While much of the debate around European card regulation and interchange focuses on Visa and MasterCard, how will three-party schemes fare under proposed legislation?
The July 2013 publication of European Commission (EC) draft legislation concerning card payments and interchange has had many ongoing ramifications for payment networks in Europe. Joel van Arsdale, a partner at consultancy First Annapolis, explained at the time: “Three-party schemes are excluded from the scope of provisions on interchange caps and provisions on separation of payment cards and processing entities.” – reports by Victoria Conroy.
Pointing to the effects of interchange regulation in Australia, he added: “Interchange rates
Interchange a level playing field?
in Australia went from an average of 1% to an average 0.50% for credit cards. Debit cards were later capped at $0.12 (or about 0.24%). Merchants began surcharging credit cards. By 2010, 30%-40% of large merchants surcharged.”
But while much of the focus of the EC draft proposals has been on Visa and MasterCard, what has been lost in the discussion is the impact of the legislation on three-party schemes such as American Express and Diners Club. Under the proposals as they stood in July 2013, three-party schemes would not be exempted from regulations covering surcharging, and this led to American Express calling for a rethink by regulators ahead of the proposals coming into force.
Causes for concern on surcharging
Since the publication of the draft proposals, payment stakeholders from all across the value chain have weighed in with their perspectives in the hope of reshaping them. Speaking to PCM, Peter Wright, executive vice-president and head of card services for EMEA at American Express, said: “We are very much in favour of the thrust of the EC’s proposals and the proposals in general to create a single payments area in Europe but in terms of the current proposals, there are several aspects that do cause some considerable concern.
“Our view at the moment relating to the proposals drafted in July 2013 and through the many amendments since then, is that they simply consolidate the overwhelming dominance of the market of Visa and MasterCard. From the EC’s own data, Visa and MasterCard have 95% market share, leaving other players in the market with a mere 5%. Regulators have been looking at ways to control what has been described as anti-trust behaviour. But in doing that, regulators have drawn in the three-party schemes, the competitors to Visa and MasterCard. That will unintentionally damage the ability of those companies to compete in the marketplace.”
According to Wright, the main bone of contention is on surcharging, which he describes as being “anti-consumer” in general. But in relation to competition in Europe, he added: “The idea that a merchant puts a Visa, MasterCard or American Express sign in a shop window and invites people with those cards to spend, and then surcharges them, seems to me to be a ridiculous proposition. We’ve seen this in several countries in Europe. The current proposals mean that Visa and MasterCard will not be surcharged, whereas cards such as American Express or Diners Club will be surcharged.
“At first glance, it may seem quite sensible in terms of price control for Visa and MasterCard and not on three-party schemes. But when you look at it in detail, Visa and MasterCard are being controlled because of their dominance. At American Express, we contract with each individual business. We have an open discussion – no merchant needs to take American Express. Merchants who have signed with us have done so honestly and openly. For then to surcharge seems to be ludicrous.”
“Surcharging in its current guise is surcharging all forms of payment and all cards. When a consumer goes into a merchant under this new regime, how does the shop assistant know which cards should be surcharged and which cards shouldn’t be? The proposals clearly state that the consumer needs to be aware before they present their card that they’re going to be surcharged. That is a challenge, because if Visa and MasterCard cards from overseas shop in Europe, they will be surcharged, but they will look exactly like the cards in Europe.”
Wright adds that the proposals as they stand will only create even more confusion in the minds of both merchants and consumers. “In the case of American Express, the proposals suggest that American Express cards issued by American Express will be surcharged. But if we have a bank that is licenced to issue American Express cards, they won’t be surcharged. How do you tell the difference between those two cards? It’s impossible. How does the merchant carry out its duty under the regulation? What will happen is people will be surcharged when they shouldn’t be surcharged, and complete confusion is created at the POS.”
