European Union Votes To Cap Credit Card Processing Fees & What It Might Mean For Us

The European Parliament have voted in favor of a piece of regulation which will cap the interchange fees charged in processing consumer debit and credit card processing. The regulation is titled “Regulation on Interchange Fees for Card-based Payment Transactions”. At the moment there is no cap on interchange fees, under the new rules interchange fees will be capped at the following rates:

• 0.2% for consumer debit cards
• 0.3% for consumer credit cards

Member States (EU countries) can also impose maximum fee amounts on debit card transactions as well. The regulation also aims to improve the transparency on credit card fees. Merchants will also have the option to only accept consumer credit cards (e.g business/corporate cards can be denied as these cards will not have their fees restricted).

What Is An Interchange Fee

The acquiring bank (the credit card processing company that the merchant you’re shopping at) is required to pay a fee to the issuing bank (the company that issues the credit card you’re using). This fee is called an interchange fee. Typically this fee is around 1.5%, but it depends on the specific card issuer and agreements they have in place.

This new law would restrict this fee to 0.2% for consumer debit and 0.3% for consumer credit cards which is a dramatic decrease.

How Will This Affect Us?

Obviously interchange fees are one of the ways that credit card issuers make a lot of money (they also make a lot of money from interest charges and fees). If these fees are limited then it goes to stand that credit card issuers will be making less money and as a result of this will likely offer less rewards for debit/credit cards.

We’ve actually seen this happen in the United States before. The Durbin Amendment put a cap on debit card transactions of  21 cents plus 0.05% (although an additional 1¢ can be added to the cap if certain security requirements are met). After this Amendment was put into practice we saw two things:

• Rewards earning debit cards were almost entirely phased out. Unlike credit cards, debit cards do not have a lot of other ways to make money other than interchange fees (although financial institutions do often charge monthly fees and can earn money on the deposits cardholders have in their accounts). Because of this most banks that did issue rewards debit cards removed them from the market.
• Prices did not drop as a result. The Electronic Payments Commission released a study that showed 94% of consumers did not see prices drop as a result.  Now obviously the EPC have a massive conflict of interest here and I have a number of concerns about the study itself (consumers were asked directly if they’d seen a price decrease. Does this take into account inflation and other economic factors? Why not look at real prices when this information is so readily available?). There are a few more examples of this though (H/T Nall):
  • The Effect of Regulatory Intervention in Two-Sided Markets: An Assessment of Interchange-Fee Capping in Australia
  • PRICE CONTROLS ON PAYMENTCARD INTERCHANGE FEES: THE U.S. EXPERIENCE

This change doesn’t affect US credit cards directly, this will only affect credit cards that are issued in the EU and are also used in the EU. Although merchants can decide to not allow purchases from cards that aren’t from the EU as part of this new regulation (merchants no longer need to accept all cards).

My Thoughts

I’m not entirely sure where I stand on this issue, capping interchange fees reduces the amount that merchants pay but I’m not convinced that they pass that saving onto consumers. I think regulating to ensure merchants are allowed to accept cash payments at a discount and encouraging competition in the payment processing space through other legislation is the right direction.

New payment systems are really going to shake this industry up over the next five-ten years and I think you’ll start to see that reflected in better pricing for merchants. That being said, credit card payments provide a lot of benefits to consumers (e.g price protection, increased warranties, ability to issue chargebacks etc) and there is some risk in providing consumers with credit. I don’t think that is accurately reflected in the 0.1% difference between debit and credit card payments.