National Bank of Poland Payment Systems Department
Analysis of the functioning of the interchange fee in cashless transactions on the Polish market
Warsaw, January 2012
TABLE OF CONTENTS
Introduction ...... 4
Chapter 1. Description of the payment card market ...... 6 1.1. Types of payment cards ...... 6 1.2. Payment card systems ...... 7 1.2.1. Types of systems and business models ...... 7 1.2.2. Examples of schemes ...... 10 1.3. Importance of the payment card market for its participants and the development of cashless transactions ...... 11
Chapter 2. The development of the payment card market in Poland compared to other countries ...... 17 2.1. Selected indicators of the development of the Polish payment card market ...... 17 2.2. Selected indicators of the development of the payment card market - Poland against other EU countries ...... 22
Chapter 3. Factors determining the development of the payment card market in Poland ...... 26 3.1. SEPA ...... 26 3.2. Payment services directive ...... 29 3.3. Act on Payment Services ...... 30 3.4. Payment card organisations in Poland ...... 31 3.4.1. “Visa cards accepted everywhere” programme ...... 31 3.4.2. „Innovation for Poland” programme...... 32 3.5. Interchange fee policy of the European Commission and European Central Bank .32 3.5.1. European Commission's Action ...... 32 3.5.2. Activities of the European Central Bank ...... 38
Chapter 4. Description of the interchange fee ...... 42 4.1. Definition of the interchange fee ...... 42 4.2. Outline of fees on the payment card market ...... 43 4.3. Justification for the introduction of interchange fee from the point of view of payment organisations ...... 45 4.4. Economic concepts concerning the payment card market ...... 46
Chapter 5. Level of interchange fees and other fees charged in the Polish market .....49 5.1. Rates of interchange fees in the Visa system ...... 49 5.1.1. Cross-border fees ...... 49 5.1.2. Domestic rates ...... 51 5.2. Rates of interchange fees in MasterCard system ...... 54 5.2.1. Cross-border fees ...... 54 5.2.2. Domestic fees ...... 56 5.3. Comparison of interchange fees of Visa and MasterCard in the European market .59 5.4. Comparison of Visa and MasterCard interchange fees in the Polish market ...... 61 5.5. Rates of merchant service charges in the Polish market ...... 64 5.6. Other fees determining the level of the merchant service charge ...... 65
2 Chapter 6. Overview of interchange fee in Poland ...... 67 6.1. Decision of the Office of Competition and Consumer Protection...... 67 6.2. NBP Report on interchange fee in 2007 ...... 69 6.3. Programme for the Development of Cashless Transactions in Poland in 2011-2013 ...... 71 6.4. Parliamentary work related to the Act on Payment Services ...... 74 6.5. Activities of the Payment System Council at the NBP and establishment of the Interchange Fee Task Force ...... 80
Chapter 7. Examples of countries which introduced changes to the level or manner of setting the interchange fee ...... 82 7.1. Hungary ...... 82 7.2. Spain ...... 84 7.3. Australia ...... 86 7.4. United States ...... 89
Chapter 8. Scenarios for the development of the payment card market in Poland in the context of reduced interchange fee rates ...... 92 8.1. Forecast for the growth in the value of cashless transactions in Poland ...... 92 8.2. Example of a simulation of banks' income when the level of interchange fees is reduced ...... 94 8.3. Interchange fee reduction - scenario analysis...... 97
Conclusions ...... 101
3
Introduction
Payment card market in Poland has been growing rapidly for more than a dozen years. Consumers use their cards more and more often to pay for goods and services, including low- value payments, which until now were dominated by cash. The number of retailers that accept credit cards on the domestic market is also rising steadily. The development of this market is determined by many factors. One of them is the cost of accepting payment cards. This issue was clearly highlighted for the first time on the Polish market in the proceedings carried out by the Office of Competition and Consumer Protection (OCCP) at the request of the Polish Trade and Distribution Organisation with regard to the application of competition restricting practices, consisting in the conclusion of pricing agreements and setting the interchange fee, an essential component of the merchant's fee, jointly by banks associated in Visa and MasterCard card issuers association. The decision made by the President of the OCCP on 29 December 2006 recognised the practice consisting in banks' participation in the agreement restricting competition in the market for acquiring services through joint determination of the interchange rates as a practice restricting competition and prohibited its use. This dispute, following an appeal by banks and organisations, has not been resolved until today, however the problem of high merchant fees remains. Dissatisfaction among merchants because of the fees increased when the requirement to publish interchange rates had been imposed on payment organisations. It was also reflected during parliamentary debates on the act on payment services. Large retailer associations demanded that changes be made to the act which - in the opinion of the NBP - could restrict the development of cashless transactions in Poland. The Payment Systems Department, fulfilling such basic functions of the National Bank of Poland as the organisation of monetary clearing (pursuant to Article 3(2)(1) of the Act on the National Bank of Poland of 29 August 1997 - Journal of Laws of 2005 No. 1, item 2, as amended), oversight of payment systems in Poland (in accordance with the Act of 24 August 2001 on Settlement Finality in Payment and Securities Settlement Systems and the Rules of Oversight of these Systems - Journal of Laws No. 123 item, 1351, as amended) and oversight of authorisation and clearing systems operated by acquirers other than banks (in accordance with the Act on Electronic Payment Instruments of 12 September 2002 - Journal of Laws No. 169, item 1385, as amended), prepared a report presenting an analysis of the interchange fee functioning for cashless transactions in the market of payment cards in Poland against other European Union countries.
4 The results of two surveys conducted among two groups of entities operating on the Polish market constitute an important element of the report. The first survey was addressed to payment organisations, while the second one was addressed to seven largest acquirers with a 99% share in the payment card market in terms of the number and value of transactions. The survey (project, survey questionnaire, data collection and analysis) was prepared by the NBP. Some data obtained in the survey is protected by business secret clauses. Therefore, despite the fact that extensive statistical data were collected, the report contains only the analysis of selected issues. The main purpose of the report was to diagnose the payment card market in Poland in the context of issues related to interchange fee, with particular emphasis on the role and place of this fee in the Polish system of payment cards, rates and fee amount in comparison with other countries as well as identification of possible courses of action aimed at accelerating the development of the payment card market in Poland. It is not the purpose of the report to propose specific solutions to the interchange fee problem in Poland because it is the task of a separate Interchange Fee Task Force established in October 2011 at the Payment System Council, a consultative and advisory body to the NBP Management Board. However, the Payment Systems Department of NBP hopes that this report will contribute to the introduction of changes in the payment card market which will have a beneficial effect on its further development.
5 Chapter 1 Description of the payment card market
Payment cards enjoy a great and constantly growing popularity. During several decades of their functioning, they underwent significant transformations, from cards issued in the form of metal plates with customer data (in the early twentieth century) to the currently offered multifunction smart cards or virtual cards (with no material form, in the form of a string of digits used in the banks' ICT systems). This chapter presents the classification of cards, business models and main systems operating in the card market, as well as the significance of the card market for its participants and for the development of cashless transactions.
