma and would probably displace a fair amount of cash towards electronic payments at low cost. Ruth Milligan Senior Adviser on Payment Systems milligan@eurocommerce.be 5 of 6

6 EuroCommerce and the commerce sector EuroCommerce represents the retail, wholesale and international trade sectors in Europe. Its membership includes commerce federations and companies in 31 European countries. Commerce plays a unique role in the European economy, acting as the link between manufacturers and the nearly 500 million consumers across Europe over a billion times a day. It is a dynamic and labourintensive sector, generating 11% of the EU s GDP. One company out of three in Europe is active in the commerce sector. Over 95% of the 6 million companies in commerce are small and medium-sized enterprises. It also includes some of Europe s most successful companies. The sector is a major source of employment creation: 31 million Europeans work in commerce, which is one of the few remaining job-creating activities in Europe. It also supports millions of dependent jobs throughout the supply chain from small local suppliers to international businesses. 6 of 6