BLOG | Following the European Commission’s competition probes, Visa Europe has submitted a proposal to cut its inter-bank fees. Such inter-bank fees are paid by the merchant’s bank to the cardholder’s bank for every card transaction processed. Is this good news for merchants and consumers?
The ‘price cut’ will apply to all consumer card transactions for international purchases within the European Economic Area (EEA), and to domestic Visa transactions within 10 European countries. It will probably come into effect beginning of 2015.
Lower commission rates?
Visa Europe’s inter-bank fees are currently set around 0.5-0.8% of each transaction value. They would now be capped at 0.3%, a substantial drop of about 50-70%. As these fees contribute a fair amount to commission rates charged to merchants, this translates to excellent news for brick-and-mortar shops and ecommerce merchants since lower inter-bank fees could mean lower commission rates.
Positive spin-off for consumers
The European Commission (EC) also foresees a positive spin-off for consumers. Currently, the transaction fees paid by the merchant end up on the consumer’s bill, either absorbed in the purchase amount or via so-called ‘surcharges’ (incremental fees for the consumer when paying with cards). Suppose the EC is right, it would entail merchants to get lower rates from their bank, and subsequently, pass it on to consumers. It seems logical but is it going to work that way?
Lower card charges: lower price tags?
Assuming merchants will receive lower card charges, how substantial are these cost savings to justify passing it on to consumers? Throughout Europe the merchant commission is often still a 5 to 10 fold of the new capped interchange fee (1.5%-3%). If passed on to merchants, the lowered interbank-fee would then only reduce transaction costs with 10-20%. Savings are then fairly limited and will not directly result in lower price tags, especially taking into consideration the challenging economic situation for retailers both online and offline across Europe.
Recent experiences in Spain seem to substantiate the limited effect of capping inter-bank fees. There was no evidence of retailers passing on savings and consumers were charged higher cardholder fees by their own bank. This suggests that the ‘capping-agreement’ at least has one certain outcome: less transaction revenues for issuing banks. Predictions are that the total amount of interchange fees will be reduced by over 60% to 3.5 billion euro (minus 2.2 billion euro). Banks will need to tap into new revenue streams to deal with their losses. Probably it is then the consumer that pays the bill.
Author: Erik van den Heuvel, About-Payments, March 5th, 2014