1.1. Types of payment cards
Currently there are many types of payment cards in the market, primarily owing to the dynamic development of modern technologies and the financial services market. These instruments can be classified in accordance with several criteria. From the perspective of the method of transaction settlement, cards can be divided into debit, charge and credit cards. A debit card is a payment instrument that allows to execute transactions only up to the amount of funds available in the account. A credit card allows to execute transactions resulting in credit which is repaid in accordance with the terms agreed with the bank. A charge card offers a deferred payment deadline and the resulting liability is to be repaid in full at the end of settlement period, usually once a month. In addition, a prepaid card can be distinguished which can be used only if the account to which the card is assigned is previously supplied with funds. Another criterion for the card breakdown is their function. In this context ATM cards, payment-only cards and payment cards with an ATM cash withdrawal function may be distinguished. Currently, payment cards with cash withdrawal function are the world's most widely used cards, while cards equipped with only one of these functions (ATM cards, payment cards without cash withdrawal function) play a marginal role. Taking into account the technology of data recording, payment cards can be grouped into cards with a magnetic stripe, smart cards, hybrid cards (equipped with both magnetic stripe and chip) and virtual cards. The migration of cards to EMV smart cards standard which has become common in recent years, particularly in Europe, results from adjustments of the
6 banking sector and payment services to the requirements of the SEPA (Single Euro Payments Area) project. The principle of liability shift was made an element supporting the above mentioned process of technological changes.1 When speaking of the method of card's contact with the card reader, smart cards, contactless (proximity) cards and cards equipped with both technologies may be distinguished. It should be noted that payment instruments with the contactless feature only usually take an alternative form of payment cards. These can be items or gadgets equipped with a chip and an antenna such as key rings, watches or phones with a small-sized card placed under the telephone cover. Due to their unusual shapes and sizes alternative forms of payment cards: (1) can now be used only for making payments in points of sale equipped with proximity card readers, which may pose a certain limitation for users due to the moderate albeit rapidly and systematically growing network of terminals with the proximity function; (2) may not be used for cash withdrawals in ATMs. However, there are no technical obstacles to using the gadgets for the cash back service. Payment organisations are currently testing this solution. Another criterion for the breakdown of cards is the card functioning mode at the time of making a payment by the customer. These may be cards that function on-line and off- line mode. The first solution has been functioning globally for many years on a wide scale, while the second solution is much less popular. It can be used in contactless, low-value transactions that do not require a confirmation of the transaction with PIN.2 Currently issued payment cards can be equipped with many functions. For instance, the following payment instruments that are available in banks' offer may be listed: chip contactless credit card, prepaid card with a magnetic stripe or, less commonly, a combination of a debit and credit function in one card. A wide variety of payment cards reflects their rapid and continuous development.
1.2. Payment card systems
1.2.1. Types of systems and business models
Payment cards are issued under payment card schemes. These schemes form the
1 SEPA Cards Framework, European Payment Council, 16 December 2009, p. 16-17; More in: M. Polasik, K. Maciejewski, Innowacyjne usługi płatnicze w Polsce i na świecie, Materiały i Studia, No. 241, National Bank of Poland, Warsaw 2009, p. 31. 2 In Poland, such transactions are below PLN 50. 3 2 In W.Poland, Chmielarz, such transactions Systemy elektronicznej are below PLN bankowości 50. , Difin, Warsaw 2005, p. 104. 4 T. Kokkola, The payment system, European Central Bank, 2010, p. 56.
7 payment card market and constitute an essential pillar of the market for payment services in developed economies. Due to its specific nature involving the use and continuous development of a complex ICT infrastructure, the payment card market is one of the most innovative areas of the payment services market.3
The participants of the payment card market usually include:
• Consumers – card holders making card payments for goods or services in certain retail trade and service outlets,
• Merchants - retailers receiving payment for goods or services effected with the use of payment cards,
• Acquirers - clearing centres (banks or non-bank entities) which have signed agreements with merchants on accepting payments with the use of payment cards. An acquirer also settles transactions between card issuers and merchants.
• Issuers of payment cards - entities (mostly banks) issuing payment cards to card holders,
• Payment card organisations - embrace card issuers (e.g. as members or customers) who issue cards with the logo of the organisation, provide the technical infrastructure to enable immediate authorisation of transactions, set the rules for accepting and clearing cards, elaborate and develop standards for payment cards as well as services and products related to payment cards, implement and develop payment card technologies, advertise and promote the brand of their products among card holders and merchants.
There are two main business models for payment cards: three-party schemes (closed) and four-party schemes (open).4 They are presented in figure 1 below. In addition, there are also two-party schemes which, however, play a marginal role in the market for payment services.
3 W. Chmielarz, Systemy elektronicznej bankowości, Difin, Warsaw 2005, p. 104. 4 T. Kokkola, The payment system, European Central Bank, 2010, p. 56.
8 Figure 1. Business models for payment cards Four-party scheme Three-party scheme
Payment Payment organisation / organisation issuer and acquirer
Customer / Issuer Acquirer Merchant Card holder
Customer / Merchant Card holder
Source: Own study.
Two-party payment card schemes are the simplest form of cooperation between the entities forming a payment system. Under this system, payments made by consumers are accepted only by the card issuer, for instance a network of retailers such as supermarket chain and its subsidiaries, with the network of retailers also processing and clearing transactions.5
A three-party payment card system refers to the interdependence between three groups of entities: consumers (card holders), merchants, and the central institution (bank or payment organisation) which also performs two functions: that of the issuer and the acquirer.6 The latter, in addition to technical aspects of card issuance and transaction processing, also determines the conditions for issuing and accepting cards. Examples of three-party systems include systems organised in many countries by Diners Club and American Express.
The most developed card payment systems operate under the four-party payment model involving four groups of entities: consumers, merchants, card issuers and clearing centres. In this model the issuing and clearing functions may be performed by separate, independent entities (issuing bank and acquirer). Four-party payment card systems are operated in particular by VISA and MasterCard organisations.
Four-party model differs from other models (two- and three-party models) in that it separates the function of the card issuer and acquirer and charges the interchange fee.
5 Benefits of Open Payment Systems and the Role of Interchange, MasterCard, 2008, p. 2-4. 6 Report on Interchange fee, National Bank of Poland, Warsaw, 2007, p. 9.
9 With regard to the range of operations, the following three types of payment card systems can be distinguished: local, national and international. Local systems operate as part of one or more banks in a limited geographical area, such as a small chain of stores located in one or several cities. A national payment card system represents a more developed infrastructure. It includes processing of transactions in a particular country where payment cards accepted by retail outlets may be those issued under domestic and international payment systems. On the other hand, international payment card systems process transactions around the world, regardless of the country in which cards were issued. Due to the fact that the development of the infrastructure and card acceptance network on a global scale is a costly and lengthy process, there are only several international card schemes.
