Why Europe needs the Payments Package: the merchants position
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1 Why Europe needs the Payments Package: the merchants position Summary July 2014 EuroCommerce and the European Retail Round Table (ERRT) urge the Council and the new Parliament to adopt the regulation on interchange fees (MIF Regulation) and the Payment Services Directive (PSD II) as a matter of urgency. What the package consists of: The MIF Regulation 1 will set caps on fees paid by merchants on each card transaction, which profit the banks that issue cards. These fees cannot be negotiated by merchants and are set by a mechanism judged to be anti-competitive by the Commission and the European Court. Current fee levels vary hugely across member states and according to the type of card; they include costs for marketing and free gifts which generate waste and render electronic payments more expensive than cash. All this cost is ultimately borne by all consumers - whether they use cards or not. The Regulation would cap fees at a standard level across the EU market and remove the associated anti-competitive rules which stifle innovation and prevent market entry. Some member states already have zero, or very low, debit card fees: this model should be standard across Europe. The PSD II 2 will allow non-bank, third-party payment provider (TPPs) the limited access to consumers account information necessary to initiate a payment. This single reform will revolutionise the market, allowing innovation, promoting competition and creating conditions for the best use of new technologies. The legislation will also strengthen security through new rules on dual authentication which will prevent fraud. Banks must not be able to insist on individual contacts with TPPs this would stifle the market. Rather, an independent body, such as the European Banking Authority, should devise standards and rules applicable to all. What the package will do: The package will bring benefits for all: consumers will get lowcost, safe, efficient electronic payments which operate across the EU; SMEs will get access to affordable card acceptance as all merchants will pay no more than their fair share and card issuers will reap the benefits of an expanded market with a greatly increased number of transactions. Why we need EU-level action: Europe needs a flourishing e-commerce and payments market with a single set of rules. Consumers expect the same rights and fee levels for payments services no matter where they live or shop; merchants need a clear, uniform set of business rules if they are to operate across the EU; SMEs, in order to expand, need cost efficient electronic payments. Fee levels must be set at a single maximum level, which creates a level playing field for payment providers and users. If, as we urge, member states are able to set lower maxima, and, possibly, allow surcharges on expensive cards, this will achieve the optimum system. The package proposed by the Commission was an excellent start; the Parliament improved it in April this year. With the few additions we outline below, we recommend that the Council and new Parliament adopt the text as voted in April. 1 COM/2013/0550 final 2 COM/2013/0547 final
2 Payments Package: the specifics 1. Why we need this legislation: the multi-lateral interchange fee Retail is increasingly shifting from the high street to the digital space. A whole, as yet untapped, market is emerging, which will benefit merchants, consumers and payments providers. We need forward-looking payment legislation, for both face-to-face and distance transactions, to allow this new market to flourish. The SEPA promise is to ensure fast, secure and low-cost payments across the EU, delivering potential market benefits of 123 billion euros 3. The MIF Regulation and the PSD are essential elements in securing these promises and in removing national market distortions. The interchange fee business model has fulfilled its purpose of incentivising card use by balancing the supply and demand side of the market. But, in the highly developed card market which now exists in the EU, where almost every adult citizen has at least one debit card, this model is obsolete and now operates as a barrier to competition and innovation. This mechanism is holding back progress in the EU for numerous reasons: The Visa & MasterCard Card schemes compete for the business of the card issuing banks, which obtain revenue from the interchange fees gained on the cards they issue. Thus the two major card schemes offer ever higher MIFs to the issuing banks as an incentive to switch from one scheme to the other. Card issuers also introduce new and complex high-mif and high-reward products to entice their card users to switch from low-mif to high-mif card products (i.e. from basic to premium/gold cards). Thus perversely, competition in this area leads to higher, not lower prices both for merchants (who are obliged to accept all these cards) and for all consumers. Fees are wholly hidden from those who eventually pay them this includes all consumers, not just card users. Studies also show that the MIF model results in lowincome cash users subsidizing the rewards offered by high MIF card users. It generates extra costs which go as profit to banks and schemes and also perpetuate the misallocation of resources in the system. It removes incentives for banks to develop anti-fraud measures as the cost of fraud is covered by MIF charges. It acts as a barrier to new players from entering the market and restricts innovation. It produces distortions in the single market as domestic MIF levels in some member states can be maintained at disproportionately high levels. 2. The need for EU action All the above problems must now be addressed at EU level as a matter of urgency they have cost businesses and consumers, on average, 9 billion euro per year for over a decade. Regulation is the only way to tackle these problems. The MIF is not the only issue: there are restrictive contractual rules, barriers to entry, and fragmentations of the single market. Over more than 10 years, the Commission has pursued competition action against MasterCard and Visa at European level which have resulted in settlements capping crossborder MIFs (and those in some member states). However, although member states have also taken action in some countries, this has not been uniform and, there is still wide 3 See SEPA potential benefits at stake, Capgemeni Consulting: 2 of 6
