Interchange fee caps will have the largest impact out of the four main areas covered by the MIF Regulation (acquirer pricing transparency, separation of card schemes and processing, and “supporting rules” are also within scope). Acquirers, card issuers, and payment service providers are all affected by the changes, but the nature of interchange fee cap impacts – and what it means for their businesses – varies considerably.
As of 9 December 2015, interchange fees in the EU were capped at 0.3% for credit cards and the lesser amount of 0.2% or €0.05 per transaction for debit cards, with individual EU member states free to mandate even lower caps. The credit card cap came into effect immediately while individual member states can allow debit card interchange fees to adjust more slowly, reaching the 0.2% rate no later than 9 December 2020.
Interchange Fee Cap Impacts on Acquirers and Payment Service Providers
Acquirers and payment service providers currently benefit from the lower rates, due to the fact that interchange rates have been reduced, but there is no obligation for cost savings to be passed on to merchants. Healthy margins means additional revenue, but the advantage could be short lived. Savvy merchants may turn to their payment providers to renegotiate pricing, and may be willing to move if other providers offer better rates. And some payment providers will no doubt see this as a competitive advantage and opportunity to grow their market share.
There is evidence of this in markets that have implemented similar fee caps in the past, such as the U.S., Australia, and Spain. Incumbents, in the time that they are enjoying high margins, will develop pricing and communication strategies to retain existing merchants. Challengers, meanwhile, will use lower pricing to attack the incumbents.
Payment service providers and acquirers can expect a two to three year window of increased margins, as illustrated in the chart below.
Although acquirers and payment service providers will face technical and operational challenges as a result of the MIF Regulation, there are other potential benefits beyond short-term increased margins. Lower interchange rates will encourage greater card acceptance amongst merchants, with the most pronounced effect in those markets that had relatively high credit interchange fees, such as Central Europe, Eastern Europe, and Germany. More merchants readily accepting cards means consumers are likely to follow. In a large market such as Germany, where smaller value transactions (especially in sectors such as hospitality) are still predominantly cash, the impact could be substantial.
The MIF Regulation does create technical and operational challenges for acquirers and payment service providers, principally due to the pricing transparency requirements. Issues such as ensuring that processing systems and statements can support interchange++ pricing, and the need to obtain merchant consent in writing before bundling pricing may be significant hurdles, especially for smaller acquirers with older, inflexible legacy systems. Those additional Euros and cents, courtesy of the higher margins resulting from interchange fee caps, could be wisely directed towards addressing such operational challenges.
Interchange Fee Cap Impacts on Issuers
The 0.3% cap on credit and 0.2% cap (or €0.05 per transaction, whichever is lower) on debit card interchange fees means significantly reduced revenues for card issuers, although the magnitude varies by market. In those countries accustomed to high credit and debit card interchange fees, such as the UK, Ireland, Germany, Spain, Portugal, and several Central and Eastern European countries, issuers will feel the most pain.
Generally speaking, credit card issuers will feel a greater sting because the pre- and post-MIF Regulation interchange fees are much closer for debit cards. Nowhere will this be felt more strongly than the UK and Germany, where pre-regulation rates were at least three times higher than the new caps. By contrast, there are also countries that had relatively high debit interchange fees, and debit card issuers in those countries will feel the bite. Overall, EU issuers are expected to lose between €5–6 billion annually in interchange revenues.
Issuers are combating decreased revenues by reducing rewards levels, increasing cardholder fees, simplifying product sets, reducing expenses, and considering new opportunities the regulation brings, such as lower scheme fees through co-badging. There will surely be a knock-in effect for consumers.
Three-party schemes, such as American Express and Diners, are mostly unaffected as they do not operate with separate issuers and acquirers. Their business models can remain intact and they can continue to invest the revenue from their premium fees into marketing, cardholder benefits, and other innovations.
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