1.2.2. Examples of schemes
There are many payment card schemes around the world. The best known international systems include: VISA, MasterCard, Amex (American Express), Diners Club, JCB (Japan Credit Bureau) and China UnionPay. All the above mentioned systems, except for JCB and China UnionPay, have their origins in the U.S. market. The largest payment card organisations in the world are VISA7 and MasterCard.8 VISA operates as an association of card issuers. Within this organisation there are decision-making structures at the national level in Poland, i.e. Visa Forum Polska. The Forum comprises representatives of issuing banks and acquirers, with the voting right available only to card issuers and the number of votes available depends on the number of cards issued or the value of card transactions handled by a given system. MasterCard operates as a joint-stock company listed on the stock exchange and it groups together issuers who are both its shareholders and customers. All decisions concerning the Polish market are made solely by MasterCard.9
The organisations that play a lesser role in the global payment card market are Diners Club, Amex and JCB. They operate in the form of clubs and issue mostly T&E (Travel and
7 More on the history of the Visa organisation in: Visa Inc. Corporate Overview, http://corporate.visa.com/_media/visa-corporate-overview.pdf (December 2011); History of Visa, http://corporate.visa.com/about-visa/our-business/history-of-visa.shtml (December 2011). 8 More on the history of the MasterCard organisation in: Corporate Overview, http://www.mastercard.com/us/company/en/docs/CorporateOverview_FINAL.pdf (December 2011); The MasterCard Story, http://www.mastercard.com/us/company/en/ourcompany/the_mastercard_story.html (December 2011). 9 Until 2008 the Forum of MasterCard Member Banks operated which constituted a decision-making structure for Poland, however it was dissolved when MasterCard became a listed company.
10 Entertainment) cards. The average value of transactions executed with cards of these organisations is clearly higher than in the case of Visa and MasterCard cards. Currently, Diners Club Polska, member of Diners Club International, deals with Diners Club cards on the Polish market. American Express is a publicly listed company. In Poland, Amex cards are accepted at most retail and service outlets equipped with payment terminals. JCB organisation has its roots in Japan where it has had a predominant position for many years. Cards of this organisation are issued and accepted also on international markets. JCB cards are, as in the case of Amex cards, widely accepted on the Polish market, however they are not issued in Poland. By contrast, China UnionPay cards may be used in the Polish market in ATMs of Citibank Handlowy.
There are many payment card schemes with a local reach. The most popular include: Dankort (Denmark), Carte Bleue and Cartes Bancaires (France), BankAxept (Norway), Geldkarte (Germany), Chipknip and PIN (the Netherlands).
1.3. Importance of the payment card market for its participants and the development of cashless transactions
Payment cards offer many benefits to the participants of the payment services market.10 They compete not only against cash but also against other payment instruments such as credit transfers, direct debits and cheques.
Benefits for consumers (users of payment cards);11
- Payment card users have a continuous and extensive access to cash, both at home and abroad. Using the card they can make purchases at retail and service outlets equipped with POS terminals (regardless of the amount of cash possessed) and can obtain cash at ATMs anywhere in the world where cards of a particular card issuing organisation are accepted. An important advantage of payment cards is the possibility of making purchases via the Internet (in Poland and abroad) which have become increasingly popular for several years. The card user can make a purchase at a
10 More information on various benefits for each party of the payment card system can be found in: T. J. Zywicki, The economics of Payment Card Interchange Fees and the Limits of Regulation, International Center for Law and Economics, ICLE Financial Regulatory Program White Paper Series, June 2010. 11 R. J. Keating, Credit Cards and Small Business: The Benefits, Opportunities and Policy Debate, The Small Business & Entrepreneurship Council’s Small Business Policy Series, Analysis 34, March 2009, p. 9-10.
11 distance, without leaving home.
- Payment organisations and issuing banks have developed financially attractive terms and conditions of using payment cards for individual customers. Card holders generally do not pay any fees for executing cashless transactions.12 However, they may have to pay fixed charges related to issuing or possessing a card. More and more banks in the Polish market offer reward or loyalty schemes for card holders, encouraging them to execute a large number of card transactions in retail and service outlets. By participating in such initiatives customers may, in addition to being exempted from charges for possessing the card, count on having a portion of expenses on shopping made with the use of the card13 refunded or receiving discounts at selected retailers (e.g. Payback).
- Payment cards offer higher security than cash. When the wallet with cash is stolen, the cash may come into the thief’s possession without any obstacles, while access to cash with the use of a payment card requires, apart from the possession of the card, the knowledge of the PIN.
- The advantage of payment cards over cash and bank transfers in respect of the security of the transaction is also reflected in the chargeback used in the international payment card systems. Chargeback consists in refunding card payments to customers under the claim procedure when no purchase of goods or services was made.14
- Making payments with the use of a payment card is easier. This means a higher level of comfort for the user of this instrument. There is no need to search for and count cash (banknotes, coins). On the customer's side, this process is reduced to handing the card over to the retailer and entering the PIN on the payment terminal or signing the terminal printout. In the case of a proximity card the process is even more convenient and faster, since the user only places the card in front of the reader at a several centimetres distance and the transaction is executed, without having to hand the card
12 There is indeed a phenomenon of a surcharge in the world, i.e. the merchant charges the customer for a commission on a card transaction. However this solution is not widely used. More information on the impact of the surcharge on consumer behaviour in the domestic market using the Netherlands as an example: W. Bolt, N. Jonker, C. Van Renselaar, Incentives at the Counte: An empirical analysis of surcharging card payments and payment behaviour in the Netherlands, DNB Working Paper No. 196, December 2008. 13 Even up to 5% of the transaction value, i.e. at the level exceeding the value of the interchange fee, more information in: R. Grzyb, Na konto nie wróci więcej niż 2 proc., Dziennik Gazeta Prawna, 23-08-2011. 14 More information can be found in: M. Polasik, K. Maciejewski, Innowacyjne usługi płatnicze w Polsce i na świecie, Materiały i Studia, No. 241, Narodowy Bank Polski, Warsaw 2009, p. 55.
12 over to the retailer or entering the PIN15, in just a few seconds16.
- The use of payment cards gives the user a greater control over the expenses incurred. Consumers may examine and analyse their transactions not only on the slips received at the cash desk but also in the bank account (assigned to the card).
Benefits for retailers (merchants):
- By accepting payment cards retailers may have a higher turnover for several reasons. The customers' access to additional funds (especially in the case of credit card users) promotes the growth of customers' total spending. In addition, by accepting cards retailers have the opportunity to participate in loyalty programs or co-branding projects and thus to expand the offer to customers and make it more attractive.
- Acceptance by retailers of payment methods that are convenient for customers, i.e. payment cards, increases customer satisfaction. This results in strengthening the customer – retailer relationship, perceiving the retailer as a modern company, who cares for the interests of the customer, and consequently leads to revenue growth.
- The increase in payment card acceptance also reduces the number of fraud transactions executed with counterfeit banknotes. The correctness of card transactions is guaranteed by the acquirer who is controlled by supervisory authorities (e.g. the central bank).
- In the case of payments made with the contactless card, a shorter transaction execution time than in the case of cash payment or another type of a payment card is beneficial not only for the consumer but also for the merchant who is able to manage the line of cash more effectively and limit queues (POS terminals accepting proximity cards can generate approximately 10% more transactions than other terminals).17
Benefits for card issuers:
- Issuance of payment cards to customers allows banks to increase revenues from many sources, e.g. from the interchange fee (on each transaction paid out by the
15 For low-amount transactions, in Poland up to PLN 50. 16 If the transaction is executed off-line, i.e. without having to connect to the authorisation centre. 17 M. Polasik, E. Starogarska, Polski rynek płatności zbliżeniowych – rok 2011, Wydawnictwo – Transakcyjność – Innowacje, Polasik Research, Toruń 2011.
