BRUSSELS | The European Parliament has voted for a regulation to cap interchange fees for consumer debit and credit card payments. The regulation was drafted by the European Commission and is intended to reduce fees for the usage of card payments. Both European merchants and consumers are assumed to benefit from limiting the interbank costs for card payments.
€6 billion in hidden fees
The Commission estimates that the cap could lead to a reduction of about €6 billion annually in hidden fees for consumer cards. The "Regulation on Interchange Fees for Card-based Payment Transactions", will also give more freedom of choice to retailers and enhance transparency for card transactions.
Interchange fees result in higher charges to consumers
When a customer pays for a purchase using a credit or debit card at a merchant, the bank that serves the merchant - the acquiring bank - pays a fee to the bank that issued the payment card to the consumer - the issuing bank.
This so-called "interchange fee" or interbank fee is then charged to the merchant and absorbed into the merchant commission rate or card acceptance fee. Often the interchange fee component is a considerable part of the total charges towards merchants. Retailers and business - in their turn - pass on these charges to consumers, either invisible (absorbed in the purchase amount) or visible by means of surcharging.
In its MasterCard judgement of September 2014, the European Court of Justice made clear that such interchange fees are a violation of EU antitrust rules. The intention of this new regulation is to help the card payments industry move from its current business practices to a new more competitive system, to the benefit of consumers, merchants and banks - according to the European Commission.
Consumer debit and credit card payments are capped
As a general rule, the new regulation will cap interchange fees at 0.2% of the transaction value for consumer debit cards and at 0.3% for consumer credit cards. For consumer debit cards, it also gives flexibility to Member States to define lower percentage caps and impose maximum fee amounts.
Besides capping interchange fees, the Regulation also increases transparency on fees and will enhance competition for payment card schemes and banks by e.g. addressing licensing issues and other conditions that have restricted the freedom of choice of retailers.
Furthermore, the Regulation removes major obstacles to technological innovation in payment options. Technologies that allow consumers to pay with their debit or credit cards online or using their mobile phones (with apps, fingerprints, contactless "swipes", etc.), are readily available. However, uncertainty on the rules regarding interchange fees has been one of the factors holding up the use of these technologies.
The legal text voted on by the Parliament still needs to be formally approved by the Council, which is expected before the summer this year.
Removing a hurdle
"For too long, uncompetitive and hidden bank interchange fees have increased costs of merchants and consumers. Today's vote has brought us another step closer to putting an end to this", said Commissioner Margrethe Vestager, in charge of competition policy.
"This legislation will put a cap on interchange fees, make them more transparent and remove a hurdle to rolling out innovative payment technologies. It is good for consumers, good for business and good for innovation and growth in Europe. As cards are the most widely used means of online payment, this Regulation is also an important building block to complete the European Digital Single Market."
The current variety of interchange fees between EU countries, indirectly charged to retailers by issuing banks when a customer uses his card, is difficult to justify and has hindered integration and innovation of the EU payments market. In December 2014, political agreement was reached by the European Parliament and the Council, with only technical modifications to the Commission's original proposal of a Regulation on Interchange Fees for Card-based Payment Transactions.
The Commission and national competition authorities have long condemned these hidden fees under the European competition rules; the Commission set out its analysis of such fees in its 2007 decision on MasterCard's multilateral interchange fees (MIFs) for cross border consumer card transactions. In September 2014, the European Court of Justice confirmed that assessment. During the appeal proceedings Council and Parliament worked on legislation creating clarity on fee models and business rules and facilitating market entry by non-banks on the basis of two Commission's proposals: a proposal for a Regulation on Interchange Fees for card based payments and a proposal to revise the Directive on Payment Services (“PSD”).
Article sourced from Press Release by European Commission, March 10th, 2015