Another Look at the European Card Regulation Proposals

We already talked on this blog site about the latest proposals by the European Commission to regulate the cards business - see Gareth's and my posts on this topic. However, I wanted to come back to a couple of points, namely:

1. the decision to cap debit and credit interchange to 0.2% and 0.3% of the transaction amount respectively;
2. the requirement to separate schemes from processing companies.

The Commission expects that the caps will cut total EU debit card fees from ~EUR4.8bn to EUR2.5bn and credit card fees from EUR5.7bn to EUR3.5bn. How big of a deal is it though? The answer is that the impact will vary hugely market-by-market. For example, in Germany average credit card rates stand at 1.8%, and given the country's aversion to debt, most cardholders are "transactors", i.e. usually pay their balances in full, so interchange is the main source of income for the issuers. Compare that to the UK where Visa's credit card interchange rate for EMV cards is 0.77%, and while the number of "revolvers" (i.e. people who borrow on credit cards) and their outstanding balances have been declining, the revolvers still represent over 60% of all cardholders, making the issuers less reliant on interchange income.

For debit it gets even more interesting. While average debit card charges are 1.6% in Poland, many other countries already have low and flat (i.e. fixed irrespective of the amount) fees for their domestic debit transactions. For example, Visa dominates the debit market in the UK and its interchange fee for a debit transaction currently stands at £0.08. Given that the average UK debit card transaction is just over £45, it already works out as an effective rate of 0.18%, i.e. cheaper than the proposed cap. From Durbin experience in the US, the proposed fee ceiling quickly became effectively the floor as well, i.e. most transactions were priced at cap. If this were to happen in Europe, the fees on debit cards in many markets might actually increase! Of course, the EC hasn't ruled out the possibility that it might decide to ban interchange fees on debit cards altogether, but we expect this to remain a prospect in the distant future.

The EC proposals also include a recommendation that 'card schemes and the entities that process transactions' be organizationally separated. It will be interesting to see the actual interpretation of this recommendation. A similar requirement is one of the fundamental tenets of the SEPA cards framework: "a scheme should implement a separation of SEPA card schemes’ brand governance and management from the operations that have to be performed by service providers and infrastructures without any possibility for cross-subsidisation." Visa's and MasterCard's position has always been that they meet these requirements by not mandating their processing services and having separate pricing for scheme and processing services.

However, some commentators believe that this time the Commission might want to go further and impose legal separation of the schemes, processing assets and potentially even issuing and acquiring side of the business, which would have far reaching consequences to most players, from Visa/ MasterCard to American Express to local debit schemes to even banks. Given the lack of clarity in how this might be implemented so far, we expect a lot of lobbying on all sides in the coming months and years until the outcome is settled.