Earlier this year, the European Parliament voted to regulate credit and debit card interchange fees, lowering the cap to 0.3% and 0.2% respectively. Coming into effect in January 2015, the multilateral interchange fee (MIF) regulation is designed to enforce a fair price among all products and providers in order to encourage new market-entrants and increase competition within the Single Euro Payments Area (SEPA).
MIFs are the fees paid by merchants to payment card providers in exchange for the ability to accept credit and debit card payments both online (card-not-present or CNP transactions) and at the point-of-sale (POS). There has been some resistance to the regulation, particularly from card providers who collect the profits from MIFs, but also from merchants and SEPA-opponents in specific parts of Europe which could potentially see negative effects as a result of the regulations.
SEPA and MIFs
The Single Euro Payments Area is a payment integration initiative coordinated by the European Payment Council in order to introduce a single, harmonised payment format for all transactions in the euro currency. The initiative was designed to integrate the separate national European markets into a single domestic market.
Following in SEPA’s footsteps, the new MIF regulation eliminates the difference between cross-border and national card payments, treating all European card payments equally. While our previous article about SEPA mostly focused on the benefits of that initiative, now that the deadline has passed there is going to be a long period of growing pains while the formerly fragmented European markets merge their payment systems.
Added to these growing pains are further initiatives spearheaded by the European Commission, including the interchange fee cap. This and other initiatives are designed to be beneficial to the European payments landscape overall, but because they apply without prejudice to all eurozone countries, some countries will initially benefit more than others due to existing payment habits, technological infrastructure and economic realities.
For example, in the UK the introduction of additional layers of security to card-not-present (CNP) transactions such as Visa 3D Secure and MasterCard SecureCode has had a positive impact on conversion rates. Despite the additional step in the purchase process, customers in the UK are more likely to make a purchase if they have the additional assurance of security. Meanwhile in Germany, the very same technologies have had a significant negative effect on conversion rates.
These extra layers of security are being enforced by the MIF regulation and will therefore now be required by all payment card-accepting merchants. Because of this, merchants who do not already offer the required extra layer of security, particularly those in markets where these technologies have had a negative effect on conversion rates, will initially be at a disadvantage once the regulation comes into force.
However, in the long-term, the regulation will force merchants to increase their level of security and ultimately allow them to profit from the lower interchange fees, which are likely to be shared with consumers in the form of lower prices.
In addition, the mixed effects that the regulation will have in different regions of Europe only applies to card-not-present transactions, while the effects on point-of-sale transactions will almost universally benefit merchants within the eurozone. This is because POS transactions in Europe are already compliant with the security requirements enforced by the new regulation and there is no additional investment necessary on the merchant’s side.
- Secure and low-cost electronic payments widely available across the eurozone.
- Wider acceptance of payments cards as more small merchants can afford the fees.
- No hidden or unexpected fees from card providers.
- The ability to accept payment cards at fair prices.
- Cost savings which can be used to improve services and be passed on to customers.
- Eurozone-wide products and services at a standardised cost.
For payment providers:
- New market entrants and increased adoption of payment card services will grow total transaction numbers.
- Increased e-commerce traffic mean increased opportunities for market additional services.
- New and innovative payment products and technologies will be developed.
Proponents of the MIF regulation view it as a necessary component in establishing a true single euro payments area and in preparing the European payments industry for an increasingly digital marketplace. The European Commission has concluded that current interchange fee levels are anti-competitive, in that they discourage new market entrants and cost businesses an average of 9 billion euro per year. Much of those costs are then passed on to the consumer in the form of higher prices.
In regards to that, lower MIFs are expected to promote innovations, improve customer service and ensure flexibility. The costs savings to merchants are expected to increase competition and result in lower prices for their customers. The negative side-effects involved in establishing SEPA and its associated regulations, while not insignificant, are merely growing pains in the process of building a strong, modern European economy.