How Interchange Fee Caps Will Affect Business in Europe

Interchange fees

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.

The Consequences

  • 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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M-Payments: Drivers and Barriers to Adoption

M-payments-good.jpg

As we have seen in our recent article about Mobile Payments Security and Consumer Confidence, the growth of mobile payments has defied the predictions of most industry analysts by happening much more gradually than expected. But there is certainly no question that it is happening and that a consumer culture with mobile devices firmly at its centre is inevitable.

In this article, we’re going to look at some of the drivers of mobile payment growth as well as the barriers to adoption that have prevented m-payments from truly taking off (yet).

Why M-Payments?

Shopping habits and payment preferences have changed. We’re witnessing the rise of omni-channel commerce, the notion that consumers want (and are coming to expect) businesses to provide the same products, features and level of service regardless of the channel, whether on their computers, mobile devices, or in-store.

This is visible in the now-common practices of webrooming and showrooming, two shopping habits that have blurred the line between shopping online and in-store. Webrooming is when a customer researches a product online before purchasing it in store, whereas showrooming is when a customer visits a store to see and feel an item in person before purchasing it online. According to a report from Merchant Warehouse, more than half of shoppers take part in one or both of these habits.

Consumers Want Mobile Wallets

People are already relying on their smartphones as one step on their path to purchase, so it’s only logical that merchants should want to make it even easier for their customers to stay on that path to purchase by accepting mobile payments at the point-of-sale. 70% of consumers believe that we will see widespread adoption of mPOS within the next three to five years, and 40% of consumers in North America have already used smartphones to make a payment at the point-of-sale, a rise from only 16% in 2012.

Today’s omni-channel consumer envisages a future where you can leave your house with nothing but your smartphone in your pocket, acting as your wallet, ID, bus pass, maybe even your car keys. However, 62% of shoppers say they are not willing to use multiple wallets and are certainly not ready to leave their physical wallets at home just yet.

This suggests that widespread consumer adoption will not occur until most merchants start accepting m-payments. So the question is why have most merchants not yet embraced?

A Fragmented Market

There has been a lot of buzz about mobile wallets in the last few years, but even efforts by heavyweights like Google, PayPal and Wal-Mart have been unsuccessful. This is due in part to the fact that these and other players have tried to “own the customer” by offering their own stand-alone solutions. Not only does this create conflict with existing customer loyalties, but it also requires merchants to subscribe to a particular provider before their customers could use that mobile wallet.

Consumer demand is not the problem with m-payment adoption, although security concerns remain a deterrent. The issue is a fractured market with many incompatible solutions and no clear front runners, as well as a lack of adequate technologies and infrastructure on the merchant side to provide consumers with the m-payment options they desire.

Convenience is everything. If a new technology is less convenient than the existing technologies, as was the case with these unsuccessful mobile wallets, then most consumers will not adopt it, no matter what other benefits it may provide. Until a true market leader emerges and mPOS adoption becomes widespread among merchants, many consumers will continue to opt for the convenience of payment cards.

However, the latest mobile wallet solution, ApplePay, may provide an answer. Unlike earlier attempts, ApplePay has provided a solution to the issue of convenience by taking a customer-first approach to mobile payments.

How ApplePay Provides a Working Model for mPOS Adoption

ApplePay is the m-payment and digital wallet service introduces by Apple in October 2014. It enables Apple devices to make payments online and in-store (using a near-field communication or NFC antenna in the device), digitising and replacing the payment card transaction at checkout. Within three days of launch, ApplePay had already become the largest adoption of a mobile payment system with over 1 million registered users.

Infrastructure

While only available in the US for now, ApplePay is the first true success story in mobile payments. The secret to that success is that ApplePay was built on top of existing payment infrastructure – Apple partnered with Visa, MasterCard and American Express so that their service utilises PayWave, PayPass and ExpressPay terminals rather than proprietary terminals provided by Apple.

This means that most stores that accept credit cards are already capable of accepting ApplePay payments, so shoppers could start taking advantage of this mobile wallet from day one.

Security

Another thing that sets ApplePay apart from less successful mobile wallets in the past is its approach to security. Security is one of the leading consumer concerns about mobile payments and previous solutions didn’t offer any additional security features. Apple, on the other hand, has been very vocal about integrating cutting-edge biometrics and tokenisation into ApplePay.

Apple’s biometric system, TouchID, prevents anyone other than you from making a payment using your device by scanning your fingerprint. To prevent the interception of payment information, Apple uses a tokenisation system, which generates a dynamic security code unique to each transaction, eliminating the need for raw data to pass between customers, merchants and financial institutions.

It’s worth noting that the recent news about ApplePay “fraud” was not a breach of ApplePay’s security features but rather spinoffs of the Target and Home Depot breaches. The stolen credit card information obtained by the Target and Home Depot hackers was used to create iTunes accounts, which in turn were used to create ApplePay accounts, enabling these cybercriminals to steal millions of dollars’ worth of merchandise. How this happened and why is a topic for another blog post altogether.

What’s Next?

ApplePay’s effect on m-commerce has been likened to the iPhone’s effect on the smartphone industry – it truly is a game changer. Until now, the lack of adequate technologies available for merchants to accept m-payments has been the main barrier to adoption and ApplePay has provided a solution.

Its success is an example for the whole industry, not only proving how wide and profitable the m-payments market is but also showing us how it can be used. ApplePay has hit on the winning formula but doesn’t own that formula, and now future market entrants have a working model to follow.

We know that mobile payments are here to stay and we want to make them more accessible for consumers and merchants alike. Though currently only available to Icelandic members, DalPay is planning the international release of our smartPOS system, allowing merchants to accept mobile payments, as well as credit and debit card payments, at the point-of-sale using DalPay as a single provider.

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