Jason Oxman, CEO of the Electronic Transaction Association, explores the impact of the European Commission’s proposals to cap card interchange fees on the existing payment eco-system.
The European Commission recently released a new set of proposals to regulate electronic payments. Among other things, the new regulations would cap multilateral interchange fees (MIFs) – what merchants pay to cover the costs of processing electronic payments – at 0.2 percent for debit cards and 0.3 percent for credit cards. Proponents of such government price-setting argue the measure will protect consumers by lowering merchants’ costs. Fortunately we don’t have to speculate about the impact – such well-meaning regulations have been tried in the U.S. and elsewhere. And even a brief look shows such regulatory measures actually harm consumers, as banks drop services and raise prices while merchants pocket their savings.
In 2011, the U.S. Congress passed the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The amendment, introduced by Sen. Richard Durbin (D-Ill.), capped the fees debit card companies could charge their merchant customers in the hope that such price caps would lower prices for consumers. It allowed merchants to set a $10 minimum for credit card transactions and to give discounts on cash or debit purchases at the register. The stated purpose of this regulatory regime was to establish competition in the interchange market. This increased competition, it was thought, would result in lowered costs for consumers.
Instead, two years later, U.S. consumers have seen available banking services decline. Unable to cover the costs of consumer-friendly debit programs, banks eliminated debit card reward programs and free checking, with only 39 percent of banks now offering checking without minimum balance requirements or annual fees. Meanwhile, consumers have not seen extra savings at the register. While merchants enjoyed an estimated $8 billion in savings from the legislation, those savings are not reflected in the prices they charge consumers. According to an Ipsos survey, only 7 percent of consumers believe merchants have passed on their savings, and only 6 percent think merchants ever intended to do so.
Australia implemented interchange caps in 2003. A new report by Europe Economics describes how that panned out, with credit card fees increasing by at least 22 percent – and by up to 77 percent for some rewards cards. Many credit card companies left the market, resulting in less competition. Worse, merchants did not lower their prices, despite their savings. In some cases, merchants are now allowed to add surcharges to credit card transactions, further bilking the consumer.
Debit cards provide a convenient payment system, one we all value. But it’s not a free service, and banks, merchants and consumers each have to put something into the system in order to reap its benefits. Imposing government-mandated caps on interchange fees gives merchants an unfair price cut – and it may signal the end of debit cards as we know them.
In short, government-mandated pricing of competitive services has done nothing to establish “fair competition” or benefit consumers. As is too often the case with government regulation of the market, such caps pick winners and losers while impeding the flow of the free market. In the case of interchange fee caps, merchants enjoy cost-saving benefits while banks have to figure out a way to make up losses, leaving the consumer with fewer banking options and no savings at the register.
The European Commission should take a long look at relevant history before imposing price caps on EU card issuers. The U.S. should learn from its mistakes too. It may seem like a good idea in theory, but giving merchants a hand up at the expense of card issuers will ultimately be transferred into loss of services for consumers without any concomitant benefits. The biggest loser of all in this case will be the consumer.
Jason Oxman is the chief executive officer of the Electronic Transactions Association, an international trade association representing more than 500 companies worldwide. Follow ETA on Twitter @ElecTranAssoc.