Payments Package: Questions and Answers Date: November 2013 Contact: Ruth Milligan, T: +32 2 737 05 95, milligan@eurocommerce.be A. Introduction The Commission published its Payments Package on 24 July 2013, consisting of a proposal for a regulation on interchange fees (MIF regulation) and a revision of the Payments Services Directive (PSD II). EuroCommerce is fully supportive of the need for this legislation, although we have a number of issues on which we feel amendments are needed to give the proposals more weight and to bring full competition, transparency and innovation to the market. These are detailed in the EuroCommerce/ERRT position paper which is on our website. This paper addressed in further detail some of the common questions on this legislation and in particular provides answers to some of the objections to those who oppose the need for regulation in this area. B. MIF Regulation 1. Why do we need Regulation? The Commission has brought cases against MasterCard and Visa at European level which have resulted in settlements capping cross-border MIFs at, broadly speaking 0.2% for debit and 0.3% for credit (the Visa commitments have yet to be fully finalized) 1. However, at domestic level, there is still wide divergence, with fees often much higher than the cross-border caps. Due to this, the Commission takes the view that an EU-wide regulation is required. EuroCommerce fully supports this view. 2. How have the 0.2% and 0.3% levels been arrived at? The figures directly reflect those proposed by Visa and MasterCard in the commitments offered following the competition cases and were originally taken from figures supplied by the national central banks of Belgium, the Netherlands and Sweden. The Commission also considers they reflect the appropriate level at which a merchant would be indifferent between being paid by card or in cash (merchant indifference test). However, the Commission is still to complete its cost of cash study which is designed to arrive at the correct levels for the merchant indifference test. 3. Card schemes argue that MIFs are required to stimulate card use is this true? No. It should be noted that all domestic European card schemes were originally created without MIFs. They have been introduced gradually, and recently have increased greatly with the take-over of national schemes by international schemes. 1 In 2009, MasterCard gave Undertakings to reduce its cross-border consumer MIFs to 0.2% for debit and 0.3% for credit cards and introduced a number of changes to the rules it imposes to retailers through the acquiring banks. Visa Europe offered similar commitments in 2010 for consumer debit and in 2013 for consumer credit cards (including cross border acquiring) these have still be accepted by the Commission. In addition, the French Competition Authority for instance made binding the commitments from the Groupement des Cartes Bancaires on 7 July 2011 to reduce its domestic interchange fees to equivalent levels.
The EU card market is already highly developed: every adult citizen has at least one debit card. In fact, low MIFs are linked with higher card usage e.g. there is no MIF in Norway and Denmark but there are very high levels of card acceptance. 4. How does competition between the card schemes raise MIF levels? Card schemes compete for the business of issuing banks, which obtain profits from the interchange fees gained on the cards they issue. Thus the 2 major card schemes offer ever higher MIFs to the banks to persuade them to switch from one scheme to the other. Thus perversely, competition in this area leads to higher, not lower prices. Example from UK: In 2005, the Switch scheme was bought by MasterCard. MasterCard then increased MIF in two steps, from 4.67p to 6.93p. In reaction Visa increased its interchange fee to 8.00p in 2007. Almost immediately, nearly all the banks decided to move to Visa to gain additional revenue. For example in 2009, HSBC switched 10 million customers from Maestro to Visa debit. From 27 million cards in 2008, Maestro had only 2.8 million in 2011, losing 90% of its market share. MasterCard eventually gave up the single brand Maestro and moved to promoting a MasterCard branded debit card, with an interchange of 11p - 3 pence more than Visa. 5. Would banks lose revenue if MIFs were capped? This claim is not substantiated. The main reasons are that: Card acceptance and therefore card usage would increase; therefore any loss in revenue would be made up in increased volumes. The profits from MIFs are economically unjustifiable and stem from a system which produces wasted cost i.e.: Marketing through the offer of rewards designed to persuade card-holders to switch to higher-rate cards. Unrequested and unused rewards. MIF fee-increases from competition between the card schemes (see 4 above). The European Court in the MasterCard case established two important points 2 : MIFs are not objectively necessary for functioning of card market; debit cards generate important commercial benefits for banks apart from MIFs; The Commission s Impact assessment accompanying the Regulation proposal 3 noted that a zero IF on debit plus cap on credit would significantly increase merchants ability to accept cards, especially smaller merchants, thus generating increased volume, therefore increased revenue for banks. The Commission memo which accompanied the payments package states 4 : Capping interchange fees would be likely to have a positive effect on card acceptance by merchants and encourage consumers to use their cards more. Increases in the volume of transactions (through higher acceptance) and the savings on cash handling should at least partly compensate banks for the losses due to the cap on interchange fees. Another cost saving may result from fewer ATM cash withdrawals and more limited interchange fee amounts banks pay to ATM acquiring banks. 