13 acquirer) and fees for card issuance (one-off fee paid by the customer) or for the use of the card (fee charged to the customer periodically, usually every month). Owing to such a structure of revenues in the area of payment cards, the increased use of payment cards by customers results in higher revenues for banks. Moreover, banks may increase their revenues by cross-selling other products and services to credit card holders.
- Banks can also enhance their image and position by participating in new market segments, e.g. promoting the use of payment cards in the areas of the economy until now dominated by cash (public transportation, mass events), by issuing proximity cards. Such actions also contribute to the growth of issuing banks’ revenues.
- Offering payment cards to customers reduces queues and customer service costs in banks' branches. Owing to the provision of ATMs to customers, the number of cash register transactions has decreased and employees of banks' branches can perform operations that are more profitable for the bank than the cash pay out (e.g. lending, advisory services).
Benefits for acquirers:
The most important benefit for acquirers is generation of revenues as operations of these entities are oriented to making profit from processing transactions executed with payment cards. The acquirer generates revenues from fees for the lease of the terminal and from commissions on transactions. Due to the increasing competition in the area of payment card acceptance, acquirers compensate for declining margins by intensively developing the acceptance network. This enables them to increase revenues or at least to maintain them at the current level.
Benefits for the public sector and the economy:
- The growth of cashless transactions, associated with the development of payment cards, brings significant benefits to the state. It contributes to the reduction of the costs of cash issuing and handling. Cashless forms of money, as opposed to cash, are not subject to damage, do not need to be manufactured, transported, counted or physically stored. The costs of cash issuing and handling are significant. According to the existing estimates, they can amount to as much as approximately
14 1% of GDP.18
- Wider popularity of electronic payments in a particular country facilitates the economic growth in this country.19
- One of the main objectives of cashless transactions promotion by the public sector is an attempt to reduce the “grey zone” in the economy and to combat money laundering.20 The results of analyses showed that the growth of electronic payments contributes significantly to the reduction of the size of the shadow economy.21 In 2005, the “grey area” in Poland reached the level of 29% of GDP, while in 2009 it accounted for 26% of GDP. In terms of the value, the unofficial economy in our country reached the value of EUR 70.1 billion (with GDP of EUR 244 billion) and in 2009 - EUR 80 billion (with GDP of EUR 310 billion). Therefore, even a partial reduction of the shadow economy is of great importance to the state budget revenues.
- The cashless turnover also allows to reduce operating costs of the public sector. An example of the benefits achieved by the public sector owing to the popularisation of cashless transactions include, for instance, a reduction in the high costs of retirement and disability benefits cash payments by increasing the range of various types of benefits paid by the Social Insurance Institution to beneficiaries' bank account or the distribution of benefits as part of the social assistance in the form of cards.22
- It should also be noted that the popularisation of cashless transactions, particularly in retail trade, may contribute to the reduction in the costs of Poland's entry to the euro area related to the production of banknotes and coins and costs to be borne by the private sector.
The use of payment cards does not only generate benefits for the participants but also
18 Obrót bezgotówkowy. Zalety i wady wynikające z jego upowszechnienia, NBP, Warsaw, 2008, p. 17. 19 The Virtuous Circle: Electronic Payments and Economic Growth, Visa International, Global Insight Inc., p. 4-5; M. Zandi, V. Singh, The Impact of Electronic Payments on Economic Growth, Moody's Analytics, March 2010, p. 7. 20 H. Brits, C. Winder, Payments are no free lunch, Occasional Studies, Vol. 3, Nr 2, 2005, De Nederlandsche Bank, p. 32-33. 21 AT Kearney and F. Schneider, The shadow economy in Europe. Using electronic payment systems to combat the shadow economy, Visa Europe, 2009, p. 8; AT Kearney and F. Schneider, The Shadow Economy in Europe, 2010. Using electronic payment systems to combat the shadow economy, Visa Europe 2011, p. 7-8. 22 Obrót bezgotówkowy. Zalety i wady wynikające z jego upowszechnienia, NBP, Warszawa 2008, p. 20-23.
15 produce costs, with costs of one group of the payment card system participants constituting, at the same time, benefits for another group of participants of the system in many cases. Selected cost-related issues are addressed later in this paper.
Although cash transactions dominate in many economies in the world payment cards have been an alternative to banknotes and coins for many years, mainly in transactions executed in retail and service outlets. The importance of payment cards has been increasing steadily. They have become the most widely used payment instrument among cashless methods of payment in the European Union. In 2006, the share of cashless transactions executed with payment cards in the Community amounted to 34.4% (credit transfer 30%, direct debit 25.2%, cheques 9.2%, electronic money and other instruments 1.3%), and in 2010 card transactions already accounted for 39.2% of the total number of cashless transactions in the EU (credit transfer 27.8%, direct debit 25.5%, cheques 5.8%, electronic money and other instruments 1.6%).23 We believe that the importance of payment cards in the world will continue to grow.
23 Statistical Data Warehouse, European Central Bank, http://sdw.ecb.europa.eu, (September 2011).
16 Chapter 2 The development of the payment card market in Poland compared to other countries
The concept of a payment card originated in the United States in the early twentieth century. Cards from this period were usually made of metal and included customer data used for confirming rights to receive goods and debiting the customer's credit account. Before the outbreak of World War II, charge cards enabling deferred payment for goods were issued by larger chains of shops and petrol stations, however they were accepted only in retail outlets of their issuers.24 The first company to have been successful on the payment card market was Diners Club. Soon competitors appeared on the market, such as American Express which offered the world's first plastic card, or Bank of America which issued the world's first credit card in California.25
The Polish payment card market is relatively young. Although credit cards appeared in Poland in the late 1960s, they were cards issued by foreign banks and used by tourists for making payments in a small number of outlets (mainly in outlets related to the Orbis travel agency, exclusive hotels and restaurants). The domestic market for payment cards began to develop in Poland as late as in the 1990s.26 This was mainly due to the reforms implemented in our country after 1989 which also shaped he domestic banking sector. The reforms also had a direct effect on the transformation of retail banking. At that time banks started to offer new types of products and services to customers, including payment cards.27
2.1. Selected indicators of the development of the Polish payment card market
The development of the payment card market can be described on the basis of an analysis of several key areas, such as:
24 R. Janowicz, Rynek kart płatniczych w Polsce na tle rozwiniętych rynków w krajach Unii Europejskiej. Stan obecny i perspektywy rozwoju, Materiały i Studia, no. 116, NBP, Warsaw 2001, p. 9. 25 K. Żwiruk, Historia kart płatniczych na świecie, http://kartyonline.pl, 7 July 2003. 26 More information can be found in: R. Janowicz, Rynek kart płatniczych w Polsce na tle rozwiniętych rynków w krajach Unii Europejskiej. Stan obecny i perspektywy rozwoju, Materiały i Studia, no. 116, NBP, Warsaw 2001, p. 12. 27 Rynek kart płatniczych w Polsce, NBP, Warsaw 2003, p. 6.
