EC Considers Cross Border Interchange for New Debit Program

Visa, MasterCard, and the European Commission have been jockeying for over a year with respect to cross-border interchange fees. The EC's desire to spur on the introduction of the Single Euro Payment Areas ("SEPA") direct debit program may help bring about an agreed solution.

Interchange fees are charges paid by merchants to accept credit cards. Although these fees are imposed by the card systems, they do not compensate the systems for any service provided. Instead, they are passed on to the bank that issued the card to help support its card-issuing business. The EC has focused particularly on the charges imposed when a card is used outside the country in which it was issued.
Interchange fees have raised competitive concerns in the US and Europe for decades. Card systems have long argued that these fees are necessary to provide a sufficient return to card issuers. In recent years, however, that justification has been attacked on multiple fronts. A multi-district class action filed by U.S. merchants is on-going, and, in other countries, competition regulators have struggled to find viable alternatives.

The concern with interchange fees stems from two market factors. First, the merchants are generally unable to pass the fees on to card users. In some cases, merchants are legally prohibited from surcharging card transactions; in others card systems’ rules prohibit surcharging; and in any event, surcharging may not be practical for many merchants. Because merchants cannot assess these fees only on card users, they may simply increase their prices across the board. All consumers would thus pay higher prices to enable some to use cards. And, even those who use cards might not if they were required to bear the full cost of card use.
Second, system rules and competitive considerations require many merchants to accept all cards issued on the largest systems, Visa and MasterCard. As a result, individual card issuing banks within the Visa and MasterCard systems need not compete on interchange fees to attract merchants to accept their cards.

In the U.S., merchants have sought the right to surcharge and an injunction against card issuers setting interchange fees cooperatively through Visa and MasterCard. In other countries, regulators have 1) permitted surcharging and/or 2) limited interchange fees to an amount necessary to cover only certain costs of card issuing.
The EC recently found that MasterCard’s method of setting cross-border interechange fees was anticompetitive, holding that an open card system must limit interchange fees to the extent that they “contribute to technical and economic progress that benefits consumers.” The Commission has been investigating Visa’s fees as well. While MasterCard is fighting the determination against it, Visa has been seeking to negotiate an acceptable interchange fee with the EC.

The EC has likely entertained Visa’s efforts because it is struggling to determine an appropriate method of interchange fee setting. Although current fees may be supra-competitive, eliminating interchange fees entirely could result in an inefficient drop in card issuance.

Recently, the negotiations have been impacted by the EC's desire to encourage a European-wide direct debit system in which cardholders could 1)use cards across Europe and 2) have the cost of the transaction deducted directly from their home bank. The banks claim that they are reluctant to support the direct debit plan if a cloud of uncertainty continues to hang over the interchange issue. EC competition commissioner Neelie Kroes recently recognized the need for an interchange system to get the direct debit program off the ground. “It may prove necessary,” she said, “to have a multi-lateral interchange fee for cross border SEPA Direct Debits.” But she wants to limit those fees to the “very initial stage” of the program. Whether that will be enough for many banks to back the debit system remains to be seen.