The tide is turning on interchange
By Ruth Milligan (*) | Monday 10 December 2012
The retail sector rejoices in the hope that the era of interchange is drawing to a close. It has been a long struggle, but we now see political will mounting behind the need for action, with the European Parliament’s adoption of the Terho report on cards, internet and mobile payments. This recognises that EU regulation is required to deal with the multilateral interchange fee (MIF), which presents a barrier to the creation of an innovative payments market in Europe. This builds on the Commission’s announcement in October of plans for a regulation on MIFs in 2013.
The commerce sector, which pays out some €25 billion in such fees every year, has one plea: the measures taken must be bold enough to decisively break the stranglehold of this anti-competitive business model on the European payments system.
The MIF is a fee on a card transaction, charged at the banking level and passed on to merchants and consumers. But it is invisible to consumers, who cannot avoid it. It is set by the card scheme and/or their member banks who issue cards. In May this year, the European court upheld the 2007 Commission decision against MasterCard’s MIF. The court found the system to be a price-fixing cartel contrary to EU Treaty rules.
The EU competition cases, against MasterCard and Visa, initiated by EuroCommerce in 1997, have led to improvements but the MasterCard judgement applies to cross-border fees only, and the real deleterious effects of the MIF are felt at national level. Also, in the current card-saturated market, the MIF turns competition on its head – rivalry between the big two for issuing bank custom, pushes fees up, not down. In the financial straits Europe is in, we cannot afford to squander resources in this way. But national competition authorities have been slow to follow the EU lead, especially since MasterCard has appealed to the higher Court of Justice.
Internet purchasing is on the increase and smart phone technology looks set to revolutionise the way we pay. If we are to truly take advantage of these innovations, we cannot hamper ourselves with last century’s business model. Electronic payments can take the place of many cash payments in a modern world: they can and should be cheaper, safer and more efficient than cash, yet the MIF prevents this. So, we must tackle the MIF. But in addition, we must remove a whole set of legal and contract-based barriers which stand in the way of new entrants.
The commerce sector calls for a regulation which delivers a fundamental rethink on how we price and pay for electronic payments. Our proposal is for a ‘basic payment’ service based on full transparency, priced on cost and charged according to the ‘user pays’ principle. Europe requires a simple, cheap method of card payment to restore the service of national debit cards. The ‘basic payment’ would be guaranteed; all costs would be transparent and borne by the party which benefits from the service to which that cost applies. Any other services banks wish to offer would be additional and selected by the consumer – but they would be unbundled from the ‘basic payment’ application. It should be available on all cards and mandated by European legislation.
To make this work, we need a regulation which dismantles the current closed system. Card scheme rules set specific limits on what retailers can do. Some payment cards, for example, carry huge MIFs: these costs must be built into the price of all goods, whether bought with a card or not. But retailers cannot divulge publicly the exact figures they are charged, thus preserving the consumer’s ignorance as to how much they really pay for their ‘gold card’.
Cross-border acquiring is another issue. Even if merchants centralise their acquiring systems in a member state with low interchange fees, they cannot make savings, since the MIF on each transaction must be charged at the rate where the transaction is initiated (eg the consumer’s country of residence) and not at the rate of the country where the payment is processed. These rules must be abolished.
We also need new, non-bank players – payment service providers (PSPs) - to be allowed access to the consumer’s account but only to check the availability of funds. If proper regulation is in place, and account details are ring-fenced, there should be no threat to security. Clearing and settlement systems should also be accessible to more players. In such a system, new PSPs would be able to carry a payment through from the consumer to the merchant without going through the restrictive system imposed by the big card schemes.
Regulators are already proposing a basic bank account available to all EU citizens: a ‘basic payment’ would make cheap payment models available to all. Each year, EU retailers and consumers waste millions: it is time for this to stop. We look to the Commission’s proposed legislation to return payments in Europe to the people they are intended to serve.
(*) Ruth Milligan is senior adviser on payment systems at EuroCommerce