European Commission To Legislate Interchange Fee Cap

The European Commission is drawing a line, and will soon settle on new legislation to cap interchange fees. This initiative would reduce the fees that retailers pay banks when consumers in the EU use a credit or debit card, according to The Financial Times.

The EC has been battling with Visa Europe and MasterCard since 2000 in an attempt to limit interchange fees. In an effort to seal a victory, the Commission has drafted proposed legislation that—according to Bloomberg—would reduce credit card interchange fees to 0.3 percent and debit card fees to 0.2 percent.

The cap would cause massive reductions in many countries across the EU. Currently, debit card interchange fees range from an average of 0.1 percent in Denmark to 1.6 percent in Poland, reported The Financial Times. Germany is a bit higher, with an average of 1.8 percent for credit cards, and France has a lower average of 0.5 percent.

EU banks that issue debit and credit cards are currently the ones gaining from the fees. At present, The Commission reported that it believes EU banks gain around €4.8 billion from debit card fees and €5.7 billion from credit card fees every year. The proposed ceiling would cause debit fees to fall to just €2.5 billion, and credits to drop to around €3.5 billion, wiping out more than €4 billion in bank revenue per year.

While merchant acquirers pay the fees in the first instance, they usually pass some or all of the fees onto the merchant. According to the Financial Times, which has seen the draft: “High fees paid by merchants result in higher final prices for goods and services, which are paid by consumers.”

Financial institutions are well aware of imminent changes and have cautioned that the revenue losses will likely be compensated through raising consumer fees. They also dispute that merchants will cut their prices.

The Financial Times reviewed the EC’s draft and also reported that it enforces a legal separation between payment card programs and transaction processing systems.

Under the Commission’s proposal the caps would apply only to cross-border transactions for the first two years. After the two-year transition, caps on domestic transactions will also apply.

In countries such as Australia and the US, reductions in interchange fees have resulted in consumers paying higher bank fees. How consumers will fare in the end, is the big question looming over the proposal. EU banks are sure to complain that consumers will lose and retailers will win. EU Parliament has much to consider when future debate about the legislation commences.

 To read the full story Bloomgberg click here, or at the Financial Times click here