Interchange Fee Regulation Impact Assessment Study JANUARY 2020 Interchange Fee Regulation Impact Assessment Study Release version 1.1 | April 2020 (minor typographical corrections applied) Tel: +44 207 283 1114 | Mail: [email protected] To subscribe to our newsletters, visit www.edgardunn.com/newsletter-signup © Edgar, Dunn & Company. All rights reserved. Contents 01 Executive Summary 1 06 Impact on acquirers and merchants 25 1.1 Introduction 2 6.1 Acquirers have partially passed through the 26 1.2 Objective of the IFR Study 2 interchange reduction to merchants post-IFR 1.3 Overview of findings – intended 2 6.2 Merchant acceptance of regulated cards has not 27 and unintended consequences increased as quickly as the acceptance of unregulated card brands such as Diners and American Express 1.4 There was significant growth in the number 2 of card transactions as consumers and merchants 6.3 The Study found no evidence of whether 28 adopted the convenience of contactless often merchant pass-through to consumers took place combined with self-service checkout. 6.4 There have been no additional benefits to markets 28 1.5 Issuers received reduced interchange and 3 with lower interchange than the capped rates in the IFR compensated by increasing the cost of payment products to consumers 07 Impact on competition 30 1.6 Acquirers have passed on a proportion of 3 7.1 Competition in the card issuing market 31 the interchange reduction, but this has largely benefited mega and large merchants 7.2 Competition in the acquiring market 32 1.7 Other market impacts observed 4 7.3 International versus domestic card scheme 32 competition has not changed due to the IFR 02 IFR Impact Assessment Study 5 7.4 Three-party versus four-party scheme competition 33 7.5 End-to-end network fees decreased 34 2.1 Introduction to the IFR Impact Assessment Study 6 on a per transaction basis 03 The Methodology 7 08 Other market impacts of the IFR and PSD2 35 3.1 Overview of the methodology 8 8.1 Investment in innovation 36 3.2 Financial modelling 8 8.2 Merchants are aware of the right to reject 36 3.3 Terms and Conditions analysis 13 commercial card products, but few 3.4 Consumer survey 13 chose to exercise this right 3.5 Merchant survey 13 8.3 The issuance of unregulated commercial 37 cards has not increased post-IFR 3.6 Issuer interviews 14 8.4 Consumers continue to experience surcharging 38 04 Macro changes in the European 15 and minimum spend limits on card cards market since 2014 transactions post-IFR and PSD2 8.5 The payer right to select payment 39 brand has had minimal impact 05 Impact on issuers and consumers 18 09 Appendix 41 5.1 Issuer interchange revenues 19 decreased significantly post-IFR 9.1 Card payment ecosystem revenues (2014-18) 42 5.2 Issuer revenues from consumers 21 increased in absolute terms post-IFR 5.3 Consumer choice of credit card products 22 diminished following the implementation of the IFR 5.4 Consumer cost of ownership of credit cards 22 has increased through increased interest charges and reduced value of loyalty programmes 5.5 Issuer revenues from credit cards has 22 decreased on a per transaction basis 5.6 Consumer choice in debit cards has diminished 23 since the implementation of the IFR 5.7 Loyalty programmes associated with current 23 accounts provide less benefit for the consumer 5.8 Issuer revenues from debit cards has 24 decreased on a per transaction basis Tables Figures Table 1 Total number of consumers surveyed per market 8 Figure 1 4-party model ecosystem revenues changes assessed 8 Table 2 Total number of merchants surveyed per market 8 Figure 2 Overview of the Study model: interchange, 9 network fees and revenues Table 3 Interchange model - market data and sources 9 Figure 3 Total number of consumer debit and 16 Table 4 Interchange model - channel data and sources 9 credit cards in EU28 (2014-18) Table 5 Revenue model – credit card market data (2014 and 2018) 10 Figure 4 Total number of debit and credit card 16 Table 6 Revenue model - debit card market data (2014 and 2018) 10 transactions in the EU28 (2014-18) Table 7 Revenue model - acquiring market data (2014 and 2018) 10 Figure 5 Total value of debit and credit card 16 Table 8 Issuing market and channel data sources 11 transactions in the EU28 (2014-18) Table 9 Acquiring market and channel data (2014 and 2018) 11 Figure 6 Debit and credit card ATV decreases 17 in the EU28 (2014-18) Table 10 Mastercard issuing network fee types 11 and drivers (2014 and 2018) Figure 7 Interchange reductions in EU28 (2014-18) 19 Table 11 Mastercard acquiring network fee types 12 Figure 8 Capped versus unchanged interchange scenario 19 and drivers (2014 and 2018) Figure 9 Distribution of credit card revenues