3 divergence, with fees often much higher than the cross-border caps. A single market for payments can only be achieved through harmonized EU action, which is why the Commission takes the view that an EU-wide regulation is required. EuroCommerce and the ERRT fully support this view. The point is even clearer for the PSD. Rules on access to payment account information must be set at EU level, so that all consumers can have access to the same beneficial services such as SCT-based payments online, only currently available in some member states, and also so that the banking system and the corporate sector can conduct business efficiently and in a harmonized way across Europe. 3. Benefits for all The payments package will provide benefits for all users of payment systems. For consumers: Low-cost, safe, efficient electronic payments which operate across the EU. Lower MIFs will produce better services and lower prices for all consumers. Access to new products and services which can be purchased from anywhere, to anywhere, at any time. Flexibility as to which payment model to use new methods will emerge. Benefits of new technologies to revolutionise the shopping experience. Easy access to and use of merchant promotions, discounts, loyalty points. For merchants: Merchants will pay their fair share and only that. Merchants want to pay for the benefits they receive from electronic payments security, diversity, guaranteed payment and efficient technologies. They also pay processing fees on top of the MIF, but do not agree to be locked into excessive, non-negotiable fees for services from which they do not benefit. MIF caps will provide a fairly-priced, low-cost electronic payment system accessible across the EU, free from high-mif national silos. Ability to reach customers across an EU-wide market for products and services. Cheaper acceptance for merchant will lead to cost efficiencies which can be used to improve services, support investment in new technologies and lower prices for customers. For payment providers: Banks argue that MIF caps will lead to higher bank costs for consumers. On the contrary, current MIF models lead to wastage which, when eliminated, will make the whole system more efficient. Once healthier competition is established, payment providers can also benefit: An expanded market and the emergence of new payment products will increase transaction numbers so there would be no loss of revenues. Electronic payments will increasingly displace cash leading to savings. Extra services can be marketed through increased online traffic for banks. New providers will gain access to an expanded market Banks will move to embrace new technologies, innovative payment products and make the best use of new technologies. 4. The MIF Regulation 4.1. The scope: consumer, commercial, three-party 3 of 6
4 The Plenary text includes commercial cards within the scope of the regulation and also includes three party schemes if they reach a certain threshold of market share. We believe this is entirely the correct approach and should be maintained: Commercial cards: There is no economic justification for exempting commercial cards. The mechanics of acceptance and therefore the costs of processing is exactly the same as a consumer transaction. MasterCard argues that SMEs would lose out if commercial cards were capped as they provide access to extended forms of credit finance. This is simply not the case. SME finance is funded through the interest payments on such cards, which would not be affected by caps on transaction fees. There is the additional risk that schemes would try to circumvent the objectives of the regulation by shifting business from consumer to commercial cards if such cards were not capped. Three-party schemes: The retail sector acknowledges that currently three party schemes hold only a relatively small share of the market, however in some sectors (e.g. airlines) they are used in the majority of payments. However, there is a real danger that banks will switch to promoting three-party schemes if these are exempt from the Regulation. We also think it is important to maintain a level playing field amongst payment methods. We therefore believe that these schemes should be included in the caps whether by the mechanism proposed in the plenary text (i.e. if their market share exceeds a certain threshold) or by some other method. Geographic scope: The current text would apply to transactions carried out in the EU when both the card issuer and the merchant s acquiring bank are situated within the EU. We believe this is too narrow. The scope should be widened to include non-eea issued cards (those used by tourists) and international online purchases i.e. it should apply to all purchases made in the EU The caps: the principles Single market: Efficient, low-cost payment systems are crucial for the development of e-commerce and a digital market in Europe. Cost and the fragmentation and lack of availability of certain payment models are barriers to cross-border digital trade. EU-wide legislation is crucial to provide transparency and a level playing field across the European payments market. EU regulators must provide a clear and costeffective framework for businesses to accept cards across Europe, which in turn will provide incentives for companies to establish online services across borders. Lower caps at member state level: This provision will complete the proper functioning of the single-market by allowing member states, within the boundaries of EU-maxima, to tailor cap-levels to national market needs. Merchant Indifference test (MIT): We understand that the cap levels in the Regulation may be reviewed in line with the results of the cost of cash study, based on the MIT, which is being carried out by the Commission. We are looking forward to the final report, as first results show that an MIT-based MIF may be significantly cheaper for both debit cards and credit cards. However, we are concerned at the possible unintended consequences of the use of the MIT as a methodology. The pegging of fees for electronic payments to the cost of cash payments is not appropriate. Technology allows electronic payment services to operate at significantly lower costs and to be materially more efficient than cash payments: they should therefore be much cheaper for merchants and consumers to use The caps: the levels The Plenary text would set caps on interchange fees at 0.2% or 7 cents for debit (whichever is the lower) and 0.3% for credit. Member states would be explicitly allowed to set lower caps. Debit: 4 of 6
