RBTE 2016: CMSpi highlights 'weaknesses' in interchange fee regulation

Interchange Fee Regulation (IFR) was supposed to provide merchants across Europe with relief against excessive card fees, but holes in the regulation have opened up the opportunity for card schemes and merchant acquirers to absorb a substantial portion of the savings. In this environment, only the shrewdest merchants will avoid missing out.

The IFR caps came into force across the EU on 9th December 2015 and bring an estimated €4.2 billion (£3.2 billion) of annual interchange savings for European merchants. In the UK, Europe's largest card market, annual savings of £650 million are expected, a 25% reduction for the average merchant.

However, there is no guarantee that regulatory benefits will feed through to merchants and many merchants have already lost out. So, what are the weaknesses with the IFR and why are we concerned?

Acquirer absorption

We estimate that, to date, tens of millions of pounds of savings have been absorbed by acquirers in the UK alone. Article 9 of the IFR states that acquirers must offer merchants “unblended”, or 'interchange plus plus', pricing from 9 June 2016. However, interchange plus plus is often seen as complex, and our concern is that many merchants may be persuaded not to accept it. As a result, these merchants may remain on the same pricing structure indefinitely following the IFR and the entire benefits could be retained by their acquirer. Even merchants who do transition to unblended pricing need to be savvy enough to ensure that the new pricing reflects the full amount of interchange reductions.


Interchange is only one of three primary components of card fees and evidence from other jurisdictions where interchange has been regulated suggests that the two other components – scheme fees and acquirer margins – are liable to increase. In the US, the aftermath of debit card interchange regulation in 2011 saw $7 billion of savings eroded by $3.4 billion of additional fees from the card schemes and $500 million of extra profit for acquirers.

Article 5 of the IFR purports to protect merchants against circumvention of the regulation. However, this clause covers net income received by issuing banks only and does not, therefore, cover income received by card schemes and merchant acquirers.

Our fears have been heightened by Visa Inc's confirmation of their purchase of Visa Europe, with Visa Inc's CEO Charles W Scharf commenting that they will now “genuinely evaluate pricing (in Europe) from the perspective of a commercial enterprise”. Indeed, as a result of this purchase we are already seeing evidence of scheme fee increases in Europe. An equalisation of fees between Visa Inc and Visa Europe could wipe out the benefits of the IFR completely. Additionally, MasterCard has already announced five new fees/changes that will reduce the IFR savings by an estimated €200 million per annum across Europe.

Doubts over the PSR

We are keenly awaiting the result of the PSR’s review strategy and, in order to demonstrate its effectiveness, the PSR needs to show strength in combating increasing costs from the schemes. 

Additionally, although the IFR provides a broad set of rules that all member states must adhere to, individual member states do have significant scope to impose stricter interchange caps if they wish.

Many member states, such as Spain and Ireland, have already exercised this right and there is a compelling argument that stricter caps are necessary in the UK. This is because interchange caps are calculated by making the cost of accepting card payments equal to the cost of accepting cash payments, leaving a merchant indifferent between a customer paying via cash or card. The UK is Europe's largest cash and card market so is likely to have significant economies of scale in the handling of cash and card transactions. This suggests that cash fees and, subsequently, cards fees in the UK should be lower than their European peer group.

We would like to see the PSR taking seriously the possibility of introducing a lower cap. We have long campaigned for the appointment of a payments regulator in part due to the shortcomings of the UK Payments Council and the ever increasing power of the card industry. Despite this, we are concerned that the current incarnation of the regulator will not be strong enough to impose more appropriate interchange caps.

We will know more when the PSR publishes its year-long research into the UK card industry in April 2016, but our early suspicions are that the card industry will be let off lightly.

Conclusion - What do merchants need to do?

Merchants who are savvy will see the commercial benefits of the IFR remain intact.

Although the increase in headline scheme fees may be difficult to avoid, since regulation in the US the amount that the card schemes paid out to acquirers and merchants in negotiable “incentives” has increased substantially. This may be an option for European merchants.

Additionally, we are currently working with all of our merchant clients to ensure that interchange savings are passed on in their entirety by their acquirers. A thorough understanding of the underlying costs that make up the merchant service charge is adequate to ensure that merchants are not exploited by their acquirers.

Combes is involved in a panel debate at today's RBTE in London, where some of the above topics are being discussed and argued about in detail. Other panellists include Steven Hart, CEO of Cardswitcher; Ruth Milligan, head of payments & retail financial services at the British Retail Consortium; and Peter Robinson, project manager at the British Independent Retailers Association. The discussion is chaired by Vendercom CEO, Paul Rodgers.

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