Robert Miklós Babirad
Credit and debit card interchange transaction fees have been subject to increasing governmental regulation and review both within the EU and abroad. This article will begin with a brief overview of interchange transaction fees as well as the arguments both in favour of and against their stricter regulation by governmental authorities. The proposed EU level regulation for interchange fees will also be considered contextually with regard to a parallel trendoccurringin the United States, which appears to follow a similar methodology to that being pursued by the European Union in this area.
In conclusion, it will be suggested that the European Union is engaging in a beneficial move toward increased and stricter governmental regulation of interchange transaction fees with the overall objective of promoting consumer welfare, increasing product price transparency and inhibiting anti-competitive conduct within this field.
2. The Controversial Nature of Interchange Fees
In accordance with EU regulation, a fee paid between the consumer’s payment service provider and that of the merchant, which has been multilaterally agreed upon (although bilateral agreements may also occur), constitutes a multilateral interchange fee. Under the U.S. Durbin Amendment, interchange transaction fees are defined as “any fee established, charged or received by a payment card network for the purpose of compensating an issuer for its involvement in an electronic debit transaction.” Interchange fees are paid per transaction by the bank of the retailer to the bank of the consumer where a payment card is used (the reversal of this payment sequence may also occur). Additionally, interchange fees are paid for by consumers as part of the cost of their purchase of goods and higher interchange fees have the potential to subsequently result in greater product costs.
The issue of increased governmental regulation of interchange fees has both supporters and opponents, because these fees have a significant impact on various parties and interests connected with a transaction. The interesting nature of interchange fees stem from the fact that the costs as well as the corresponding benefits received by both an issuer and acquirer of a particular payment card are directly associated with the interchange fee that has been established. Therefore, various parties are impacted by the interchange fee rate as well as the type of payment card that is being employed by the consumer. It is also important to note that the predominant source of revenue derived by a credit card company, where a consumer is not otherwise liable for other finance costs associated with the use of their payment card, stems from the interchange fee.
A difficulty associated with interchange fees is that they are for the most part not readily noticeable by the consumer while generally constituting the greatest part of the fee being paid in connection with their purchase. Additionally, the use by cardholders of payment cards that produce higher fees is encouraged. Companies issuing payment cards also compete with each other by offering greater interchange fees in order to “attract issuing banks” to their particular card, thereby also resulting in increased merchant costs, which are passed on to consumers.
An argument in favour of the need for greater standardisation and governmental regulation is that interchange fees being collectively established; possess the possibility of constituting anticompetitive conduct. Increased regulation of interchange fees has the potential to remove hidden costs not readily visible to the consumer and to require retailers to compete against each other on price costs for retail goods that reflect greater transparency.Lower interchange fee charges and increased regulation also possess the positive potential of encouraging banks to issue the cards of new payment schemes such as those emerging in the field of mobile payments.
Enhanced governmental regulation and enforcement of interchange transaction fees are necessary, because without such a system in place, these fees have the potential to be used as a bargaining instrument between banks and card issuing companies who may compete to increase their own respective profits exponentially, but without making equal provision for consumers to also derive corresponding benefits.
The relatively “hidden” nature of these fees is also troublesome, because of their ability to negatively impact consumers, who may not otherwise be aware that an increase in the price of the goods that they purchase, is directly related to the bargaining occurring between banks and card issuing companies with regard to the setting of interchange fee transaction rates. A limited or unregulated situation with regard to these fees has the ability to work to the severe detriment of consumers.
The lack of an EU level regulation also creates increased disparities where each Member State is individually legislating with regard to the establishing of interchange transaction fees. Interchange fee rates will vary between Member States as well as the degree of effective enforcement available against their abusive use by banks and card issuing companies, which may seek to attain maximum profits at the expense of consumers. Additionally, consumers within the European Union may only have the opportunity to fully benefit from the potential benefits otherwise available to them by purchasing within the Single Market, through the establishment of an EU wide regulation, which standardises interchange transaction fees and provides a uniform set of expectations and guidelines that prevent these fees from being exploited by private interests.
3. Present Situation in the EU
The European Union does not presently have a direct legislative framework in place for the regulation of interchange transaction fees. The issue has been addressed by the Member States by adopting legislation and enforcement through judicial proceedings by national competition authorities, but this has also led to the creation of disparities with regard to interchange transaction fee regulation throughout the Single Market. The proposed regulation will fill an existing gap in the legislation, which is currently in place relating to payment services, but which fails to address the need for a system that standardises interchange transaction fees throughout the European Union.
Presently, the Payment Services Directive operates with the objective of providing conditions and consumer rights for payment services on an EU-wide basis and provides for a standardised structure concerning payments throughout the Single Market. Additional regulations have also been enacted, which complement this provision, but none which directly address the standardisation of interchange transaction fees on an EU-wide level.
Enforcement in the market concerning card payments has also occurred through judicial proceedings related to competition law enforcement by both national competition authorities as well as the European Commission. The General Court’s judgment in MasterCard, Inc. and Others v European Commission stated that competition is restricted by multilateral interchange fees, consumers do not derive benefits from these fees and card acceptance costs are subsequently increased through their application.Visa and MasterCard have also submitted commitments to the Commission with regard toreducing multilateral interchange fee charges concerning both domestic as well as transactions that cross Member State borders. However, even these commitments combined with the existing Payment Services Directive are insufficient for the providing of an effective and uniform EU-wide system for the standardisation and effective regulation of interchange transaction fees.
