Be Wary On Benefits Of EU Interchange Fee Cuts

In the United Kingdom and all across Europe, the debate over card fees, and card fee caps, continues.

SkyNews reported that U.K. businesses should be able to “save millions” due to a new card fee cap, mandated as of today (Dec. 9) by the European Union. The limit places restrictions on fees that debit and credit card companies can charge merchants as they utilize electronic payments.

Now, the credit card fees are capped at 0.3 percent, a far sight below the regional average of nearly 0.9 percent.  The debit card fees are going to be tied to 0.2 percent of transaction values, only slightly lower than they had been before.

That cap would help slash the amount of interchange fees paid out, currently at 1 billion pounds annually, and the British Retail Consortium has said that the cap could save companies roughly half of that amount.

And yet … one unintended consequence here is that for every dollar (OK, pound) giveth to the U.K. merchant via interchange fee cuts, the card companies may opt to taketh thee away from the consumer. As noted by Nick Frankcom of uSwitch: “One of the unfortunate effects of this is that many card companies are now cutting reward schemes and cashback schemes that many of us rely on for that little bit extra from our spend.”

Tesco and RBS have already reduced the size of their customer rewards programs in the wake of the new legislation, which had been passed last year.

In addition, there could be another unintended consequence, namely that corporate cards may drop from favor if there remains confusion about just how corporate billing and expenses are handled across cards (corporate cards are exempt from such fee caps).

By limiting the amount of fees retailers are charged for letting customers pay with cards, the “minimum spend” mandated by some retailers at the counter may also go the way of the dodo.  That may be good for consumers on the surface, but it may actually be a pain point for merchants, as cards bearing minimal charges still would have fees attached to them, which would be relatively outsized compared to, say, the cost of buying a candy bar (and would in turn eat into profits, no pun intended).

Add to that the fact that card companies can make up for lost revenue in other ways, such as by jacking up percentage rates on the cards themselves, then the effect may be mutually dismal, with card transactions (and electronic payments, the very industry that is ostensibly being promoted by the fee caps) sliding and card companies themselves issuing fewer cards in the wake of softened demand.

Indeed, if the United States offers any guide in the wake of the Durbin Amendment (which also capped fees) from four years ago, banks recouped losses in a variety of ways, from doubling fees on current accounts to eliminating free checking, to reducing free accounts overall. In the U.S. research from David S. Evans and Global Economics Group showed that costs to merchants for taking debit cards declined by $7 billion annually due to U.S. debit card interchange fee caps.

“Our estimate is that, based on the expectations of investors, the present discounted value of the losses for consumers as a result of the implementation of the Durbin Amendment is between $22 and $25 billion,” the research stated.