6. Would MIF caps result in increased charges for consumers - i.e. higher bank and card fees? No: this should not be the case. Any such increase would not be economically justifiable for the very reasons given above. However, some banks still claim that they will have to increase cardholder fees. However: Account holders will in general be able to see the increase in fees (which they cannot do with interchange fees) and switch banks if they increase. In the US, banks tried to increase fees after MIFs were capped by regulation but backed down after public outcry. The package as a whole will result in competition from new payment methods: For instance, in the Netherlands, the cheap online payment solution (IDeal) was adopted widely by retailers largely because of the low interchange fees (below 0.2%). As a result, Dutch consumers do not have to pay credit card subscription fees in order to shop online. Consumers using low cost means of payment will no longer 'subsidise' the use of high fee cards which will compete on their own merits. The Commission memo further notes that the legislation will promote (a wider choice of) more efficient and innovative providers, including pan-european ones. National (normally cheaper) card schemes will also be able to expand while currently they tend to be replaced by international schemes offering higher fees to issuing banks (as in the UK, the Netherlands, Austria, Finland and Ireland). 2 MasterCard, Inc. and Others v European Commission, Case T-111/08, 24 May 2012 3 Commission Staff Working Document Impact Assessment SWD/2013/0288 final 4 MEMO /13/719, 24 July 2013 2 of 5
7. How about ordinary bank account fees or charges for using ATMs will they increase? No. There is no evidence of link between MIF levels and levels of bank charges. Evidence shows that the level of bank account charges is linked to the level of competition amongst retail banks in any one member state: the less competition, the easier it is for banks to charge high fees. Any possible such increase would be outweighed by benefits from lower retail prices Also important is the ability of consumers to a) identify the level of fees and b) switch banks. The proposed directive on access to basic account services would improve both of the above. It will require member states to: establish a central data-base of bank charges so that consumers can easily compare charges; put in place mechanisms that make it easy for consumers to switch from one bank to another. 8. What is the evidence as to what will happen at member state level the Spanish study There has been much argument from the schemes that caps on IFs will have a negative impact on consumers and publicity has been given to a study carried out in Spain which showed that post IF caps, bank fees went up. However: Other evidence show that that competition in the Spanish banking sector is relatively limited: for instance fees for maintaining current accounts doubled from 2007 to 2012, fees for overdrafts increased 30%. Increases in retail banking fees seem widespread in Spain and no relation can be made with interchange fees. At the same time, the number of (more expensive) credit cards grew much more than debit cards, in spite of the economic crisis. 9. What is the evidence from other countries? The Commission s Impact Assessment provides the following information: France: After the domestic scheme Groupement des Cartes Bancaires accepted a weighted average fee of 0.30% for domestic debit and credit card transactions in July 2011, no correlation whatsoever can be established with increases in retail banking fees. Before the decision, between 2009 and 2012, cardholder fees increased by 6% and this trend seems to persist, with increases in current account fees on a par with inflation. Denmark: Dankort, the domestic debit scheme, has a zero interchange fee. This is a highly popular and commercially viable scheme which does not raise the costs of current accounts for consumers: an average account holder pays current account fees well below the EU average. Switzerland: Here, the main debit card network is Maestro (part of MasterCard) which has no multilateral interchange fee. After IF were decreased in Switzerland, there was a parallel decrease in cardholder fees. Netherlands: Currently interchange fees for debit cards are below 0.2%. A regulated cap is not expected to have any impact on the current levels, as public authorities have gone or can go below this level, through legislation or competition enforcement. The cap might however put a halt to the race to the highest fees Australia: Here, cardholder fees were increasing fast before caps on interchange fees were introduced and after the reforms, the growth of cardholder fees actually slowed down (between 1997 and 2002: credit cards +218% and between 2003 and 2008: +122%). 10. Will prices for consumers actually decrease? There is little hard data on whether prices for goods have been seen to reduce following MIF reductions. However, here are some points to note: Retailers currently bear high costs for IFs which must be passed on in the price of goods, so consumers currently pay the interchange fees indirectly in retail prices. Competition among retailers is very high. Therefore if retailer costs decrease, this high market pressure and competition is most likely to manifest in lower prices and better services for consumers. This is likely to lead to consumer benefit through pricing, even if retailers do not pass on 100% of savings. As the Commission notes, due to the higher competitive pressure in retail than in retail banking it is likely that the resulting costs-savings to retailers (estimated at 6 billion in total for the two phases of the regulation) would be passed on by merchants to consumers through lower retail prices. In Australia, the estimated reductions in retail prices are 0.47 per purchase and 54 per customer per year. 5 An example from US: Home Depot reduced prices on 3000 products following regulation of MIFs. 5 Commission Staff Working Document Impact Assessment SWD/2013/0288 final 3 of 5