17 - the number and structure of payment cards issued,
- the value of transactions executed with payment cards,
- the acceptance network measured by the number of POS terminals, retail and service outlets equipped with POS terminals or merchants. Chart 1 shows the number of payment cards issued by banks in Poland from 2000 to 2011. In the analysed period the number of these payment instruments increased nearly 3 times. The structure of payment cards also changed. In 2000 credit cards accounted for 3.3% of all cards issued (in terms of volume: 0.4 million cards), while in the third quarter of 2011 they already accounted for 22.4% (in terms of volume: 7.14 million cards).
Chart 1. Number of payment cards issued in Poland, 2000-2011 (millions)
debit cards charge cards credit cards 35 33,2 32,0 31,9 30,3 30 26,5 25 23,8
20,4 20 16,9 16,9 14,4 15,1 15
11,3 10
5
0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: NBP data. Data for 2000-2010 are presented as at the end of the year and data for 2011 as at the end of September.
The increase in the number of cashless transactions executed with payment cards was also very dynamic, which is presented in Chart 2. Over seven years, between 2004 and 2010, the number of card cashless transactions increased more than 4 times, while the number of cards issued in this period (2004-2010 - see Chart 1) nearly doubled. This shows that card holders have been using cards more and more often to make purchases. It is worth noting that in 2009, for the first time in the history of the Polish card market, the number of cashless transactions was higher than the number of cash transactions and in the third quarter of 2011 it reached the level of 58% of all card transactions executed with Polish cards.
18 Chart 2. Number of cashless transactions executed with payment cards, 2004-2010 (millions)
domestic transactions transactions executed abroad
900 844 800 700 704 600 577 500 462 400 354 264 300 198 200 100 0 2004 2005 2006 2007 2008 2009 2010
Source: NBP data.
Between 2004 and 2010 the value of transactions also increased steadily (Chart 3). In 2004, consumers executed transactions with the use of cards issued in Poland for the total value of PLN 25 billion, of which payments executed abroad amounted to PLN 1.6 billion. In 2010, the total value of card transactions was nearly PLN 90 billion and transactions executed abroad constituted 6.6% of this amount, i.e. PLN 6 billion.
Chart 3. Value of cashless transactions executed with payment cards, 2004-2010 (PLN billions)
domestic transactions transactions executed abroad
100 90 80 70 60 50 40 30 20 10 0 2004 2005 2006 2007 2008 2009 2010
Source: NBP data.
In Poland, a continuous development of the payment card acceptance network has been observed. As presented in Chart 4, the fastest growth was recorded in the number of card
19 accepting devices (mainly terminals and imprinters in a lower number), while the increase in the number of retail and service outlets equipped with card accepting devices was slower. The increase in the number of merchants was the slowest: from 60 thousand in 2003 to 110 thousand in the third quarter of 2011. This means that terminals are installed more often in commercial establishments which had accepted cards before - as additional card accepting devices - than at new merchants.
Chart 4. Number of POS terminals in Poland and retail and service outlets (RSO) equipped with POS terminals, 2000-2011
Merchants RSO Devices
300 253 258 250 231 212 206 189 200 176 186 166 176 143 153 150 133 134 136 135 119 104 110 101 93 100 76 78 70 82 60 69 50
0 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: NBP data. Data for 2003-2010 are presented as at the end of the year and data for 2011 as at the end of September.
It should be noted that the growth rate of the acceptance network in Poland is much lower than the growth rate of the number of payment cards and the number and value of card transactions, as presented in chart 5.
It may be concluded that the much slower development of the payment card acceptance network than the rise in the number of payment cards or the number of transactions constitutes an increasing barrier to further faster growth of card payments. Attention should be also drawn to the saturation of the acceptance network. Data published by the Central Statistical Office (GUS) show that in 2009 there were 371,839 shops and 9,738 petrol stations in Poland, i.e. 381,577 such entities.28 However, it seems that there are many more potential retail and service outlets in Poland that could accept payment cards. Experts estimate that the number of such outlets could be between 500 thousand to 1 million. This
28 Rynek wewnętrzny w 2009 r., Central Statistical Office, Trade and Services Department, Warsaw 2010.
20 means that the saturation of the market in Poland with retail and service outlets accepting payment cards ranges from 19% to 38%, i.e. it is relatively low. Due to the fact that the saturation of the Polish society with payment cards is much higher (according to the 2009 NBP survey, the share of Poles holding payment cards was 70%), this small share of merchants accepting payment cards in the total number of retail and service outlets in Poland means that an increasingly higher number of Poles holding cards will use them practically only with the group of merchants used now. Card holders will encounter increasing difficulties in using cards to make payments in new retail and service outlets because they are faced with the barrier of non-acceptance.
Chart 5. Growth rate of acceptance network and the number of cards and cashless transactions, 2003-2010
Source: NBP data.
It should also be noted that the network of POS terminals in Poland is unevenly developed territorially, not only in geographical terms (the saturation with POS terminals per number of inhabitants is generally higher in the western part of Poland than in the eastern part), but also within individual provinces (much denser acceptance network in large and medium-sized cities than in small towns and rural areas). Due to the above factors, a relatively common inability to use cards to make payments in retail and service outlets has a parallel effect on the continuation of financial exclusion in Poland, calculated as the percentage of people having a bank account, at a relatively high level in comparison with other EU countries. People who live in places where there are no shops accepting payment cards will not be interested in opening a bank account and receiving a payment card which in
21 practice cannot be used. A poor development of the acceptance network in Poland is therefore one of the major barriers to reducing the financial exclusion and the development of cashless transactions in Poland.
The analysis of factors affecting the acceptance of payment cards was the subject of a merchant survey conducted in 2008 on behalf of the NBP.29 Among the factors that determine whether to start accepting a particular payment method, cost factors were decisive for the management of large-area stores (a total of 57% of the weight, including the amount of commission charged on the value of accepted transactions - 14.9%, and fixed costs of accepting a particular payment method - 37.4%). Yet, in the case of additionally selected entities, cost factors accounted for 35.1% of the weight, including the commission on the transaction value standing at 18% (it was the most important factor for this group of surveyed entities) and fixed costs of accepting a particular payment method at 17.1%. The results of this survey point to the crucial importance of the level of merchant fees as the factor determining whether the retailer chooses to accept payment cards or not.
2.2. Selected indicators of the development of the payment card market - Poland against other EU countries
The indicators presented in this part of the report are based on statistical data published periodically by the European Central Bank in the Statistical Data Warehouse as well as in the form of reports, the so-called Blue Book, which cover 27 Member States of the European Union. Statistical data are presented in the form of charts with indicators describing and comparing the level of use of payment cards per capita in the EU countries.
Chart 6 shows the number of payment cards per one inhabitant in Poland and other EU countries in 2010. The group of seven countries with the lowest number of payment cards per capita in the European Union comprised post-socialist countries of Central and Eastern Europe. Regretfully, Poland comes out poorly even in comparison with those countries and with the ratio of just 0.84 payment card per capita it surpassed only Romania (0.59 card per capita). The highest level of saturation of the payment card market was in Luxembourg where there were 2.64 cards on average per 1 inhabitant as well as in the UK (2.37 cards per capita)
29 M. Polasik, K. Maciejewski, Innowacyjne usługi płatnicze w Polsce i na świecie, Materiały i Studia, No. 241, National Bank of Poland, Warsaw 2009, p. 124-125.
