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ANALYSIS: Legislation

Change on the cards

Retail expert Adam Bernstein says new legislation on interchange fees for card transactions could save retailers money and help speed up the introduction of new NFC-driven payment methods

Europe has for some time been concerned about the cost of debit and credit card transactions charged to traders and passed on to consumers. In March last year, the European Parliament passed legislation to cap the cost of these transactions.

The new rules, implemented in the UK last December, could lead to a reduction of about €6 billion a year in fees charged to consumer cards, the European Commission estimates. The Regulation on Interchange Fees for Card-Based Payment Transactions followed a Commission proposal put forward in July 2013. It is hoped that it will give more freedom of choice to traders while making card transactions more transparent.

Adam Bernstein, retail expert
Adam Bernstein, retail expert

Europe thinks that the variety of interchange fees between EU countries, indirectly charged to traders by card-issuing banks when a customer uses their card, is difficult to justify and has “hindered integration and innovation of the EU payments market”.

Amanda Hulme, a partner in the financial regulation group at Addleshaw Goddard LLP, explains: “According to the Competition and Markets Authority, Visa charged 8p per debit card transaction and 0.77 per cent of the transaction value for consumer credit cards. In comparison, MasterCard typically charged 7p to 11p per MasterCard and Maestro debit card transaction, 0.8 per cent of transaction values for ‘standard’ consumer credit cards, and 1.05 to 1.5 per cent for ‘premium’ consumer credit cards.”

Background

Interchange fees are multilaterally agreed fees payable between the consumer’s card-issuing bank and the bank that handles a trader’s account – the card acquirer.

In the majority of cases, the trader’s bank pays these fees to the consumer’s bank for each transaction. The most common type of card scheme is the so-called “four-party” scheme which, as the name suggests, features four parties – a card issuer, consumer, trader (merchant) and a card acquirer. Under this arrangement, a multilaterally agreed interchange fee is usually in place between the trader’s card acquirer and the consumer’s card issuer.

For each transaction, the trader pays a fee to its bank, called a merchant service charge (MSC). The acquiring bank then pays the merchant the sales price after deduction of the MSC. This is mostly made up of the interchange fee – other elements include a card scheme or ‘network’ fee and a fee paid by the merchant for the services of the acquiring bank. The interchange fee is then passed on by the bank for the merchant to the bank for the consumer.

When someone buys something in a store using a credit or debit card, these costs are hidden and worse, neither the retailer nor the consumer can alter these rates or shop around for the best deal.

Costs need to be absorbed somewhere and so, where traders pass these costs on to consumers, this leads to inflated prices. If they don’t, traders make less margin.

Europe has already taken Visa and MasterCard to task over the issue. Visa in 2010 and 2014 agreed to reduce its maximum average interchange fees for debit cards to 0.2 per cent and to 0.3 per cent for credit cards. And MasterCard found itself before the European Court of Justice which, in September 2014, said that such interchange fees were a violation of EU antitrust rules.

The new regime will cap interchange fees at 0.2 per cent of the transaction value for consumer debit cards and at 0.3 per cent for consumer credit cards. However, after a five-year transition period, for smaller transactions only, member states can choose to set a maximum fixed fee of €0.05 (4p) per transaction instead of a 0.2 per cent fee for domestic transactions. What constitutes a “smaller” transaction will be for each member state to decide.

The regulation removes major obstacles to technological innovation in payment options. Many with a recent iPhone know, for example, that their device features an NFC payment chip that allows swipe-based payments.

Of course, there are other technologies in the market that allow consumers to pay via an app or with a fingerprint. However, Europe reckons that uncertainty on the rules regarding interchange fees has been one of the factors holding up the use of these systems.

Going forward

Some have suggested that the drop in interchange fees means retailers could see a windfall and pocket the difference by not passing on the savings.

Ms Hulme says that card fees need to be covered one way or another. Indeed, consumers have seen the benefits of card use drop recently and there is likely to be a decline in the issue of loyalty/rewards cards. uSwitch agrees, saying: “While the changes will not have any substantive effect on the average person, they will most likely mean the end of the era of free rewards credit card.”

The new rules affect all payments involving Visa and MasterCard, which account for most of the market. However, the price cap will not apply for three years to so-called three-party card schemes, such as Diners Club and American Express, which involve only one bank.

The last word goes to the UK Cards Association. It says: “As the UK is the largest card market in Europe, we welcome the Government’s measured application of the regulations and echo its calls for any savings to be passed on to consumers in the form of lower prices.”

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