European Commission proposes credit and debit card fee cap

It has drafted a new Multilateral Interchange Fees (MIF) Regulation (33-page / 428KB PDF) which, when combined with a revised version of the Payment Services Directive (PSD II), would cap interchange fees for consumer credit cards at 0.3% of the value of the transaction and for consumer debit cards at 0.2% of the transaction value. Taken together, the proposals would also limit the application of any 'Honour All Cards' rules and ban surcharges for the use of cards subject to regulated interchange fees. These surcharges are often imposed on customers by retailers for the purchase of airline tickets, for example.

The Commission said that the proposals would save retailers €4.5 billion in charges, which it said would ultimately be passed on to consumers.

"The interchange fees paid by retailers end up on consumers' bills," said Competition Commissioner Joaquin Almunia. "Not only are consumers generally unaware of this, they are even encouraged through reward systems to use the cards that provide their banks with the highest revenues. Complementing the enforcement of antitrust rules, the regulation capping interchange fees will prevent excessive levels of these fees across the board."

MIFs, or inter-bank fees, are payments between an 'acquiring' bank (the bank of the retailer, or its payment processor) and the issuing bank (the bank of the customer) in the context of a 'four party' card scheme. The MIFs form part of the cost to retailers of accepting payment by means of a debit or credit card. The Commission said that the level of interchange fees "varies widely" across the EU, maintaining that "they do not have a clear justification".

The new caps would apply to the most common 'four-party' card schemes, such as those operated by MasterCard and Visa. They would also apply to those 'three-party' card schemes that use third parties as issuers, including Diner's cards and around 9% of American Express cards. Retailers will be able to apply surcharges to customers for the use of cards that are not subject to the caps, such as commercial cards issued to businesses and those 'three-party' cards that do not use interchange fees, however these surcharges must not exceed the costs incurred.

Businesses are already prevented from charging customers fees for using a particular payment method that are higher than what it costs them to accept that particular payment method. This ban is set out in the Consumer Rights Directive and implemented in the UK by the Payment Surcharge Regulations.

The Commission said that the cap levels were "based on an estimate of the fee at which a merchant would be indifferent between being paid by card or in cash". As the cap proposed for credit card transactions is lower than the interchange fee levels applying in every member state, it argued that the change would likely have a "significant" impact on the number of customers using credit cards, particularly in countries like Germany where these fees are particularly high.

The change is likely to have less of an impact on the debit card market, where fees are already below the proposed cap in several member states, the Commission said. In the UK, current debit card MIFs are around 0.25%-0.26%, meaning that the change would lead to a reduction in costs to retailers by approximately one fifth, it said.

Despite the Commission's figures, competition law expert Alan Davis said that it was far from clear that any savings would be passed on to consumers and "it was difficult to see how this could ever be measured or proven".

The new rules would apply to cross-border transactions only for a transition period of 22 months, after which the caps would also apply to domestic transactions according to the Commission's proposal. The plans must now be approved by the European Parliament and member states, and the Commission said that it hoped work would begin "as soon as possible after the summer".