Dec 18, 2007

Regulators about to make a major ruling on interchange in Europe – watch this closely

Here's something that could have a big impact on how payment schemes are going to compete in the future.

European regulators are expected tomorrow to force MasterCard to cut interchange fees, according to Bloomberg and others. Those are the rough and bold headlines, but the devil’s in the details - everyone will be watching to see what the ruling actually says. The Bloomberg article jumped out at me among all the others today because it goes into a little more detail on what merchants are saying. There’s a little piece of information hidden near the bottom of the article which I think holds the real key to addressing interchange regulations.

“Ikea estimates that the fees cost the company 80 million euros a year. In the U.K., the retailer applies a surcharge for payment by credit cards to reflect the higher costs for these transactions. Customers have responded by using debit cards.”

That's the real answer!

Merchants already have a very viable solution in some countries, like the UK. Let them apply surcharges on card brands that are too expensive in relation to their value, in order to encourage customers to use cheaper payment methods. The card brands will respond either by reducing their fees on their own, or by adding value to their card products so that merchants want to accept them even if the fees are higher.

The only regulation needed is to allow merchants the ability to easily apply surcharges. There is no need for artificially setting interchange fees in a regulated manner like what was done in Australia.

4 comments:

John said...

I agree. The role of governments and regulators should be to ensure a fair and competitive environment for the economic benefit of their citizens. Regulators should be looking at the fairness of no surcharge rules - the elimination of such rules would allow interchange fees to be set by market forces - instead of regulating the supposed barrier (i.e. the fees) to open payment method competition.

My guess is that retailers would continue to accept any form of payment if the cost/benefit was right. It is not hard to imagine a retailer not surcharging as a means of winning customers from their competition.

Anonymous said...

If surcharging were allowed, I question its impact on the US market. In theory it sounds wonderful, but in reality the issue is complex. If merchants were to surcharge, they would either do so through a fixed rate or a variable one. If merchants charged a fixed rate for EVERY credit card transaction, then it would be unfair to consumers with cheaper cards. If merchants applied a variable rate, they would have difficulty relaying that rate to the cardholder without creating checkout hassles/inefficiencies. I'd think the issue is much less complex in markets with significantly fewer issuers. (e.g. Australia)

In the US, two existing conditions are probably a good indicator of what would happen if surcharges were allowed: First, merchants have always been able to offer a cash discount, but few, if any, do. Second, Discover waived its no surcharge rule in 2006, but I haven't heard of merchants taking advantage of this.

Aneace Haddad said...

Hi anonymous. Merchants would certainly need to be able to apply variable surcharges, with a higher fee for more expensive cards. They're actually doing it in a way today when they try to steer people towards PIN debit as opposed to signature. Today, in the US, they do it through more complicated means than a simple surcharge. I don't see the problem. You mention that merchants have had the right to offer cash discounts which they haven't taken up, and you seem to imply that that is the same as a surcharge, but there is enough literature available now which shows that that's just not true. A credit card surcharge is much more powerful than a cash discount. Finally, the comment on Discover is way off. Discover is already positioned as the low cost interchange card, so allowing surcharges is less of an issue to them.

dan said...

See the press release and attached documents at this ECB site. Information just released today.

http://www.ecb.int/press/pr/date/2008/html/pr080111.en.html