22 and Sweden (2.15 cards per capita). In Europe's largest economy - Germany - this ratio was 1.56 card per capita. In the EU countries the average was 1.45 cards per 1 inhabitant.
Chart 6. Number of payment cards per capita issued in Poland and other EU countries in 2010
3
2,5
2
1,5
UE average 1.45
1
0,5
0
UK
Italy
Malta
Spain
Latvia
France Ireland
Poland
Greece
Cyprus Austria
Sweden
Finland
Estonia
Belgium Romania
Bulgaria
Portugal Hungary
Slovakia
Slovenia
Lithuania
Denmark
Germany
Luxembourg theNetherlands Czech Republic Source: Own study based on Statistical Data Warehouse, European Central Bank, http://sdw.ecb.europa.eu, (September 2011).
The highest indicator of the number of card payments per 1 inhabitant was observed in Sweden and Denmark (197 transactions), as presented in chart 7. In the EU the average level of payment card use was much lower and amounted to 68 cashless transactions per capita. In Poland the number of cashless transactions executed with the use of a card was 3 times lower in comparison with the EU average. Only residents of countries such as Hungary (21), Czech Republic (20), Greece (7), Romania (5) and Bulgaria (3) used cards for making purchases less frequently than in Poland.
23 Chart 7. Number of cashless transactions executed with payment cards issued in Poland and other EU countries in 2010, per capita
200
180
160
140
120
100
80 UE average 68
60
40
20
0
UK
Italy
Malta
Spain
Latvia
France Ireland
Poland
Greece
Austria Cyprus
Sweden
Finland
Estonia
Belgium
Bulgaria
Hungary Portugal
Slovakia
Slovenia
Romania
Denmark
Germany
Lithuania
Luxembourg theNetherlands Czech Republic Source: Own study based on Statistical Data Warehouse, European Central Bank, http://sdw.ecb.europa.eu, (September 2011).
In terms of the card payment infrastructure, Poland also looked very poorly compared to other EU countries (Chart 8). There were only 6.6 POS terminals per one thousand inhabitants in our country. A lower rate was recorded only in Romania (5.0). The largest number of terminals in relation to the number of inhabitants was observed in Finland (37.5 terminals per 1 thousand inhabitants). It is worth noting that this country recorded a very dynamic growth in devices that accept payment cards. Even in 2006 this indicator was 19.9 which means that in 5 years as many as 18 terminals per one thousand of inhabitants were installed, while in Poland there were 4.6 terminals per 1 thousand of inhabitants in 2006 and by 2010 this number increased by 2 terminals per one thousand of inhabitants. The following countries ranked high in this list: Greece and Spain (respectively 36.5 and 30.1 devices per 1 thousand of inhabitants), i.e. tourist traffic-oriented countries. Among ten countries with the lowest level of accessibility to terminals there were eight former socialist countries as well as Germany and Austria. It is worth mentioning that the establishment of a POS terminal network in our country with the density at the current EU level (17.56) would require an
24 increase by 2.7 times in the number of POS terminals, from 251.8 thousand to approximately 670 thousand.
Chart 8. Number of POS terminals per 1 thousand inhabitants in Poland and other EU countries in 2010
40,0
35,0
30,0
25,0
20,0 UE average 17.56
15,0
10,0
5,0
0,0
UK
Italy
Malta
Spain
Latvia
Ireland
Austria
France
Estonia Poland
Greece
Finland
Belgium
Sweden
Cyprus*
Slovenia
Denmark Bulgaria
Portugal Hungary
Slovakia
Lithuania
Romania
Germany
Luxembourg Czech Republic theNetherlands Source: Own study based on Statistical Data Warehouse, European Central Bank, http://sdw.ecb.europa.eu, (September 2011). * Data for Cyprus are for 2008.
Based on the above analysis it can be said that the intra-Community payment card market is characterised by a great diversity. Indicators of the payment card market development in Poland are low in comparison with the majority of EU countries. In all presented charts Poland has the least developed payment card market in the EU. This demonstrates, on the one hand, Poland’s significant backwardness in comparison with the majority of European countries and on the other hand - a great potential for the development of electronic payments in our country.
25 Chapter 3 Factors determining the development of the payment card market in Poland
Factors determining the development of the payment card market in Poland can be considered at various levels. These factors may be external and internal. They may be national, local - arising from the specificity of our economy, as well as international. Conditions for the development of the payment card market may also relate to business, regulatory, legal and technical issues. The most important of them are presented below in the form of comprehensive projects undertaken in the payment services market.
3.1. SEPA
In recent years many initiatives have emerged which are aimed at developing and regulating the market for payment services. Currently, large projects are being implemented in the European market which address the integration of the retail payments market.30 In connection with Poland's integration with the European Union the banking industry and market regulators are facing a major challenge posed by intra-Community diversification of the payment services markets (in terms of the structure, operating principles and the legal and institutional environment) which hinders cross-border payments in particular,
One of the major projects in this regard is the establishment of the Single Euro Payments Area (SEPA) which was preceded by a long period of preparations undertaken by many actors and institutions connected with the European payments industry. In line with the vision of the project initiators, i.e. the European Commission, the European Central Bank and the European Payment Council (EPC), SEPA is to be an area in which consumers, businesses and other participants of the economic life will be able to make and receive both domestic and cross-border payments in euro, within Europe, under the same, simple principles, rights and obligations, regardless of their location.31
The SEPA project which was launched on 28 January 2008 marks another stage of the integration of the European financial market, following the introduction of the single euro
30 A. Borcuch, Globalny system pieniężny, CeDeWu, Warsaw, 2009, p. 105-111. 31 Single Euro Payments Area (SEPA). Integrated retail payments market, European Central Bank, 2006, p.7
26 currency and TARGET large-value payments. Its coverage includes mostly euro-area countries but it also applies to other EU states and 4 countries from the European Free Trade Association (EFTA) countries, i.e. Iceland, Norway, Liechtenstein and Switzerland. In total, SEPA covers 31 countries in Europe. It should be noted at this point that the SEPA project was intended to be of a self-regulatory character, which means that it was to be implemented without any formal orders or prohibitions from EU or national authorities.32
The SEPA project consists of several components, such as: the single currency, a single set of euro payment instruments, efficient infrastructure for euro payments, common technical standards, common business practices, harmonised legal basis, and ongoing development of customer-oriented services.
The primary component of the Single Euro Payments Area is a set of new SEPA payment instruments: SEPA credit transfer, SEPA direct debit and SEPA card payments. These are non-cash instruments offered to customers in accordance with harmonised standards and principles. From the official launch of the project until the end of 2010, the so- called transitional period was in force under which SEPA instruments were to be introduced gradually and coexist with the existing national solutions. According to program guidelines, starting from 2011 a full migration to SEPA standards should take place.33
The adaptation of payment cards to the SEPA requirements is implemented in accordance with the principles laid down in the SEPA Cards Framework (SCF). The main objective of establishing the SCF principles is to create an environment free from technological, legal and commercial barriers to the issuance of payment cards and to processing, accepting and executing card transactions. In accordance with the SCF, from 1 January 2008 tol 31 December 2010, i.e. during the transitional period, a gradual migration to the EMV standard should take place, consisting in replacing magnetic stripe cards with cards based on the microprocessor technology and adapting the infrastructure of POS terminals and ATMs so as to handle cards in the EMV standard. In the same transitional period all payment terminals and ATMs were also to be adapted to accept EMV cards. After this period, i.e. from 1 January 2011, all general purpose payment cards in circulation, issued by SEPA banks should comply with the SEPA Cards Framework. This means that magnetic stripe cards
32 D. Duziak, R. Kaszubski, Nowe regulacje europejskiego rynku usług płatniczych to korzyść dla polskich klientów, "Gazeta Prawna" of 12 June 2008, http://biznes.gazetaprawna.pl. 33 Polish Banks Association, SEPA Poland Service, http://sepapolska.pl (December 2009).
