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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Everything You Need to Know about Selling in Italy

E-commerce in Italy is in an interesting position for sellers and buyers alike. Considering it is a European country, the urban population is relatively low and, with an internet penetration of less than 60%, the infrastructure for e-commerce remains underdeveloped. Because there are few options in the domestic market, cross-border activity is flourishing, with almost one third of Italian consumers participating in cross-border e-commerce, and most of the growth is driven by the high mobile penetration rate. Let’s take a look at the Italian e-commerce market and how your business can benefit from selling in Italy.

SELLINGITALY

In the Everything You Need to Know series, we take a look at a specific e-commerce market to help you decide whether you should expand online sales across borders. As a provider of comprehensive payment processing services, we at DalPay specialise in cross-border commerce and have first-hand experience facilitating business in over one hundred markets worldwide.

Online marketplaces vary significantly around the world in a wide number of ways, such as their level of economic development, shopping habits, preferred payment methods, access to technologies, legality, logistics, etc. Because of this, there are a great many factors to consider when choosing which international markets to expand to. This series is designed to provide you with all the information you need to choose which countries are a good fit for your business and to begin selling across borders.

Unless otherwise noted, figures in this article are sourced from:

The European Union has made considerable strides in the last two decades to create a single, unified European economy, from the introduction of the euro in 1995 to the official integration of the Single Euro Payments Area (SEPA) just last year.

Despite the harmonisation of the currency and payment systems throughout the Eurozone, the countries of Europe will always have their own differences in culture, language and payment habits. SEPA makes cross-border e-commerce within Europe much more accessible to businesses on or off the continent, but no matter how easy it is, there will always be regional differences in how people shop and Italy is no exception.

Quick Figures

  • Total population: 60 million
  • Internet penetration: 58.5% (36 million)
  • Mobile penetration: 159%
  • Online shoppers: 15.8 million
  • E-commerce sales: EUR 11 billion
  • E-commerce annual growth rate: 18.2%

Italy has become a very attractive target market for online retailers looking for new countries to expand to for a number of reasons. Thanks to initiatives by the European Union, it’s easier than ever to do business in Italy, especially for businesses that already operate elsewhere in Europe. Though still a relatively small e-commerce market, Italy has the third largest economy in Europe and 30% of online shoppers buy from businesses across borders, amounting to roughly 5 million potential customers and growing.

Italy also has one of the highest mobile penetration rates in Europe. 21% of mobile users make mobile purchases at least once a month, and retail apps in Italy show a year-over-year growth of 74.8%. As m-commerce becomes increasingly synonymous with online retail, merchants selling across borders gravitate toward mobile-ready markets.

What You Need to Know

Top e-commerce categories

When making cross-border purchases, Italian consumers mostly buy from the UK and Germany. The most popular product category is airline tickets, followed by consumer electronics and apparel. Niche online retailers have the most success in Italy. There is a significant demand for high-end cosmetic and fashion brands as well as niche products marketed to young consumers more accustomed to shopping online.

Preferred payment methods

The most common method of online payment in Italy is by credit or debit card with 25.6%, followed by e-wallets with 22.7%. The leading credit card in Italy is Visa, followed by MasterCard, with the two providers accounting for 99% of the total credit card market.

One of the reasons why e-commerce is underdeveloped is that Italy is still very much a cash-based economy. Many consumers are not comfortable buying online. Because of this, in tandem with the high mobile penetration, omni-channel retailers can drive e-commerce revenues by leveraging online retail inventory at the point-of-sale, i.e. “order-in-store, ship-to-home”. Allowing consumers to purchase in a physical store and have the products delivered to their homes can help grow acceptance of online payments in Italy.

Logistics

The reverse is also true. 51% of Italian consumers have said they prefer to shop from an online retailer that offers in-store pick-up, and 59% prefer the ability to return items in-store that were purchases online. Italian consumers also have a high expectation for delivery services, with 63% citing free delivery as a major factor in their purchasing decisions.

Cybercrime report

Italy is the eurozone’s third largest economy, and with the growth of credit card usage in recent years, card fraud has followed suit. Card fraud in 2013 accounted for a total of EUR 56.8 million, with half of that being attributed to counterfeit fraud largely associated with cross-border payments. Card-not-present transaction account for EUR 14.2 million in fraud losses and lost or stolen cards account for over 10 million. Still, Italy’s total fraud rate of 2.1 compares favourably to that of France (7.4) and the UK (5.9).

Legality

International sellers planning to expand their e-commerce operations into France will have to familiarise themselves with local legislation as well as, if they are based outside of Europe, the legislation of the European Union.

For example, under the European WEEE regulation, it is mandatory to register the number of physical products being put to market, as well as the number of items taken back from the market (as in the case of returns), or risk thousands of euros in fines. Products imported from outside of the EU are subject to duties, while inter-EU deliveries are subject to the EU Directive on the VAT-system.

Italian E-Commerce in Brief

Pros:

  • One of the largest economies in Europe
  • Over 15 million online shoppers
  • Widespread acceptance of cross-border e-commerce
  • Very high mobile penetration rates
  • Few barriers to entry

Cons:

  • E-commerce relatively underdeveloped
  • Cash-based economy

It is no secret Italy’s economy has been in turmoil in recent years. While the recovery is well underway, there is still a wide income disparity across the country. Due to the economic instability, many Italian consumers are hesitant to participate fully in e-commerce and harbour concerns about the security of online payments.

However, e-commerce in Italy broke EUR 10 billion in 2013 and is showing five years of consistent, stable growth. The economy is now one of the strongest in Europe and the mobile penetration is one of the highest. The result of this is that the demand for online retail is growing faster than domestic providers can keep up, and Italian consumers are turning to cross-border retailers for their e-commerce needs.

Expanding into a new international market is a risky venture but a very rewarding one if done correctly. For the latest information about how you can build and maintain a strong e-commerce enterprise and keep it compatible with legislation and buying habits at home and abroad, subscribe to the DalPay Blog and follow us on Facebook and Twitter for the latest industry news.

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