11. What is the real likely impact on the card market? A study from First Annapolis Consulting 6 suggests a number of likely changes in the card market, which, far from raising fees for consumers, would actually bring efficiencies: Rationalising profits and rewards: It is likely that issuers will reduce the number and variation of their types of card and reduce the reward schemes. This will be beneficial for several reasons: Many rewards are not asked for and not used; it will remove the current anomaly that means all consumers pay for high-reward cards and it will greatly increase the transparency of fees. Focus on interest revenue: Instead of making people pay for the actual transaction, issuers will focus on making profit through providing credit, which is a more equitable profit mechanism and may also expand the availability of credit. Merchant cooperation: Card schemes may cooperate with merchants to provide new products e.g. cobranded cards, discount schemes etc. Also they may seek to increase markets through data commercialization. 6 First Annapolis Consulting, Navigator, September 2013 4 of 5
B: Payment Service Directive II 12. What are the main objectives of this Directive? The main objectives are to: Contribute to a further integrated and efficient European payments market, Improve the level playing field for payment service providers (including new players), Ensure a high level of consumer protection and of payments security, Encourage lower prices for payments, Facilitate the emergence of common technical standards and interoperability 13. What are the economic benefits for consumers The new rules will bring more competition to the electronic payments market, providing consumers with more and better choices between different types of payment services and service providers. The main way it will do this is by allowing new third party payment providers (TPPs) to access bank account information. During the past years new actors have emerged in the area of internet payments offering consumers the possibility to pay instantly for their internet bookings or online shopping without the need for a credit card (around 60% of the EU population does not possess a credit card), establishing a payment link between the payer and the online merchant via the payer s online banking module. These innovative and often less costly payment solutions are already offered in a number of Member States (e.g. Sofort in Germany, IDeal in the Netherlands, Trustly in Scandinavia). However, these new providers are not yet regulated at the EU level. 14. Why do we need an electronically readable IBAN? The International Bank Account Number (IBAN) identifies the bank account which belongs to any consumer. It can be used by the merchant to initiate a one-off direct debit payment, based on a mandate obtained from the consumer at the point of sale, where the card is simply used as a means of identifying the consumer and the correct account. This system known as ELV - is currently used in Germany and Austria. It is much cheaper than normal card payments and the system is popular and efficient. We call for the system to be available throughout the EU because: Ensuring that the IBAN is electronically readable will provide a further payment type which can compete with 4-party card systems, thus opening up the market to further innovation and bringing prices down. The system could be even cheaper for the end-consumer and the merchant than the current MIF caps proposed in the MIF Regulation. Currently, the ELV system used in Germany and Austria operates through a one-off direct debit payment If the IBAN were electronically readable on all cards, merchants across the EU could use a similar system. It could thus become an EU-wide payment method which could compete with current card payments. The SEPA End-date Regulation and the SEPA direct debit Rulebook have been worded to allow for cardbased direct debit. Further technical changes could be made to make the system operate with a PIN authentication system. There are no security concerns with such a method any greater than using a 4-party card payment since the account number on its own cannot be used for fraudulent purposes. 15. Will payments through TPPS be as secure? Yes. Card payments over the internet are not very secure as they require consumers to enter sensitive card data onto web pages. Many of the new payment models do not require this as they use the consumers own banking site, which is already much more secure. In addition: All payment service providers, be they banks, payment institutions or TPPs, will need to prove that they have certain security measures in place ensuring safe and secure payments. An assessment of the operational and security risks and the measures taken will need to be done on a yearly basis. Payment service providers also have to ensure strong customer authentication for payments with a payment instrument that is not present at the point of sale (e.g. internet payments) There are new rules on liability: Except in cases of fraud and gross negligence, the maximum amount a payment user could under any circumstances be obliged to pay in case of an unauthorised payment transaction will be decreased from the current amount of 150 EUR to 50 EUR. 5 of 5