In March, the European Parliament voted in favour of a bill, introduced last year, to cap credit and debit card interchange fees at 0.3% and 0.2% respectively for both domestic and international transaction. The caps, which come into force on December 9th 2015, will limit the fees charged by cardholders’ banks to merchants’ banks on every transaction.
The regulation is intended to remove hidden fees for consumers and offer retailers more fair choice in their payment methods and providers, but at the time of writing, the EU ruling has pushed credit card interest rates to an all-time high of 20.6% APR and has seen card issuers reducing or cancelling their cash back and reward schemes.
With these effects already being felt by the consumer just two months after the passing of the bill, this could be a bad sign for the European economy. While it’s too soon to say whether the new rules will be a benefit or detriment to business in Europe in the long term, small businesses and emerging payment technologies are already feeling the pinch.
The Fine Print
Still recovering from recent economic turmoil, the European Union has been hard at work formalising the Single Euro Payments Area (SEPA) and introducing widespread regulations designed to stabilise the payments space.
The interchange fee cap bill was introduced by the EU last year and approved by the European Parliament in March. When the rules come into effect, interchange fees in Europe will be capped at 0.3% on credit card transactions and 0.2% on debit card transactions, a significant reduction in fees which currently range from 0.5% in France to 1.8% in Germany.
According to Commissioner Margrethe Vestager of the European Commission, “It is good for consumers, good for business and good for innovation and growth in Europe. As cards are the most widely used means of online payment, this Regulation is also an important building block to complete the European Digital Single Market.”
Many interested parties doubt the validity of that statement however, citing examples in other countries such as the U.S. where, in response to caps introduced on debit card transactions, none of the merchants’ savings were passed on to the consumer and, what’s worse, consumers actually ended up spending more because issuing banks cancelled debit card incentive programs and increased usage fees to make up for the lost revenues.
Now it seems that the worst predictions are coming true. Before the ruling, the European Commission estimated a saving of EUR 6 billion annually for consumers resulting from the reduction of hidden fees. However, on May 26th, MoneyFacts reported a loss of EUR 3.36 billion for card issuers as a result of the rule change, which is now being passed on to the consumer – a difference of over EUR 9 billion!
ApplePay and Emerging Payments Technologies
The consequences don’t end there. The new rules limit the amount of revenue a bank can receive from a card transaction, and therefore limit the bank’s freedom to partner with other financial organisations and providers of emerging payment technologies such as mPOS, since there’s simply not enough money to go around.
For example, ApplePay launched as a U.S.-only service on October 20, 2014, and international expansion was expected by April 2015. So what is holding up ApplePay’s launch in Europe? It all comes down to money and who gets a share of the revenue from the card payment (the interchange fee).
In the US, Apple’s cut is between 0.15% and 0.25% of this revenue. The difference is that in Europe, the total revenue from a card payment is now capped, so the banks are less willing to share their slimmer profit margins with payment technology providers such as ApplePay.
Apple also has less incentive to take the deal, since 0.25% of a 0.3% interchange fee is not much of a profit. Compare this to the interchange fee in neighbouring Canada, which was set to 1.5% by Visa and MasterCard in April, five times that of the EU, and you can see why Europe is looking a lot less attractive for the emerging payments industry.
- Banks’ revenue from interchange fee is vastly reduced.
- Consumers pay more as banks increase their account fees and interest rates to make up for the lost revenue.
- Emerging payment technology providers lose revenue as banks have less incentive to support them.
What is clear is that the regulations have disrupted the revenue streams of financial institutions. What isn’t is how this reduction in revenue will affect the state of business and innovation across Europe. As long as banks are in control of the payments space and act as the gatekeepers for new, innovative payment technologies, emerging competitors operating at a high level of efficiency and productivity will have to seek out markets that are able to accommodate them. At this time, it’s looking like Europe is not one of those markets.
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