European Commission card payment plan will not meet deadlines and may not save consumers money, say experts

The Commission has proposed a maximum interchange fee that banks can charge retailers to process [certain types of] credit and debit card transactions and a revised Payment Services Directive (PSD) to replace the 2007 Directive. The Commission wants to bring the PSD up-to-date and ensure that it takes account of new types of payment services such as payment initiation services that you might find in a mobile wallet, and to ensure a level playing field. For more information see our guide to the changes.

The Commission aims to increase competitiveness in the EU payments sector and to promote innovation in electronic and mobile payments. It also wants to tackle competition concerns, particularly in relation to interchange fees, and provide greater protection for consumers, particularly when read in parallel with its proposed Directive on basic bank accounts.

But, taken in the round, the proposals are likely to lead to higher costs for retailers' banks and no guarantee that the benefits of lower card transaction charges will be passed on to consumers. The Commission's timetable is also unrealistic given the scale of the changes proposed.

If adopted, the impact of the proposals on the card payments sector in their current form would be profound.

Impact on issuers

Issuers will face a material reduction in revenue from interchange fees on consumer cards in the EU although the immediate impact will be less in certain countries where interchange fees are already lower. This may disincentivise issuers from offering premium consumer cards or lead to substantial changes to current premium product offerings.

As an anti-circumvention measure, schemes will be limited in their ability to provide marketing or other financial support to compensate issuers for a loss of interchange revenue as a result of the caps.

The proposals are not consistent with the caps set in the context of the Commission’s related competition law investigations, by requiring a cap per transaction rather than caps set on a weighted average basis.

It is proposed that the interchange caps would be reviewed after four years. In relation to debit card interchange fees, the Commission has implied that these are not likely to be justifiable in the future once debit cards become ‘omnipresent’ across the EU.

The interchange caps are a maximum and EU countries will be free to require lower caps at a domestic level or to maintain their current lower rates. This would enable the proposed new payment systems regulator in the UK to impose lower UK domestic interchange fees.

There is likely to be growing pressure on non-regulated interchange fees charged on commercial cards through measures to improve transparency and the ability of merchants to steer customers away from more expensive forms of payment. On the other hand, if the Commission’s assumptions are correct, its proposals may encourage more card acceptance and a greater use of cards which may provide cost efficiencies.

The proposed separation of scheme and processing functions will provide opportunities for issuers and acquirers to pursue lower cost processing options.

Impact on acquirers

Acquirers, those banks acting for retailers, will incur significant additional costs in complying with the rules requiring greater transparency to merchants and cardholders of the underlying components of merchant service charges (MSCs). Separately, the UK’s Office of Fair Trading has recommended that the proposed domestic regulatory framework for payment systems should include scope to regulate MSCs themselves as well as multilateral interchange fees (MIFs).

New rules prohibiting restrictions on cross-border acquiring may lead to greater competition in the acquiring market.

Impact on schemes

The cap on interchange fees will apply to four party schemes only and not to three party schemes such as American Express, save where they are considered to operate in fact like four party schemes. The Commission has identified that this is the case for American Express’s Global Network Services cards, for example.

The timetable for making the very significant structural, contractual and systems changes required by the proposals appears wholly unrealistic given the nature of the card schemes and how they operate.

Schemes argue the interchange caps and other rules will reduce or eliminate competition between the brands and co-badging in particular, and also reduce their ability to incentivise investment and development.

Impact on retailers, consumers and new entrants

Merchants should benefit from increased transparency in terms of information on charges that they are required to pay and in principle should benefit from a reduction in fees. But it remains to be seen whether these benefits will be passed on to consumers with lower retail prices. This is one of the most controversial claims on the part of the Commission and the evidence presented is disputed strongly by the card schemes.

While the regulation of interchange fees may benefit providers of new types of payment services, they may in turn be inhibited by the imposition of regulatory requirements under the proposed new PSD that will inevitably impose greater costs.

As there are significant differences between markets across the EU in terms of the use of card payments and the conditions of competition vary markedly, it remains to be seen whether the Commission’s proposed measures will in fact reduce market fragmentation and do so to the benefit of these various stakeholders.

Timetable

If the proposals remain as currently envisaged, the timetable for implementation carries significant risks in terms of costs, as well as the risk of implementation failure and unintended consequences.

The proposals come after many years of intense scrutiny by the anti-trust regulators at EU and national level, including in the UK. If adopted they will leave the current interim settlement with MasterCard and that being market-tested with Visa rather superfluous, though MasterCard is still contesting the Commission’s underlying decision before the Court of Justice of the European Union. The Commission has also confirmed that it is not letting up in its antitrust enforcement efforts and will continue the proceedings launched recently against MasterCard in relation to inter regional interchange fees.

Alan Davis and Jenny Block are competition law experts at Pinsent Masons, the law firm behind Out-Law.com