EP Vote on Commission Proposal for a Regulation on Interchange-Fees

Friday, April 4, 2014

On April 3rd the EU Parliament voted to adopt a commission proposal for a “regulation on interchange-fees for card-based transactions”. The underlying commission proposal dates back to July 2013.

The legislative proposal aims at regulating the European payment card market. To this effect, so-called interchange fees will be capped uniformly within the EU. Inter-change fees are fees paid between banks for the acceptance of card base transactions. Usually, they are charged to merchant banks by credit card issuers to cover the cost of converting credit card charges into deposits in the merchant's account. Interchange-fees are collectively agreed. Currently they differ significantly across the EU. The Commission estimates that the annually charged interchange-fees exceed the amount of € 10 Billion.

At the current state of the legislative procedure, the regulation would cap interchange-fees at 0.3% of credit card transaction values. For debit card transactions the fee would be capped at 0.2% or 0.07€, whichever is lower.

These caps will be binding, beginning one year after the entry into force of the regulation. They will apply to both cross-border transactions taking place within member states. Both payments by consumer cards and payments by commercial cards will be affected by the cap.

The proposal also bans the so called “Honour-All-Cards-Rule” which requires merchants to accept all cards from a brand or not accept the brand at all. This concerns Gold-Cards, Platinum-Cards or Co-Branded cards, for which higher interchange-fees may be charged, the merchant having no right to steer customers toward a payment instrument, which would be more efficient for him.

If the proposal will be adopted, card providers would have to provide more fee information; retailers would be allowed to disclose such data to their customers. As the EP and the Commission state, many customers are unaware of the existence of interchange-fees.

 The Commission believes that interchange-fees are anti-competitive and drive up the costs of goods and services, the final consumers having to pay higher prices. They believe that retailers, which have to pay interchange-fees in case of card-payment, generally charge higher prices in order to pass on the fees to their customers. Hence, even customers who pay in cash, bear higher costs. The Commission furthermore believes that the differing interchange-fees make it more difficult for other payment card offerings to enter the market and hinder innovations in the sector of card-payment services.

The Commission and EP hope that, by capping interchange-fees, retailers may save € 6 billion per year and translate these estimated savings into price cuts for customers. They also believe that more payment-card providers would enter the market and raise competition and innovation in the EU payments landscape.

Most consumer associations welcome the proposal. The real benefits for consumers are meanwhile unclear, as higher administration fees will be charged to consumers in order to make up for lower interchange-fees.  Many critics say that the chosen technique raises doubts whether the desired result will be achieved.  Furthermore there is a concern that adoption of the proposal would make entry of competitors even more difficult, as significantly lower turnovers are to be expected by market-entrants, and the new requirements would serve as obstacles.

The final vote on the proposal will take place in the next parliamentary term. The vote on April 3rd concerned modifications and amendments to the Commission’s proposal, such as the introduction of the 0.07€ cap or the application of the cap on commercial cards, which were not included in the commission’s proposal. The positions of major stakeholders and EU committees have already been taken into account.

The proposal will have to be ratified at a second reading in the new EP after the May elections. The current draft is not legally binding for the new EP; however it has high political relevance.

It remains unclear to which degree new political framework conditions will allow for an abandonment of this proposal. This, however, would be desirable for credit card companies.