27 issued in the SEPA area should be withdrawn from circulation.34
According to the European Commission, in the fourth quarter of 2010 a total of 81% of payment cards, 96% of ATMs and 90% of POS terminals in the EU countries were equipped with a chip compliant with the EMV standard.35 In Poland the process of adapting the infrastructure of POS terminals to the EMV standard is also progressing quite well (80% of terminals), while migration of ATMs to these standards is much faster (98% of devices). However, until 2010 the process of equipping payment cards with a chip was slower than the EU average because the percentage of cards compliant with EMV standard amounted to 49.6% as at the end of 2010, although it increased significantly by June 2011 to 61%.
A payment card transaction consistent with the SEPA principles is a transaction executed with a "general purpose" payment card (debit, credit or charge card) issued in one of the SEPA countries, in the area covered by SEPA and with the participation of a SEPA bank. This may be a payment transaction (at a retail and service outlet or a remote transaction) or cash withdrawal at an ATM, however always with the use of EMV technology (except for remote transactions) and settled in euro (the account may be operated in any currency). Payments will be executed with one card throughout the SEPA area, yet retailers will be able to impose restrictions on the acceptability of individual brands of cards. It is worth noting that the SCF guidelines do not include the electronic money and prepaid cards, which creates opportunities for the development of niche solutions such as: local payments, fees for public transportation or gift cards. Poland, like other non-euro area Member States and EFTA countries, may and does participate in the SEPA as part of euro payments and will be able to adopt SEPA standards for payment instruments in the national currency.
An important element of the SEPA project is the incorporation in the SCF of provisions prohibiting application of different prices for domestic and cross-border services. In addition, each system should have a transparent pricing structure, uniform for the whole SEPA area that will allow the largest possible number of actors to participate in the system. Consequently, this means a prohibition to differentiate scheme fees geographically (e.g. depending on the country)36. Imposing such a shape of pricing policy on card schemes means
34 R. Kaszubski, D. Duziak (edit.), Jednolity Obszar Płatności w Euro - SEPA. Wpływ zmian na rynku płatności na podmioty prowadzące działalność gospodarczą, Polish Banks Association, 2008, p. 19, http://www.sepapolska.pl (October 2008). 35 3rd progress report on the state of SEPA migration, European Commission, DG Internal Market and Services, Brussels, 17 May 2011, http://ec.europa.eu/internal_market/payments/docs/sepa/progress_report_2010_en.pdf (August 2011). 36 SEPA Cards Framework, European Payment Council, 16 December 2009, p. 14.
28 that they must change their existing beneficial business model, mainly because of the freedom in setting fees for the participation in the system. Therefore, it can be assumed that the organisations will attempt to evade the requirements imposed on them.37 However, attention should be drawn to the provision pursuant to which each payment card scheme is responsible for its interchange fee, which means that the SCF has not introduced regulations relating to the interchange fee and that setting it remains, as before, at the discretion of a particular scheme associating card issuers.38 This approach is explained with the role of the interchange fee which is to compensate for the costs of operating the scheme, and also with the fact that the fee is calculated multilaterally, and therefore it applies to all entities participating in the network. In turn, in the opinion of the European Central Bank a long-term continuation of rates differentiated geographically is in conflict with the pro-integrative concept of SEPA.39
3.2. Payment services directive
The second project, in addition to SEPA, aimed at creating an integrated market for payment services is the Payment Services Directive (PSD). The Directive was adopted by the European Parliament and the Council of the European Union in 2007, and Member States were required to implement the regulation by 1 November 2009. However, not all countries, including Poland, met the deadline.40 This document establishes a common legal framework for the provision of payment services in the European Union which until now were governed by regulations of separate legal systems of Member States.
The major areas governed by the PSD regulations include;41
- right of public provision of payment services, meaning the harmonisation of conditions for market entry to be met by non-bank entities intending to provide payment services. This is to ensure a level playing field for all market participants and stimulate increased innovation and competitiveness of national markets;
- requirements for transparency of information defining a set of harmonised information
37 J. Chaplin, SEPA – changing the game for cards, First Data International, 2007, http:\\\www.firstdata.com. 38 SEPA Cards Framework, European Payment Council, 16 December 2009, p. 16. 39 5th Progress Report (July 2007), SEPA - from concept to reality, European Central Bank, p. 13. 40 Poland was the last country in the European Union to have implemented the provisions of the Directive into national law as late as on 24 October 2011, i.e. simultaneously with the entry into force of the Act on Payment Services of 19 August 2011. 41 Single Euro Payments Area (SEPA), European Central Bank, http://www.ecb.int/pub/pdf/other/sepa_brochure_2009pl.pdf (February 2010).
29 requirements that will have to be presented by all payment service providers;
- rights and obligations of users and providers of payment services which are explained in the Directive in detail and finally.
The objectives of the Directive which include the support for consumer rights and integration of national systems as well as the promotion of the transparency and competition in the market for payment services greatly support the creation of the Single Euro Payments Area.42
The Directive does not provide for requirements for determining the level of interchange fees. As far as national options are concerned, only activities related to the introduction of the surcharge are permitted.
3.3. Act on Payment Services
The Polish Act on Payment Services implements the Payment Services Directive. The final text of the Act was determined by the Parliament after the consideration of the Senate's amendments on 19 August 2011.43 The Act on Payment Services was published in the Journal of Laws on 23 September 2011, and its basic provisions entered into force on 24 October 2011. It is worth noting that the implementation of the Payment Services Directive took a very long time in our country. Poland is the last EU country to implement the Directive into the national law. The delays resulted from a very long process of consultations and a large number of comments and amendments reported at various stages of work on the act. The provisions of the Act relate to the market which until now has not been regulated in its major part (except for regulations on, among other things, payment systems, acquirers and authorisation and clearing systems). According to the Act, payment services and the provision of such services will no longer be provided, as before, as free economic activity and will be subject to the supervision of the Polish Financial Supervision Authority.
The Act specifies the conditions for the provision of payment services, in particular in respect of the transparency of contractual provisions and requirements for informing about
42 (1) Making SEPA a Reality. Implementing the Single Euro Payments Area, European Payment Council, Doc: EPC066-06, Brussels, 28 June 2006, (2) Joint statement by the European Central Bank and the European Commission concerning the adoption by the European Parliament of the Payment Services Directive, European Central Bank, 24 April 2007, http://www.ecb.int/press/pr/date/2007/html/pr070424.pl.html (August 2011). 43 Polish Parliament, Payment Services Act of 19 August 2011, text of the act determined finally after consideration of Senate amendments, http://orka.sejm.gov.pl/opinie6.nsf/nazwa/4217_u/$file/4217_u.pdf
30 payment services; the rights and obligations of the parties arising from contracts on the provision of payment services, as well as the responsibilities of providers in respect of the performance of payment services and principles for conducting the activity by payment institutions and payment services agencies, including through agents of these entities, and the principles for supervision of these entities. As part of parliamentary debates on the Act, one of the items discussed was the problem of the surcharge and interchange fees, which is further described in section 6.3.
