Unregulated fees continue to soar as interchange fee regulation remains unaltered

The European Commission has released its findings on the Interchange Fee Regulation (IFR) review, summarising: “Given the positive impact of the IFR and the need for more time to see the full effects of the regulation, the report is not accompanied by a revision legislative proposal.” This lack of revision will come as a disappointment for the merchant community who have actively campaigned for flaws in the directive to be reviewed – which subsequently are significantly impacting merchants’ costs.

The intention of the IFR, when it was introduced back in 2015, was to lower the prices for everyone by sustainably addressing the hidden fees imposed on retailers for accepting payment cards. While this was a success and saw merchants benefit from the IFR’s reduced interchange rates, ever-increasing scheme fees have continued to erode a significant chunk of that benefit, with cards outside of the regulation – such as commercial cards – continuing to grow in volume and also increase costs for merchants.

Many believe the IFR review, which was published on 11th March 2020 by Ernst & Young and Copenhagen Economics, was based on a suboptimal methodology focused heavily on unreliable and outdated survey data and therefore didn’t accurately represent the overall effectiveness of the IFR.

Soaring card fees

Due to the lack of regulation, card schemes have been able to absorb much of the savings benefits of the IFR through introducing higher scheme fees. Nonetheless, the review suggested scheme fees hadn’t increased enough to warrant being included in the regulation at this stage. However, the methodology the review used only covered a two-year period between 2015 – 2017, and out of the 10 scheme fee increases which have taken place since 2015, only two falls within this time (Figure 1).

As the review didn’t acknowledge these additional increases, EY and Copenhagen estimated the increase in scheme fees had cost merchants €280 million, whereas CMSPI estimates the true cost of scheme increases to total around €791 million.

Additionally, while the regulation saw interchange fees reduce by €2.7 billion, the overall Merchant Service Charge (MSC) reduced by just €1.2 billion for merchants.

Due to acquirers interpreting the unbundling clause – which mandated all invoices were interchange pass-through, as opposed to bundled – as being opt-in, rather than opt-out, they have had opportunity to absorb a large portion of the IFR’s savings. In fact, acquirers saw revenues rise by over €1.2 billion following the regulation. These numbers suggest an acquirer absorption rate of 50% of the intended savings for merchants and consumers, and many member states and the European Commission do not police this regulation.

Another area in which merchants are losing out significantly, due to not being regulated, is the rise of commercial card transactions – the report highlighted a significant increase of 12%. On average, commercial card interchange is around five times the amount of consumer card interchange, and while the interchange fee associated with commercial cards may not have increased, higher commercial card usage increases the cost of acceptance for merchants. As commercial card spend continues to rise, merchants will inevitably see increases in the cost of accepting payments eroding more of the savings introduced by the IFR over time. CMSPI estimates capping commercial card interchange could save European merchants a further €3.4 billion annually.

Ultimately, at CMSPI we would like to see both interchange and scheme fees being brought under control, either via further caps or competition from co-badging. However, this is unlikely to change anytime soon and therefore, in the short term, merchants should look to protect their bottom lines by thoroughly auditing and scrutinising every fee to keep costs low.

An article written by Callum Godwin, Chief Economist at CMSPI