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Interchange fees in European

card payments

Ann Börestam

European Central Bank

World Bank Global Payments Week

Lisbon 23 October, 2012

[The views expressed in this presentation are the author‘s and do not necessarily reflect those of the European Central Bank]

ECB - UNRESTRICTED Introduction

ECB Occasional Paper (2011)

“Interchange fees in card payments”

by A. Börestam and H. Schmiedel

http://www.ecb.europa.eu/pub/pdf/scpops/ecbocp131.pdf?97b29544d163e40b947272601a01414c

www.sepa.eu

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Introduction

Card schemes and banking industry

• IC fees are necessary, contributing to efficient payments, e.g. by balancing costs

• Lack of guidance from the Commission is hampering development and innovation

The Commission

• IC fees might be compatible with

competition laws but card schemes

have not yet been able to prove it

• Sufficient guidance is provided in

legislation, decisions and guidelines,

as well as the recently presented

Merchant indifference methodology

Interchange fees is a topical issue influencing discussions

in several areas of payments

The aim with the paper is to provide a description of

economic theory and concrete regulatory actions taken

within Europe in the context of interchange fees for cards

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Strong, continued growth of card payments…

Cards; the most important payment instrument

Payment transactions in the euro area – changing composition (millions)

Source: ECB Statistical Data Warehouse, 2011

Use of Payment instruments in the euro area (2000-2009)

All Cards +9.66%

Credit Transfers + 3.35%

Direct Debits +6.15%

Cheques -3.99%

E-money +22.26%

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Year

Mln

Tra

nsa

cti

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(P

ure N

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)

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Cards; large differences in card use per country

Payment transactions in the EU

Source: ECB Statistical Data Warehouse, Data, 2011

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Card schemes; different models

Four party schemes Three party schemes

Scheme manager

Acquirer Issuer

Merchant Cardholder Merchant Cardholder

Acquiring Issuing

Scheme manager

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Two sided markets

Acquirer Issuer

Interchange fee

Merchant fee Cardholder fees Card benefits

Two sided markets

Supply and demand on one

side are determined by

supply and demand on the

other side

Trying to bring both sides

“on board” by appropriate

charging of each side

Different charging models

might be used for the two

sides Merchant

Card holder

An interchange fee is a transfer of funds

from one side of the market to the other (usually from the acquirer to the issuer)

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Two sided markets (issues at stake)

Merchants

• The more cards on a market, the higher demand for acceptance

• Competition in attracting customers

• Low price elasticity; demand is affected relatively little by changes in prices

Card-holders • Favouring:

– Cards with low fees and additional benefits

– Cards with wide acceptance

• Higher price elasticity; changes in card prices might trigger change of card or mean of payment

Issuers •Competing with other issuers

•Decision on which card to issue is depending on the interchange fee

Acquirers •Competing with other acquirers

•Interchange fee + acquiring costs = Merchant service fee

•The Interchange fee setting the floor for the Merchant service fee

Card schemes consist of a group of sellers on the issuing and acquiring side

that have agreed on common rules for providing the service, setting prices

to maximise the aggregate profit for their members

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Legal basis and guidance provided

Legal basis

Article 101 Treaty on the Functioning of the EU (former Article 81 Treaty Establishing the EC)

Regulation (1/2003) on the implementation of the rules on competition in Article 81 and 82 of the Treaty

Commission’s guidance

• Decisions

• Guidelines on the application of Article 81(3) of the Treaty (2004/C 101/08)

• Guidelines on the applicability of Article 101 TFEU to horizontal co-operation agreements (2011/C 11/01)

• The Merchant indifference methodology (Tourist test)

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The Merchant indifference methodology

The Merchant indifference methodology

or the Tourist test

A measure of the level of the interchange fee that would

make merchants indifferent to which payment instrument is

used (i.e. card or cash), ensuring that interchange fees are

corresponding to the value of the benefit that the card use

generates to the merchant

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Visa case

EU Commission’s decision (July 2002)

• Complaint by EuroCommerce

• Relevant market; payment cards

• Visa’s cross-border MIF was considered to restrict

competition in the meaning of Article 81(1) but

• as it contributed to technical and economic progress,

providing a fair share of its benefits to the users it was

considered as fulfilling the conditions for an exemption under

Article 81(3)

• Individual exemption until December 2007

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Visa case

Statement of objection by the Commission (April 2009) • The MIF restricts competition between acquiring banks, inflates the costs

of payment card acceptance and increases consumer prices

Commitment by Visa (April 2010)

to cap the yearly weighted average cross-border MIF for consumer debit cards at 0,20% for four years (also applying to national transactions in GR, HU, IS, IE, IT, MT, SE, LU and NL)

The Commission makes Visa’s commitment legally binding (December 2010),

• the MIF applied by Visa is in conformity with the Merchant indifference methodology

MIF’s for credit cards still an outstanding issue • Statement of objection by the Commission (July 2012)

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MasterCard case

EU Commission’s decision (December 2007)

• Relevant market; card acquiring

• MasterCard’s MIF restricted competition between acquiring

banks by setting a minimum price for acquiring

• MasterCard appealed the decision (March 2008)

MasterCard cut cross-border MIFs (April 2009)

• Maximum weighted average MIF per transaction

– 0,30% for consumer credit cards

– 0,20% for consumer debit cards

• EU Commission supported MasterCard's decision, referring

to the Merchant indifference methodology

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MasterCard case

The General Court dismissed MasterCard’s appeal and

confirmed the Commission’s decision (May 2012)

• The MIF was not regarded as objectively necessary

• Competition between card schemes has resulted in an upward

pressure on MIF’s

• MasterCard was not able to prove

– that services provided by issuing banks constituted objective advantages

for merchants,

– the correlation between costs for providing these services and the level

of MIF’s.

MasterCard appealed the judgement to the Court of

Justice (August 2012)

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New initiatives

The Commission’s Green Paper “Towards an

integrated market for cards, mobile and internet

payments” (January 2012)

– Is there a need to increase legal clarity on interchange

fees?

• Public consultation until April 2012

• Feedback statement published, June 2012

• Focus areas to be revealed Q4, 2012 .

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New initiatives

The Eurosystem’s position on interchange fees as expressed in its reaction on the Commission’s Green Paper

• The Eurosystem’s stance on interchange fees remains neutral,

• MIF’s, if any, should not lead to negative price signals towards payers and payees,

• No differentiation based on geographic criteria,

• Increased clarity on the legal soundness of the business models for cards,

• Without such clarity, the market will most likely not be able or willing to take investment decisions.

http://www.ecb.europa.eu/paym/sepa/pdf/2012-03-

23_Eurosystem_reaction_to_EC_Green_Paper.pdf?a7f0c1fad6a577f499667e630687870c

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Conclusion

• The upward potential in card transactions is a business case in itself, even for a scheme which operates with a low MIF.

• One single payment area – no geographical differences in IC fees.

• IC fees (if any) should be set at a reasonable level to promote overall economic efficiency in compliance with competition rules.

• Due to MasterCard’s appeal, IC fees still an open issue.

• Additional guidance to the market; as ultima ratio by legislation might be considered.

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Many thanks for your attention

ann.borestam@ecb.europa.eu