We provide below a brief recap on the many-many years of competition law enforcement by the European Commission (EC) against interchange fees, a summary of the EC decision of 29 April 2019 related to Visa's and Mastercard's interregional interchange fees on consumer cards, and provide some thoughts on the forthcoming revision of the EU Interchange Fee Regulation (IFR), as well as some points on the interplay between the IFR and PSD2.
A brief summary of years of EC competition law enforcement against interchange fees
The EC has been investigating interchange fees (i.e. the fee paid by the merchant acquirer to the card issuer on every card transaction) on consumer cards for many-many years:
- In 2002, the EC adopted a competition law decision (then called "an exemption decision") blessing the reduced interchange fees that Visa Europe had offered to apply on cross-border transactions within the EEA.
- In 2007, the EC adopted an infringement decision against Mastercard's interchange fees applicable to cross-border transactions within the EEA, which ultimately forced Mastercard to reduce the level of those interchange fees.Mastercard challenged the EC decision in front of the EU General Court and the EU Court of Justice, albeit unsuccessfully. The upheld EC decision is the basis for the private actions for damages that Mastercard and Visa are currently facing in the UK courts, and the consumer class action that Mastercard is also facing in the UK.
- In 2010 and 2014, the EC endorsed further reductions by Visa Europe of the interchange fees applicable not only to cross-border (consumer card) transactions within the EEA, but also interchange fees applicable to domestic (consumer card) transactions in some EEA countries, as well as transactions at EEA merchants with consumer cards issued in a few non-EEA countries.
The IFR was adopted in 2015, regulating the level of interchange fees on consumer cards for Intra-EEA transactions (i.e. issuer and acquirer, and arguably merchant, located in the EEA), as well as domestic transactions in EEA Member States (i.e. transactions where issuer and acquirer, and arguably merchant, are located in the same EEA Member State).
However the IFR did not cap the levels of interchange fees applicable to transactions where either the issuer or the acquirer (or, arguably, the merchant) is located outside of the EEA – so-called interregional transactions (e.g. card issuer in the US, and merchant located in the EEA).
The EC 29 April 2019 decision
On 29 April 2019, the EC announced the adoption of two decisions against Visa and Mastercard, which make binding on Visa and Mastercard commitments that both card schemes have offered for a gradual reduction of their interregional interchange fees on consumer cards (see press release here - Visa MIF case file 39398 here and Mastercard case file 40049 here).
The agreed levels are as follows:
For card-present transactions: 0.2% for consumer debit/prepaid cards, 0.3% for consumer credit cards (i.e. the same maximum levels as the IFR);
For card-not-present (CNP) transactions: 1.15% for consumer debit/prepaid cards, 1.50% for consumer credit cards.
The EC claims that those reduced levels amount, on average, to a reduction of 40% of the existing levels.
The reduction will become effective six months following the date on which Visa and Mastercard will receive formal notification of the EC decisions, and will last for five years and six months after that notification (which means that, in practice, the reduced rates will be in place for five years).
The EC stated in its press release that "This is expected to lead to lower prices to the benefit of all European consumers" – i.e. the EC assumes that the reduction of interchange fees will be passed-on (in whole or in part) by acquirers to merchants in the form of a lower Merchant Service Charge (MSC), and that merchants in turn will pass-on that reduction of the MSC to shoppers in the form of lower retail prices. This is obviously something that will be very difficult to measure…
With this decision, the EC puts an end to decades of EC competition law enforcement against interchange fees. Indeed, almost 17 years have passed since the above-mentioned Visa Europe 2002 decision... and that was not even the beginning of the "interchange fee (competition law) saga": that saga started well before 2002…
En route towards IFR2?
The future of interchange fees probably lies in more regulation (as opposed to competition law enforcement), namely the revision of the IFR.
The EC was under a legal requirement under the IFR to submit a report to the EU Parliament and EU Council by 9 June 2019 on the impact of the IFR on the market. However the EC only announced in September 2018 the appointment of consultants to perform the required study, therefore the report is not expected before mid-2020.
The consultants are currently collecting data from various stakeholders, namely merchants, card issuers, merchant acquirers, card schemes (three-party and four-party), consumer associations, and regulators. The various template questionnaires used by the consultants are publicly available here.
Under the IFR, the report is required to address amongst other things:
- the effects on the IFR on costs for cardholders and merchants?
- the level of merchant pass-through, i.e. to what extent have merchants passed-on to shoppers the reduction of the MSC?
- the effect on the market of the absence of interchange fee caps on commercial cards?
- the development of cross-border (or central) acquiring and its effect on the EU single market?
- the application of the rules on separation of payment card scheme and processing activities?
Some merchants have already started expressing concerns on the effectiveness of the IFR, for example about an alleged shift from fixed interchange fees (e.g. X Eurocents per transaction) to ad valorem interchange fees (i.e. 0.2% per transaction) in some EU countries, an alleged migration from consumer cards to commercial cards (which are not subject to interchange fee caps), an alleged increase in the scheme fees charged by the card schemes to merchant acquirers, etc.
