New Report Says Interchange Fee Regulations Redistributes Costs-In Billions

Saturday, September 5th, 2020

The European Commission (the “Commission”) has just published its study on the Interchange Fee Regulation. EU Regulation 2015/751 on interchange fees for card-based payment transactions is easily the most decisive regulation for payment transactions the industry has seen in the past decade. It not only imposed limits for interchange fee payments from acquirers (payment services providers) to issuers (card issuers), but it also contained a set of business rules which European card businesses had to adhere to (beginning June 2016).

Implemented in 2015 and 2016, these rules capped debit card interchange at 0.2% of the sale and credit card interchange at 0.3%. According to a news release, prior to this, interchange fees “were highly diversified, elevated and non-transparent. These fees represented an obstacle to single-market integration and created distortions of competition, including higher costs for retailers and consumers.”

Redistribution of costs

The aim of this regulation was a redistribution of costs – in the billions. This would affect suppliers on both market sides, including a decrease in costs for acquirers and a loss of income for issuers. The end goal was for consumers to benefit from the price decrease imposed by the regulations. Acquirers would pass on cost reductions to merchants through lower card acceptance fees, while merchants reduce their prices and the consumer benefits.

And the results? According to the 36-page report, “the main objectives of the regulation have ben achieved, as interchange fees for consumer cards have decreased, leading to reduced merchants’ charges for card payments, and ultimately resulting in improved services to consumers and lower consumer prices.”

In fact, in some countries the regulation cut average interchange rates by more than 50 percent. “The reduction in interchange fees resulted in a redistribution of revenues … from issuers to acquirers and merchants, while consumers in the longer run benefit either directly via lower final prices or indirectly through improved retail services,” the report went on to say.

While the report does not give an exact number on the savings merchants have passed on to consumers thus far, it does say that merchants will eventually pass on an estimated 66% to 72% of their lower expenses and has had a “significant, positive impact on consumers”.

“Overall, the capping of interchange fees will over time entail significant benefits for consumers, by means of lower merchant service charges [discount rates] passed through into lower consumer prices, with estimated annual consumer cost savings of between €864 million and [€1.93 billion],” the report says.

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