The European Commission proposal and the European Parliament's position would lead to a disproportionate intervention in the market with inadequate analysis of what the effects of that intervention would be.
The digital market requires efficient payment infrastructures that require investments and innovation from financial services suppliers.
The European Commission proposal and the European Parliament's position; both of which would lead to a disproportionate intervention in the market with inadequate analysis of what the effects of that intervention would be.
As seen in other countries that have already capped interchange, this approach ends up hurting the very consumers and businesses it intends to protect.
The focus should be on developing a pragmatic approach that increases the efficiency and transparency of electronic payments so that all parties work together to improve the European economy. Everyone wins.
All risks associated with credit card payments are taken on by card issuers, not consumers or merchants. For example, in the event the consumer doesn't pay for the transaction, the card issuer absorbs that at no cost to the merchant or consumer. The value of this "payment guarantee" exceeds the cost of interchange fees.
Commercial cards (credit) provide a total net benefit of €9.3bn across the EU-UK and Germany taking c.34% of total net benefits as a result of having the highest usage across the EU.
The interchange fee caps could result in a reduction of net benefits by €645mn for issuers, leading to an 81% increase in card fees (€20 per card) and a decrease in small and medium enterprise net benefits by €645mn.
Many small and medium enterprises accept cards as merchants because they simplify the process of purchasing inventory and supplies by replacing the cumbersome purchase order and cheque writing process traditionally used for these operations. While this may seem like a relatively modest benefit, it can be extremely important to small merchants for managing cash flow. Assuming the average transaction value stays the same, a reduction in total card volume by 40% will reduce net benefits by €1bn for merchants even with the reduced merchant service charges, making it more difficult for merchants to justify the cost of accepting commercial cards.
Larger merchants are able to negotiate to obtain the full cost reduction from interchange fee regulation while small and medium enterprises are not. This puts smaller merchants at a disadvantage.
With declining volumes of bank lending (for example in the UK this has been decreasing at a rate of 4% per annum from 2010), commercial cards are a key form of quick credit for small and medium enterprises, with as much as 55% relying on business credit cards in the UK.
Reduction of credit could reach a possibility of €372m for small and medium enterprises and merchants across Europe.
Reduced credit availability also means that the cardholders who purchase from small and medium enterprises will have less credit available to spend.
The EU's mission is all about getting rid of barriers to make life easier and less expensive for citizens, interchange capping will do just the opposite.
In Australia, interchange fee caps have been implemented and as a result, consumers now pay 50% more for their cards. Australian small merchants now pay up to ten times more to accept card payments than large merchants. Fees for standard four-party credit cards increased by 22% between 2001 and 2004, while annual fees for rewards cards increased by 47%-77%. As a result, cardholders in Australia are now paying approximately AU$480 million more in additional fees for credit cards each year. Meanwhile, the value of reward points for four-party cards has declined by approximately 23%. The interchange cap has also benefited merchants to the extent of approximately AU$850 million per year but merchants have yet to show evidence these savings have been passed on to the consumers. On average, surcharges on users of four-party cards have exceeded average merchant service charges. In 2002, the Reserve Bank of Australia reduced interchange fees by some 50%, saving retailers AU$850 million a year. Unfortunately, this has meant consumers are paying some AU$500 million more in additional card use fees to cover the shortfall while the benefits have declined. This has translated into 22% more in annual fees for standard credit cards and 77% more for reward cards. On average, surcharges on users of four-party cards have exceeded average merchant service charges.
In Spain, 50% increase in annual fees for standard four-party payment cards, that's a total cost to consumers of €2.350 billion over the five year period. Since the agreement the standard four-party payment cards operations average dropped from €52.1 in 2005 to €44.3 in 2010, while the ATM operations average rose from €91.2 to €117.2. A 2005 reduction in interchange of almost 60% resulted in a 50% increase in card fees. Spanish merchants have received a MSC reduction of €2.749 billion form interchange capping during this five-year period and there is no evidence that even a fraction of this cost saving has been passed on to consumers via reduced prices or through an improvement of the services provided.
In the United States where interchange fee capping was implemented, many no cost or low cost bank accounts were eliminated. Consumers now pay increased fees for basic deposit account services. In the United States, legislation in 2010 implemented a reduction in interchange fees of nearly 50%, saving retailers an estimated $8 billion a year, yet consumers found that they were paying more for the same products whilst paying higher charges for traditional banking services and enjoying reduced rewards.
In the United States, legislation in 2010 implemented a reduction in interchange fees of nearly 50%, saving retailers an estimated $8 billion a year, yet consumers found that they were paying more for the same products while paying higher charges for traditional banking services and enjoying reduced rewards.
We are moving towards a digital economy and the EU is leading it. Capping interchange fees sets us back and puts card companies in a weaker position to invest in costly innovations like contactless technology, mobile payments, electronic wallets or increased security.
Electronic payments help governments improve services that save taxpayers money by lessening the fraud and waste associated with paper payments to help them compete on a global economy, putting them on equal footing in terms of services and competition for their currency.
Electronic payments aid infrastructure development and cost-competiveness.
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