Regulation of Interchange Fees
Regulation of Interchange Fees
Interchange fees have been the subject of regulatory scrutiny for some years in the UK, across Europe and the rest of the world.
Interchange fees are at the heart of the success of the UK card payments market and have served the UK economy well. Such fees are the product of market forces. The only example of interchange fee regulation, in Australia, shows that the consequences of regulatory intervention can be unpredictable.
Such intervention in the UK would, in our view, be an experiment on a mass scale with one of the most competitive, efficient and ubiquitous services used by consumers and merchants in the UK.
It is vital that business, consumer groups, government and regulators fully understand the significant impact that regulation could have here.
Both the European Commission and retailers make a number of specific claims about the potential impact of removing or reducing interchange fees. They claim to be acting in consumers’ best interest but we believe that these arguments are fundamentally flawed.
The Australian example provides a real and tangible example of how a market responds to this type of intervention. It shows what the outcomes of regulation could be if existing sensitive market dynamics are disrupted.
The Australian Experience
In 2002 the Reserve Bank of Australia (RBA) decided to intervene to cap Visa and MasterCard interchange fees for banks operating in its domestic market. The effects of this decision can clearly be seen in Australia’s card payments market. Consumers have seen:
· Increased annual fees
· The introduction or increase of other fess
· Loyalty schemes that are less generous
· Fewer innovations - regulation has held back innovations like chip & PIN
· Market distortion - there has been a small distortion in market shares in favour of American Express and Diners Club (three-party models where they act as both the merchant acquirer and the card issuer)
· People paying by card don’t pay less - despite claims by retailers, there is no evidence that they have passed on savings from a reduction in interchange fees to consumers in the form of lower retail prices
Although there are some differences between the UK and Australian markets, such as the greater prevalence of annual fees for cardholders in Australia, it is more than likely that similar impacts would arise here.
Australia also tends to have a less competitive market. It does not have mono-line credit card issuers such as MBNA, Capital One or Citibank who have bought sustained price competition to the UK market since the mid 1990s.
There is an argument that such issuers will be more susceptible to changes in interchange fees as they constitute a larger proportion of their cost-covering income. One outcome in the UK, not seen in Australia, could be the consolidation of issuers through mergers and acquisitions, leading to reduced competition.
In summary, regulation of interchange fees in Australia has been great news for retailers, bad news for banks, but it is consumers who have had the worst deal. It is wrong to assume that what looks bad for banks is always good for consumers.
What The European Commission Says
“If (card schemes) operated without a multilateral interchange fee merchants would pay lower prices for accepting cards and, as a consequence, their customers should also incur lower costs for shopping at a merchant” – Neelie Kroes 14 January 2008
Untrue. This is not supported by evidence from Australia where there is no evidence that retail prices have fallen in response to regulation. At the same time the Reserve Bank of Australia has spelt out the additional costs to their consumers as a result of regulation, saying that “average fee revenue on bank-issued personal credit cards has risen from around $40 per account in 2002 to around $80 per account in 2006”. In effect, Australian banks have tried to mitigate the impact of the regulation by passing on the costs previously met by retailers to consumers.
“MasterCard interchange fees are among the highest in Europe, more than twice the level in Australia” – Neelie Kroes 19 December 2007
Whilst this may have been true at the time, the Commission failed to point out that Australian interchange fees were at comparable levels to Europe before regulation.
In most Benelux and Nordic countries banks issue and acquire domestic debit cards at low cost, because domestic debit card schemes operate without interchange fees” – European Commission Frequently Asked Questions 19 December 2007
Untrue. Such schemes either have interchange fees by another name, disguised fees, or these systems are cross-subsidised, or operate at a loss. In fact this was acknowledged by Commissioner McCreevy himself who said on 28 January 2008 “it is inevitable that there will be a charge associated with using a payment network. That seems to make basic economic sense. Is there such a thing as a cost-free payment network? If there is then I can only suppose there must be some cross-subsidisation to cover he costs involved. After all, the costs have to be met from somewhere”.
“Multilateral interchange fee arrangements inflate the cost of card acceptance by retailers. Consumers foot the bill, as they risk paying twice for payment cards: once through annual fees to their bank and a second time through inflated retail prices paid not only by card users but also by customers paying cash” – Neelie Kroes 19 December 2007
Misleading. It must not be assumed that this applies in all markets. For example, in the UK annual fees are now very much the exception and thus most UK consumers don’t in fact pay twice in the way that the Commission suggests.
What Retailers Say
“Interchange fees are secretive and excessive” – British Retail Consortium press release 6 November 2007
Untrue. Interchange fees enable retailers to make a fair and equitable contribution to the costs of operating the system that they benefit from. Before recent interventions they were based on regular costs studies commissioned by the card schemes.
If we take at face value the argument that interchange fees mean that UK retailers are incurring higher costs for accepting cards then they already have a right in law (The Credit Card Price Discrimination Order 1990) to surcharge for card payments (as we often see in travel agents). They could also choose to offer a discount for cash or not accept cards at all. In practice this is not happening on a widespread basis.
Retailers have often said that “high bank charges to retailers are leading to higher prices for consumers” and that they will pass on any savings on interchange fees to their customers – British Retail Consortium website 2008
According to the Reserve Bank of Australia “in total, over the past year (2006) merchants’ costs of accepting credit cards are around $900m lower than they would otherwise have been”. Visa report that “the evidence to date casts doubt on whether merchants have passed any, or any substantive amount of savings, on to consumers”. MasterCard reports that even “a cursory glance of the financial statements of many of Australia’s merchants would reveal a consistent growth in the profit margins irrespective of changes to that merchant’s cost base”. Would UK retailers be any more philanthropic than their Australian counterparts?
