EP votes to cap interchange fees to improve competition for card-based payments

The European Commission estimates that the rules, when implemented, could lead to a reduction of about EUR 6 billion annually in hidden fees for consumer cards. The Regulation on Interchange Fees for Card-based Payment Transactions, which largely follows a Commission proposal from July 2013, will also give more freedom of choice to retailers, enhance transparency for card transactions and pave the way for innovative payment technologies to be rolled out.

Typically, for a customer who pays for a purchase in a store via credit or debit card, the bank that serves the store (the acquiring bank) pays a fee to the bank that issued the payment card to the consumer (the issuing bank). A so-called interchange fee is then deducted from the final amount that the store merchant receives from the acquiring bank for the transaction. Today, only competition rules limit the fees set by banks and payment card schemes, which are hidden from the consumer and neither retailers nor consumers can influence.

When retailers pass these costs on to consumers this can of course lead to inflated prices. In its MasterCard judgment of September 2014, the European Court of Justice made clear that such interchange fees are a violation of EU antitrust rules. The Regulation will help the card payments industry move from its current business practices to a new more competitive system, to the benefit of consumers, merchants and banks.

As a general rule, the regulation will cap interchange fees at 0.2% of the transaction value for consumer debit cards and at 0.3% for consumer credit cards. For consumer debit cards, it also gives flexibility to Member States to define lower percentage caps and impose maximum fee amounts. Besides capping interchange fees, the regulation also increases transparency on fees and will enhance competition for payment card schemes and banks by addressing licensing issues and other conditions that have restricted the freedom of choice of retailers.

Furthermore, the regulation removes major obstacles to technological innovation in payment options because technologies that allow consumers to pay with their debit or credit cards online or using their mobile phones (with apps, fingerprints, contactless swipes, etc.), are already available. However, uncertainty on the rules regarding interchange fees has been one of the factors holding up the use of these technologies.

Commissioner Margrethe Vestager, in charge of competition policy, has claimed that uncompetitive and covert bank interchange fees have increased costs of merchants and consumers and, via the current regulation, to the issue is being dealt with. Commissioner for Financial Stability, Financial Services and Capital Markets Union, Jonathan Hill has also claimed that the vote will bring transparency and legal certainty for the credit card market and, moreover, also paves the way for more innovation and competition in the field of online and mobile payments.