The EU overregulation of Interchange Fees hurts the average card holder and consumers in Europe
Apr 16, 2014
Once again the EU Parliament has lost an opportunity to vote in defense of the European consumers. Last week the MEPs voted in favor of credit card payment fee caps, best known as interchange fees.This proposal had been previously endorsed, last February, by MEPs Pablo Zalba Bidegain (Vice-Chair of Committee on Economic and Monetary Affairs) and Diogo Feio both from the European People Party (EPP).
According to a press release by EU Parliament “The service or “interchange” fees that banks charge for processing transactions under schemes such as Visa and MasterCard, would be capped at 0.3% of the transaction value for credit card transactions and 7 euro cents, or 0.2% of the transaction value (whichever is lower), for debit card ones.” Now the proposal will be tabled to the Council of the European Union in order decide whether or not to adopt said legislation.
For those who are unaware of what interchange fees are, interchange fees are primarily transaction costs charged to card accepting merchants by companies (acquirers) that process card transactions. The recent trend by regulators has been to clamp down on interchange fees because they have been perceived to inflate costs for consumers. Therefore, in countries like Spain and Australia for instance, regulations were put in place to cap interchange fees in an effort to reduce costs for consumers. However, such regulatory reforms have instead overwhelmingly hurt consumers, especially card holders. Instead of seeing the prices at stores decrease (due to lower interchange fees), stores are predictably capitalizing on their increased profit margins. In fact, merchants in Australia are lobbying to further reduce interchange fees in order to further boost their profits.
As a result of regulations reducing interchange fees, card issuing banks have seen their profits diminish substantially and such profit losses are understandably coming at the expense of the card holders. Today, the consumers of Spain and Australia are seeing higher card holder fees, with decreased benefits (rewards). Neither of these outcomes benefits consumers. Additionally, banks and credit card companies often compete in order to attract individuals by offering benefits (or rewards for using the card). By inhibiting techniques that cardholder can employ to attract cardholders, regulators are interfering in the markets, distorting costs and hurting the very people that such overzealous regulations are meant to protect, the everyday consumer.
While in theory it would make sense that merchants pass on savings to consumers, as Evans, Chang and Joyce show in their study, this is rarely occurs in reality because it requires “perfect competition with constant unit costs.” Furthermore, Chang, Evans, and Joyce point out that because banks can decide how to distribute their costs, in a variety of fashions when they lose money due to lower interchange fees, banks can respond in a number of ways including reduced services, lower interest rates, etc. Looking at data provided by CRA International, Banking fees in Australia reflect the adverse effects of the Reserve Bank of Australia’s interchange fee regulations of 2003. For example, after interchange fee regulations, annual fees increased for standard rewards cards by 77 percent between 2001 and 2004, and by an 39 percent between 2002 and 2004. Additionally, over-limit-fees increased by 367 percent in between 2001 and 2004, and 115 percent between 2002 and 2004.
A 2013 study conducted by Europe Economics in collaboration with Professor Sheri Markose found that if the European Commission’s proposals on restricting interchange fees, it would have multiple adverse effects on the UK economy. For instance, if the UK were subjected to the Commission’s current proposals, card issuers would lose revenues up to £1 billion, cardholders fees would rise up to £.33 for debit cards and £17 for credit cards despite there being no reduction in prices for consumers at the store.
Simply put, the way to protect consumers is to let the free market correct itself. Merchants are free to decide whether or not to accept credit and debit cards. While some businesses choose to not accept credit cards (as is their right), merchants more often than not choose to accept credit and debit cards because it is more advantageous for their business. Accepting cards as a form of payment allows the merchants to increase the likelihood that consumers will purchase in their store (or purchase more). Therefore, merchants, despite the interchange fees, come out benefiting.
With little more then a month until the EU elections, scheduled between May 22nd and 25th of 2014, it is the hope of the Property Rights Alliance that such a poorly crafted proposal will be not adopted by the Council of European Union and modified by the new, hopefully more pro-free market, elected MEPs that will take office in July 2014.