Merchants are expected to gradually ramp-up their lobbying efforts, and perhaps call for lower interchange fee caps for consumer cards, perhaps interchange fee caps for commercial cards, perhaps caps on the level of the MSC and/or scheme fees, perhaps interchange fee caps on interregional transactions and in particular lower caps for CNP transactions that than those contained in the EC 29 April 2019 commitment decisions, etc.
Some consultancies representing the interests of merchants have also started publishing papers on some of the above issues, and in particular in relation to the level of scheme fees charged by card schemes to acquirers – see for example here.
As we gradually get closer to mid-2020 (i.e. the expected date for the EC report), no doubt that these lobbying efforts will intensify in order to try and influence the draft IFR2 text that the EC is expected to propose alongside its report.
Separately, during the legislative process that lead to the adoption of the IFR, three-party schemes (such as American Express, for example) had argued that three-party schemes would only represent a small proportion of card transactions in the EEA, would not constitute "must take" cards for merchants (allegedly unlike four-party scheme cards), would operate in a different way in terms of financial flows, etc, and therefore should either not be regulated at all, or at least be subject to a lighter regulatory regime than four-party schemes. Three-party schemes can be expected to re-iterate those points as part of their lobbying on IFR2 in order to try and secure a more relaxed regulatory regime compared to four-party schemes.
As regards consumers, both in their capacity as cardholders but also as shoppers, they will be represented in particular by BEUC in the IFR2 discussions. Shoppers would obviously have an interest in merchants somehow being required to pass-on to them any reduction of the MSC – although it is far from clear how such a requirement could be imposed on merchants in practice. Cardholders may also be concerned that somehow a further reduction of the interchange fee revenue of their card issuer may result in higher cardholder fees being charged to them by their card issuer, and/or the level of service that they receive from that issuer being degraded.
It took close to two years for the final IFR text to be adopted (the EC proposed the first draft in July 2013, and the final text was adopted in May 2015), and we would not be surprised if the debate on the IFR2 would take potentially the same amount of time.
IFR2 in the context of other payment regulations
Whatever policy measures the EU would seek to adopt as part of IFR2 should obviously not be analysed in a vacuum, but instead in light of the then existing market conditions, and how those are expected to evolve in particular in light of PSD2.
Indeed, one of the clearly stated objectives of PSD2 is to migrate a share of card-based payments that exist today to competing means of payments, and in particular to credit transfers – in particular for online transactions. On 14 September 2019, the technical requirements on how operators that maintain payment accounts (so-called ASPSPs – Account Servicing Payment Service Providers) are expected to give access to Payment Initiation Service Providers (PISPs) will become applicable. One of the potential consequences could be that some payment flows that are currently card-based will migrate to credit transfer-based payments initiated by those PISPs (although it is very difficult to predict the extent of this potential migration at this stage).
Some argue that the combination of those payment initiation services (PIS) with instant credit transfers (the so-called SCT Inst scheme) is a powerful combination in terms of migrating a proportion of card payments to (instant) credit transfers because some merchants would perhaps prefer to be paid immediately, possibly before they even release the goods or services, rather than relying on the payment guarantee that they benefit from in relation to card-based payments?
However, should IFR2 result in a further reduction of the interchange caps applicable to consumer cards and/or a capping of the interchange fees applicable to commercial cards, can the above migration to credit transfers really be expected? Should we not expect instead that with (very) low levels of interchange fees on (consumer) cards, merchants will prefer to continue to rely on cards (a mean of payments that they are successfully been accepting for many-many years) and the payment guarantee attached to those card transactions – rather than favouring credit transfers / PIS?
We would add that the Strong Customer Authentication (SCA) requirements contained in PSD2 should not impact significantly the merchants' decision-making process since both credit transfers and cards are both considered as being "initiated by the payer" ("through the payee" in the case of cards), and therefore subject to the same SCA requirements and essentially the same exemptions (the main difference being Merchant Initiated Transactions (MIT), i.e. essentially subscriptions on cards, which are considered as being "initiated by the payee", and therefore are not subject to the SCA requirement, and which merchants charging their customers based on subscriptions (e.g. online television services, telecom services) may continue to prefer over credit transfers).
Bird & Bird Public Affairs practice
In addition to its legal services, Bird & Bird has a Regulatory & Public Affairs practice that can assist you in your Public Affairs initiatives. This practice group is headed by Francine Cunningham – see biography here.
Should you have any questions about the above, feel free to reach out to one of the members of the Bird & Bird payments team and/or Francine.
 Also, as previously reported here, American Express had introduced a legal challenge against some of the provisions in the IFR, in particular in order to try and carve-out American Express cards/transactions involving a co-branding partner or an agent from the scope of the IFR interchange fee caps. However that challeng was unsuccessful.