An argument in favour of greater regulation within the European Union is that without such regulation being effected at the EU level, disparities in interchange rates between Member States will continue to hinder competition, the market entry of a greater variety of payment service providers will be restricted, higher consumer prices will result, and an overall reduction will occur in the EU consumer’s ability to otherwise benefit from the advantages of the Single Market. A trend toward greater governmental regulation and standardisation of interchange fees both within the EU and abroad has necessarily developed in this field in an effort to inhibit anticompetitive conduct while increasing transparency and promoting increased consumer welfare.
4. The EU’s Proposed Regulation for Interchange Fees
On July 24, 2013, the European Commission put forth a Proposal for a Regulation of The European Parliament and of The Council on interchange fees for card-based payment transactions. The proposed EU regulation aims at greater governmental regulation by standardising and capping multilateral interchange fees throughout the European Union. The cap would be applied to both consumer credit as well as debit cards and be set at 0.3% of a transaction for credit cards and at 0.2% for debit cards. An interesting aspect of the proposed regulation is that merchants will be able to levy a surcharge or decline acceptance of cards, which fail to have regulated interchange fees.
Mr. Almunia argues for the necessity of the proposed EU level regulation, because only greater transparency and the regulating of interchange fees will prevent consumers from otherwise continuing to pay higher prices for retail goods, whose costs are a direct product of inflated and hidden interchange fees, which constitute a portion of the product’s final price.
New forms of payment services will also be provided with enhanced regulation under the decision of the Commission to adopt Payment Services Directive Two. This will have a particular impact in the area of e-commerce and provide for a more “level playing field” between differing providers of payment services. The overall EU trend appears to be toward increased standardisation and regulation of interchange fees at the EU rather than Member State level resulting in enhanced cost transparency and lower interchange fees for consumers throughout the European Union. Payment methods, which fail to operate under these regulations, will be at a disadvantage and as a result consumers will be better informed of the actual charges that make up the final cost of the goods, which they purchase.
5. A Parallel U.S. Move Toward Stricter Governmental Regulation of Interchange Fees?
The United States appears to be following a similar trajectory to that of the European Union with regard to providing for enhanced standardisation and stricter governmental regulation of interchange transaction fees. In the recent and controversial July 2013 case of NACS v Board of Governors, a U.S. District Court held that the Federal Reserve Board had “clearly disregarded Congress’s statutory intent” in its interpretation of the Durbin Amendment by “inappropriately inflating all debit card transaction fees by billions of dollars” while not providing multiple networks for each transaction involving a debit card, which would be unaffiliated. The Court held that the Durbin Amendment did not enable the Federal Reserve Board to consider, in setting the standard for interchange fees, “any costs, other than variable ACS costs incurred by the issuer in processing each debit transaction.” The Court also stated that the Federal Reserve Board was not empowered by Congress to “make policy judgments” with the result of increased interchange rates for consumers.
The Court’s approach is that of a stricter and narrower interpretation of the Durbin Amendment’s standards for the promulgation of regulations by the U.S. Federal Reserve Board with regard to the setting of interchange transaction fees. A broad interpretation of the interchange fee standard and the inclusion of policy considerations being accounted for in determining this standard was not supported by the Court and this appears to be reflective of a parallel policy approach to that which is being pursued by the EU with regard to its respective call for the stricter regulation and standardisation of interchange transaction fees.
Enhanced governmental regulation of interchange fees has the potential to result in the removal of hidden costs, lower interchange fees and increase competition that will be to a greater degree transparent. Additionally, the development of new payment schemes will be encouraged and consumers will benefit from lower product prices as well as being able to take advantage of the benefits of the Single Market through the common standardisation of interchange fees.
Critics of the proposed regulation argue that restrictions on the amount that may be charged as an interchange fee will result in an increase in cardholder fees while there will be no subsequent reduction with regard to the prices charged for retail goods. The counter argument is that this criticism will not be supported, because competition between banks will occur on the basis of visible cardholder fees as a result of an EU-wide regulation rather than on hidden interchange transaction fees.
An additional argument by payment card companies and banks is that increased standardisation and governmental regulation of interchange fees will prevent these entities from being able to generate a profit or to recover their respective expenditures. Although this does not appear to be a sustainable argument, the validity of this claim will in actuality only be known after the regulation comes into effect. The Commission anticipates agreement on the proposal by both the European Parliament and the Lithuanian Presidency to occur in the Spring of 2014.
 Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Pub. L. No. 111-203, 124 Stat. 1376-2223 (2010), § 1693o-2(c)(8).
Frequently Asked Questions, p. 7.
Chang, Howard H., and David S. Evans. “The competitive effects of the collective setting of interchange fees by payment card systems.” Antitrust Bulletin Fall 2000: 641. LegalTrac. Web. 9 Oct. 2013, p. 653.
Farrell, Lisa. “A step in the right direction: regulation of debit card interchange fees in the Durbin Amendment.” Lewis & Clark Law Review Winter 2011: 1077-1106. LegalTrac. Web. 9 Oct. 2013, p. 1083.
Frequently Asked Questions, p. 3.
Commission Proposal, p. 4.
Commission Proposal, p. 4.
Case T-111/08 MasterCard, Inc. and Others v European Commission .
Commission Proposal, p. 4.
Frequently Asked Questions, p. 5.
Frequently Asked Questions, p. 1.
NACS v Board of Governors of The Federal Reserve System (D.D.C. Jul. 31, 2013) (Loislaw Federal District Court Opinions).
 See Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Pub. L. No. 111-203, 124 Stat. 1376-2223 (2010).
NACS v Board of Governors, pps. 1-2.
Frequently Asked Questions, p. 6.