Interchange fees are a thorny issue at the best of times, and banks insisting on their necessity if innovation is to happen receive short shrift from consumers. Is there a happy medium? Wendy Atkins reports.
The row over interchange fees has escalated in recent years, with competition commissions, consumer groups and merchant organisations around the world all lining up to question the validity of the charges. But banks and card companies feel they are misunderstood and are continuing their fight to demonstrate why interchange is important for innovation.
The calls for reform are coming from every quarter. In Europe, the UK’s Office of Fair Trading (OFT), the Polish Office of Competition and Consumer Protection (OCCP), the European Commission (EC) and organisations in Spain, Switzerland and Scandinavia have probed banks as well as MasterCard and Visa. Beyond Europe, the challenges to the system are just as tough, with watchdogs in countries as far afield as Singapore, Mexico, Japan, New Zealand, Australia, the US and South Africa all examining the fees. “Very strong reforms initiated by the Reserve Bank of Australia have created more transparency, notably via benchmarks for the pricing of interchange fees,” says Christophe Uzureau, principal analyst, banking, at Gartner Industry Advisory Services. “And greater transparency in the setting of interchange rates has led to increased competition between acquirers.”
SEPA implications
The move towards the Single Euro Payments Area (SEPA) has focused even more attention on interchange, with cross-border interchange being targeted by the EC. However, as Mr Uzureau points out: “You have to be pragmatic. When you look at the European market, both MasterCard and Visa are important players for the SEPA. Disrupting the card networks too much could disrupt its progress.”
MasterCard agrees. In a statement issued earlier this year, it said: “Banks may hesitate to continue to invest in the SEPA while the EC debates what to do with interchange fees. While it still seems to believe that interchange fees should be reduced significantly, it is overlooking that zero or low interchange fee schemes are often based on price regulation, cross subsidisation or operating losses. Most importantly, these schemes do not deliver the competition throughout the value chain that the SEPA aims to achieve.”
Competition increase
The creation of the SEPA is driving consolidation of payment processors and the market anticipates a strong increase in competition. “The impact will be even greater pricing pressures on the payments market,” says Mr Uzureau. “Economies of scale will be achieved by consolidation, but competing on price will not be sufficient. Added-value services will become more important. The future will be much more about creative thinking in order to move payments up the value chain.”
Aneace Haddad, chairman of payment software firm Welcome Real Time, says: “The best way to protect and grow interchange is to make payment more valuable for merchants – offer them new payment features which excite them and [make them] feel they must have. Get merchants excited about the value of payment, rather than the cost of interchange. When they get more value out of new payment card features, they will actively encourage customers to use cards rather than cash or cheques.”
Peter Ayliffe, president and chief executive officer of Visa Europe, says: “Interchange is fundamental to the day-to-day functioning and future development of the electronic payment system. It encourages and enables banks to invest. It spurs the adoption of new and more secure technologies. Chip and PIN (an area where Europe leads the world and provides the rail tracks on which the SEPA will run) couldn’t have been implemented without the freedom to set differential interchange fees.”
IPO questions
Inevitably, there have been questions about what MasterCard’s IPO and Visa’s forthcoming IPO will mean for interchange. Mr Uzureau says: “The IPOs have introduced an even greater level of competition, forcing banks to be even more innovative and deliver value-added services. Visa’s forthcoming IPO will accelerate competition in these areas as both brands try even harder to dissociate themselves from each other.”
“I think the IPO and being independent gives us a lot more confidence that in fact it makes a difference – at least in the perception of setting interchange,” says Carl J Munson, senior vice-president and associate general counsel, law department, MasterCard Worldwide. “But we’ve always encouraged our members to use cost studies to take into account both cardholder and merchant needs. So the actual mechanics of setting the fees haven’t changed that much in many places.”
Ongoing debate
While the debate rumbles on, some fundamental questions need addressing. “The real question is, who’s going to set the interchange?” says Mr Munson. “Are the systems going to set the interchange, which is increasingly what we do? Are the banks going to set it? That still happens in some places. Or is the government going to set it, as in Australia? We obviously think it’s better if we set it, because we have no incentive to set it too high or too low.”