Pre- and Post-IFR. 21 Table 12 Visa issuing network fee types and drivers (2014 and 2018) 12 Figure 10 Distribution of current account 21 Table 13 Visa acquiring network fee types and drivers (2014 and 2018) 12 revenues Pre- and Post-IFR. Table 14 Capped versus unchanged interchange scenario 20 Figure 11 Issuer revenue from credit cards (2014-18) 23 Table 15 Debit and credit card interchange 20 Figure 12 Issuer revenue from debit and 24 variance and delta (2014-18) current accounts (2014-18) Table 16 Issuer gross revenue vs. revenues from 21 Figure 13 Total acquirer revenues (2014-18) 26 consumers (2014 and 2018) Figure 14 MSC reductions in EU markets with 0.20% interchange 28 Table 17 Loyalty Programme types 22 on debit versus low interchange markets Table 18 Acquirer MSC revenues with and without transaction growth 27 Figure 15 POS devices deployed in EU markets with 0.20% 29 interchange on debit versus low interchange markets Table 19 Acceptance of major card brands 27 Figure 16 Number of debit cards per adult in EU markets with 0.20% 29 Table 20 Member states with lower interchange for 28 interchange on debit versus low interchange markets domestic consumer debit transactions Figure 17 Number of new EMIs registered by the 31 Table 21 End to end network fees (2014 and 2018) 34 European Banking Authority (EBA) Figure 18 Market share of the Domestic Schemes vs ICSs (2014-18) 32 Figure 19 Market share of the three- and four-party card schemes 33 based on number of card transactions (2015-18) Figure 20 Market share of three- and four-party 33 card scheme cards issued (2015-18) Figure 21 Merchants’ responses when asked if they exercise 36 their right to reject certain payment cards Figure 22 Number of commercial and consumer credit cards 37 Figure 23 Number of commercial and consumer credit card 37 transactions showing growth pre- and post-IFR Figure 24 Commercial and consumer card growth 38 at market level (2014 - 2018) Figure 25 The proportion of consumers that were offered to 39 override the merchant’s pre-selected application Figure 26 Proportion of merchants that have the ability 39 to pre-select payment application Figure 27 User-friendliness of using co-badged cards 40 where application selection was available Figure 28 Overview of card payment system 42 revenues in the EU28 (2014-18) 01 Executive Summary EXECUTIVE SUMMARY 1.1 It was expected that lower interchange fees, and thus costs to merchants, would see an increase in acceptance and usage of cards. The Study found Introduction that growth in acceptance for MasterCard and Visa has been the lowest The Interchange Fee Regulation (IFR) took effect on the 8th June 2015. A of all international card brands with growth in acceptance of less than 1 key element of the IFR was the imposition of capped rates for interchange 1%. While growth in acceptance has been low since the introduction of on consumer debit and credit cards, which took effect on 9th December the IFR the growth in card usage has been significant, which implies the 2015. The capped interchange rates are at 0.20% and 0.30% for debit and growth is driven by consumer preference. There is a strong correlation credit card transactions respectively. The capped rates are applicable to between the growth in contactless transactions and overall transaction POS and CNP transactions for domestic and intra-regional transactions growth. Contactless is primarily used for low value transactions as a within the EU28. Commercial cards and three-party schemes are not substitute for cash, which is reflected in the higher growth in debit card covered by the IFR and referred to as unregulated cards. transactions than credit card. The consumer preference for contactless is also reflected in the 15.1% shift in market share from the domestic The IFR also introduced new business rules and transparency requirements, debit card scheme in Italy, which was late in supporting contactless such as, the separation of scheme and processing and a prohibition on compared to the international card scheme branded cards. ‘honour-all-cards’ rules to cover unregulated cards. The business and transparency rules part of the IFR came into force 9th June 2016. The Study assessed network fees measured as the combination of scheme and processing fees for the international payment schemes. The With the transposition of the second Payment Service Directive (PSD2) Study found that while some fee adjustments have occurred the growth surcharging of cards with interchange capped by the IFR is not permitted. in the volume of transactions between 2014 and 2018 have resulted in a marginal decrease in the end-to-end per transaction network fee costs across issuers and acquirers in the EU28.