5 Percentage plus a fixed cap: We welcome this proposal: it is the sensible way forward for debit, follows the best member state practice and will facilitate acceptance of debit for micro payments. We would, however, urge the Council to set caps even lower than those proposed in the plenary text from the outset. Several member states operate debit systems with very low fixed fees or no interchange fee: this best practice should be the benchmark for EU fee levels. The 0.2 and 0.3 percent figures have been taken from the commitment proposals given by the schemes themselves in the competition cases and they are not based on proven cost data. We believe Europe needs an interchange-free electronic debit card/application for all citizens by mandating the removal of the interchange fee on consumer debit cards. That this is an economically workable solution is shown already in a number of member states. It is also in line with the principle that all citizens should have access to a basic electronic debit facility free of charge or for a reasonable fee contained in the newly adopted directive on access to basic bank accounts. 4 Credit: We urge the Council and new Parliament to lower the proposed 0.3% for electronic credit card/applications proportionately in line with lowered debit caps as above Cross-border acquiring We regard the maintenance of the cross-border acquiring provision as crucial, especially with the added proviso that the interchange fee applicable should be the fee of the country of the acquirer. This would allow merchants operating in more than one member state to locate acquiring processes in member states where caps have been set lower than the regulation cap levels. If done, this will exert additional downward pressure on MIF levels generally. However, the wording of the current proposal is not clear enough on the fee to be paid by an acquirer back to the issuing bank. It must be made clear that an acquirer charging a merchant at a MIF lower than the regulated cap should only pay the same interchange fee back to the issuing bank Timing Both cross-border and domestic caps should be implemented in the shortest time possible. Cross-border caps are already largely in place following the commitments given by both major cards schemes under the competition cases they should be imposed by regulation within 2 months, as initially proposed by the Commission. Domestic caps should be implemented within one year, thus bringing speedy benefits where they are most needed at national level while giving banks and businesses time for the change-over process Non-circumvention Article 5 on non-circumvention is of very great importance and it is essential to get the wording sufficiently tight to encompass all attempts at circumvention. We understand that in the Polish MIF regulation, no such provision was made and problems have ensued. This has also been the case in the United States where the same wording as used in the Commission proposal has proven insufficiently robust. It is essential therefore that the Council retains the catch-all provision or some similar wording as has been inserted in the plenary text Honour-all cards The merchant sector supports the removal of the HACR. This rule has been a major element in locking-in merchants to card acceptance no matter the cost and is in itself contrary to the 4 Directive COM(2013) 266, Chapter IV 5 of 6
6 spirit of free competition. The argument that removing the HACR would confuse consumers is a facile one. As long as all issuing banks are honoured, consumers are quite able to cope with a situation where choice as to payment method is the norm Co-badging and application selection We support the option for a consumer to request a co-branded card. The current wording however may need some clarification as to the specific duties of banks in relation to competing schemes. We also support the amendment in Article 8(6) which clarifies that the merchant can configure his terminal to make a priority selection on co-branded cards. This will allow merchants to steer consumers to the most cost-efficient payment method. The final choice, however, should stay with the consumer. 5. The Payment Services Directive II We are highly supportive of the PSD II and its aim to bring third party payment providers under the same regulatory framework as account servicing providers. The growth of e- commerce requires innovation, competition and new players to enter this important market. A number of issues are of primary importance for retail: 5.1. Contracts between banks and TPPs: The directive should not allow banks to require that TPPs enter into individual contracts to gain access to consumer account information, as this could hamper, or prevent the development of TPP services. We favour the idea that an independent body, such as the EBA, should devise overarching industry rules governing access and security, which can be used by all parties as an EU-wide standard. We also understand it is the Commission s intention that there be no charge from banks to third party payment providers (TPPs) for giving info on account funds: this should be explicitly stated in the directive Surcharging If the Plenary text is followed and the caps apply to both consumer and commercial cards, there is likely to be little need for surcharging. However, it should be left open for merchants to surcharge on non-regulated cards, such as three-party cards as long as they accept other cards without surcharge. This will leave open the use of effective steering mechanisms. 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 99% of the 5.5 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: 29 million Europeans work in commerce, which is one of the few remaining jobcreating activities in Europe. It also supports millions of dependent jobs throughout the supply chain from small local suppliers to international businesses. 6 of 6
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