Dgwb blog white borderI will stick my neck out and predict that consumers will not see any benefit from European interchange meddling. It’s the retailers’ shareholders who will be the winners.

Well, as expected, the EU’s “20/30” caps on debit and credit card interchange fees is going to go ahead

Fees to process debit and credit card transactions are to be capped under an EU law that attempts to wrap-up a protracted battle with payment groups such as Visa Europe and MasterCard.

[From EU caps debit and credit card transaction fees – FT.com]

I think this is the wrong approach, and so do people who known more about the topic than I do. For example, Marc Temmerman of Visa Europe. Marc is their Director of European Affairs and I have known him for many years. I’ve seen him talk many times, and I often used to sit in on his seminars on the European regulatory environment at the Bank Card Business School. He’s a great guy and he knows his subject very well indeed. So I take him completely seriously when he says that the EU’s meddling in the European card market is not going to end well.

While the reduction of interchange fees are likely to make card payments cheaper for retailers, the burden of paying for the issuing bank’s card payments infrastructure and investments in innovation will fall on the consumer.

[From EU payments regulation: unintended consequences – costs | European Voice]

You might want to listen to podcast that I recorded with Jan-Olof Brunila from Swedbank on this topic a few weeks ago. Transferring private costs from one party to another is not, in itself, a useful improvement to the operation of a market. What is a useful improvement is more competition, which is why I have consistently argued that the Commission should focus on making it easier for new entrants in the payment space by, for example, regulating for lighter touch CDD for low-value payment accounts, and letting the market sort itself out. But the retailers are smart, banks are unpopular and regulatory capture was in the circumstances predictable. It’s hardly the law of unintended consequence at work here. On the contrary, it’s the law of entirely predictable consequences.

Two-and-a-half years after the Durbin Amendment’s implementation the evidence is in: According to a new study we authored for the International Center for Law and Economics, we found that consumers are paying more and getting less as a result of the Durbin Amendment, and that low-income consumers have suffered the most.

[From How To Help The Unbanked? Repeal The Durbin Amendment]

The retailers will reap a windfall profit (which they will keep), card use will fall and the efficiency of the European payments market will decrease. Marc also wrote that

This is why Visa Europe is calling on the European Commission to encourage alternatives to cash when reforming the payments landscape.

[From EU payments regulation: unintended consequences – shadow economy | European Voice]

I could not agree more with this position. If the Commission does want to regulate the market to improve the lot of the average European, then it should regulate to reduce the overall total social costs of payments and this will mean encouraging more efficient electronic payment mechanisms instead of cash and cheques. Reducing banks’ income from the interchange on debit cards in particular will not contribute to this because it means that they will have to charge for debit card use. Since debit cards have the lowest overall total social cost, the Commission should be doing all it can  to encourage their use and to encourage the development of even lower cost alternatives. If we should be charging consumers for the use of any payment mechanism it is cash.


  1. “While the reduction of interchange fees are likely to make card payments cheaper for retailers, the burden of paying for the issuing bank’s card payments infrastructure and investments in innovation will fall on the consumer.”

    Yes, as it should if there is to be a well functioning market.

    If a retailer wish to accept card payment, he has little choice but to accept Visa & MasterCard and has little or not say in the cost.

    A consumer on the other hand can choose from many different payment products, assess which is worth the price, and change with little effort if the value for price doesn’t make sense.

    While it is rather perverse to think government price control can result in a better make, the 4-party payment scheme is rather perverse.

  2. This is nothing more than a puff piece for the benefit of Consult Hyperion’s Visa paymasters.

    Visa’s idea of competition is a 97% market share of debit in the UK, and a ridiculous HACR that compels merchants to accept all Visa cards from all issuers from all regions without being able to identify upfront what these cards will cost to accept.

    Funny thing is, why does interchange vary so much from market to market, continent to continent, by card type, by capture method, by channel, by authentication method, by industry? How can this be explained… [waves finger forlornly in the air].

    Besides, Visa wouldn’t recognise a customer if said customer were to sidle up and flick it in the face with their Visa Classic card. Behold, for example, the wonderful customer experience that is 3DS VbV, the EMV debacle currently underway in the US, and the personal and emotional costs imposed on individual customers by card fraud.

    Finally, you have misunderstood and misapplied the concept of “regulatory capture”. MasterCard and Visa have been getting away with this anticompetitive behaviour for decades. So, their regulators have truly been sleeping on the job. Gamekeeper turned poacher, or at least giving the poacher free reign. That’s what you really meant by ‘regulatory capture’.

    1. The solution to a lack of competition, if that is the problem, is more competition and not arbitrary and capricious price-fixing. And just to be clear, our paymasters include Amex and Discover, who are not affected by the 20/30 cap anyway.

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