Interchange fees in card payments - World...
Transcript of Interchange fees in card payments - World...
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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%
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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.