Unintended consequences
Wright emphasises that although these may be unintended consequences of the proposals, far from creating a level playing field, the opposite will occur. The wording of the draft proposals was: “To acknowledge the existence of implicit interchange fees and contribute to the creation of a level playing field, three-party payment card schemes using payment service providers as issuers or acquirers should be considered as four-party payment card schemes and should follow the same rules, whilst transparency and other measures related to business rules should apply to all providers. Three-party schemes should accept transactions made using their cards from any acquirer based on general card transaction standards and acquiring rules comparable to the merchant rules for the specific three-party schemes and with interchange caps in accordance with this Regulation.”
Wright told PCM: “In relation to American Express, we have our issuing business and acquiring business. We also selectively licence banks to issue American Express cards. Those arrangements are not mediated by interchange whereas the EC’s proposals suggest we do have an interchange. What we do have are commercial relationships which are not mediated by interchange because banks don’t get together to collude or agree what pricing exists. They are American Express bilateral agreements. Visa Europe has 4,500 banks – we only have 27. To impose upon American Express exactly the same regulation as Visa and MasterCard effectively turns American Express’s network into a Visa and MasterCard clone.
“On several occasions, regulators have said to us that our network and the way we operate causes no competition concerns whatsoever. So why suddenly, out of the blue, is it proposed that legislation aimed at Visa and MasterCard embraces American Express? It perplexes us along with many people in the industry. The playing field has already been tilted well in favour of Visa and MasterCard for around 30 years. The proposals will effectively mean that the other competitors will have to play by Visa and MasterCard rules. Why would a bank want to issue American Express cards on exactly the same basis as Visa and MasterCard cards? I don’t know what we would be able to give them because the rules wouldn’t allow us to give that issuing partner anything except give them access to our network with precisely the same pricing mechanism as Visa and MasterCard. Effectively we would have to create an interchange, which is bizarre and lies at the heart of the problem.”
In relation to the interchange caps, Wright points to another possible consequence of the proposals. “At present the cap on interchange is 30 basis points, and one of the proposals from Visa and MasterCard is an amendment to try and make that a blended rate as was the case in Australia. That allows them to play with interchange and create premium products which will not be surcharged. However, other premium products such as American Express will be surcharged. There will be a lack of transparency because merchants will still not be sure what they’re paying for and for which products.”
Commercial cards added to the mix
Arguably, commercial cards could come under the category of premium products. And there was more bad news to come. On 1 April 2014, ahead of a European Parliament plenary vote, MasterCard called on Members of the European Parliament (MEPs) not to include commercial cards in draft legislation on interchange fees for electronic payments. Commercial cards were not considered in the original EC proposal because of the very different role they play to consumer cards and have not been subject to any impact assessment.
According to MasterCard, if interchange fees for commercial cards were capped at 0.3%, issuing banks would be forced to raise their cardholder fees for commercial cards significantly. MasterCard cited a recent survey which suggested that around 50% of small businesses in France, Germany, Italy and the UK would not be willing to pay an extra €10 per month for their card.
In addition to provisions on commercial cards, MasterCard added that it remained “deeply concerned” by the intention of regulators to maintain a “one-size-fits-all” approach to interchange for consumer cards across Europe. “MasterCard welcomes the MEPs’ intention not to pick winners and losers and to create equal market opportunities for all payment schemes, but believes that further efforts are needed to cover all relevant players on the market, including American Express and PayPal.”
However, on 3 April MEPs not only voted in favour of the proposed credit and debit card caps, they also added commercial card interchange to the scope of the proposals – something which will raise the ire of all networks, regardless of whether they are three-party or four-party.
During a conference call on 1 May to discuss MasterCard’s first quarter 2014 results, CEO of MasterCard, Ajay Banga noted that the legislation’s current wording is “onerous” in parts, noting that the latest version of these rules looks to control fees on commercial credit cards in the same way as those on consumer cards.
“I clearly don’t like that because the aspect of other four-party schemes as well as schemes that look like four-party but may not be called four-party are also included,” he said.
Somewhat contentiously, Banga took a swipe at regulators for not only misunderstanding the economics of interchange, but also the voting process, saying: “I think what really happened here, and this is information gleaned more from hearsay than reality, is that my sense is that the recent vote was a confused vote. The legislators actually did not believe that commercial cards should be dictated in the same way as consumer credit cards, but in a mix-up in the voting pattern, it got voted the wrong way.”
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