3.4. Payment card organisations in Poland
Regulations and standards set by VISA and MasterCard which must be observed as part of civil law contracts by: (i) banks issuing payment cards with the logo of these organisations, (ii) acquirers and (iii) merchants accepting these cards, are in fact one of the main factors that contributed to the development of this market. The regulations of these organisations determine the business model which functions on the basis of a four-party payment system which requires the involvement of specialised entities operating under strictly defined rules. There is no competitive national card payment system in Poland, therefore the Polish payment card market is highly dependent on the regulations of international payment organisations.
3.4.1. “Visa cards accepted everywhere” programme
One of the recent major projects of the Visa organisation is the programme launched at the beginning of 2010 aimed at developing a payment card acceptance network, called "Visa cards accepted everywhere”. The programme aims to double the number of POS terminals in Poland, i.e. from approximately 200 thousand to 400 thousand terminals in 2015. The launch of the programme was preceded by market consultations, both with banks issuing VISA cards and acquirers. The program, which is funded by the banks issuing cards, is focused on attracting retail and service outlets which so far have not accepted payment cards. Funds are transferred to acquirers in the form of a subsidy to the installation of new terminals. Under this programme, Visa member banks in Poland will allocate more than PLN 200 million over 5 years to support the growth of card acceptance. By the end of September 2011 approximately 56 thousand new POS terminals had been installed at nearly 38 thousand merchants who had not previously accepted payment cards.
31 3.4.2. „Innovation for Poland” programme
MasterCard organisation launched the "Innovation for Poland" programme which aims at supporting banks issuing payment cards with the MasterCard logo which intend to introduce innovative products such as: proximity cards, NFC mobile payments, cards with a display or multi-application cards. Funding may be obtained for a particular project on the basis of an application submitted by the bank to the MasterCard organisation. Decisions on granting the financing are made by the group of MasterCard experts, i.e. representatives of the local market representing the MasterCard office in Warsaw and European experts responsible for innovative products.
The programme was launched on 1 January 2011 pursuant to the decision of the MasterCard organisation. The program is expected to create a fund financed by acquirers who are required to pay an additional fee of 0.025% of the value of transactions executed with payment cards. It is estimated that in 2011 acquirers will pay approximately EUR 5 million to the fund.
3.5. Interchange fee policy of the European Commission and European Central Bank
3.5.1. European Commission's Action
The issue of the interchange fee has been the subject of analyses of the European Commission for many years. The first complaint which accused Visa and Europay International of restricting competition through specific arrangements concerning interchange fees charged for cross-border transactions, was submitted by the British Retail Consortium in 1992. The second complaint, concerning, inter alia, multilaterally agreed interchange fees in Visa and MasterCard systems, was filed in 1997 on the initiative of EuroCommerce association representing retail, wholesale and international sellers in the European Union.
The first significant event was the decision of 24 July 2002 on inter-regional interchange fee determined multilaterally under the Visa Europe association. In this decision the Commission approved, as an exemption to the competition rules (Article 81 clause 3 of the Treaty establishing the European Community), the use by Visa of interchange fees for cross-border transactions, subject to acceptance by Visa of new rules which related to:
- reduction of the interchange fee; for debit cards the interchange fee will be reduced
32 gradually over a period of five years with this reduction amounting to over 50%; for credit cards the reduction of the interchange fee will also be gradual, so that in 2007 the level of 0.7% is reached; income of banks from charging this fee will fall gradually to approximately 20% in relation to the income that would have been achieved if the above mentioned change had not been introduced.
- objectivity, i.e. the use of three cost categories to set the interchange fee:
• transaction processing costs,
• costs of providing customers with a free funding period,
• costs of the so-called "payment guarantee",
- transparency; at the request of the owners of retail and service outlets, Visa member banks will be required to disclose their rates of the interchange fee and the percentage share of the above mentioned three cost categories in that fee,
- setting a separate interchange fee for transactions executed by mail or telephone, due to differences in costs in relation to transactions executed via POS.44
The said exemption expired on 31 December 2007. By this date the adjustment of the Visa system to the competition rules should have been completed. In March 2008, the Commission initiated proceedings against Visa Europe to verify the method of determining the interchange fee for cross-border transactions and certain domestic transactions.45 In April 2010, an agreement was reached under which Visa agreed to reduce interchange fee rates for cross-border immediate debit card transactions to the level of 0.2% of a transaction value on the average.46 The European Commission welcomed the Visa decision, noting that it would primarily benefit consumers who would not pay inflated prices for goods and services. It is worth noting that the maximum level of interchange fee rates agreed with the European Commission also applies to domestic debit card transactions in countries where interchange fees are set by Visa Europe. These countries include: Iceland, Malta, Sweden, Hungary as
44 Commission exempts multilateral interchange fees for cross-border Visa card payments, IP/02/1138, European Commission, Brussels, 24 July 2002, http://europa.eu/rapid/pressReleasesAction.do?reference=IP/02/1138&format=HTML&aged=1&language= EN& guiLanguage=en (September 2011), 45 Antitrust: Commission initiates formal proceedings against Visa Europe Limited, MEMO/08/170, European Commission, Brussels, 26 March 2008, http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/08/170&format=HTML&aged=0&langu age= EN&guiLanguage=en (September 2011), 46 Annual Report 2010. Making money flow, Visa Europe, p. 12, (September 2011).
33 well as the Netherlands, Luxembourg and Belgium. However, in the Netherlands and Luxembourg these rates apply to prepaid cards as Visa debit cards are not issued and in Belgium neither debit cards nor prepaid cards are issued.47
The subject of the European Commission analyses also includes the operations of the MasterCard payment organisation. In its decision of 19 December 2007, the Commission concluded that multilateral interchange fees charged by MasterCard on cross-border transactions (within the European Economic Area) for MasterCard and Maestro debit and credit cards violate the provisions of Article 81 of the EC Treaty and simultaneously they do not meet the conditions for exemption from competition rules provided for in Article 81 (3) of the Treaty. In the case of the condition of contributing to technical or economic progress, MasterCard did not demonstrate a causal link between the interchange fee and objectively measured efficiency. It merely pointed to the role of the interchange fee consisting in maximising system output and balancing the expectations of card holders and merchants. However, it did not present empirical evidence supporting this argument or evidence indicating positive effects of the discussed fee for the operation of the system and the associated benefits. The Commission also stressed that the interchange fee set by MasterCard is based on the model created by William Baxter in 1983 which has severe limitations and is based on unrealistic assumptions.48 As to the second condition of Article 81 (3) of the Treaty, MasterCard did not provide sufficient evidence that consumers (merchants and card holders) get a fair share of the benefits which result from the application of the interchange fee. With regard to the third condition, MasterCard did not prove that the interchange fee in its current form is indispensable to maximise system output. The Commission stated that it did not dispute the existence of the interchange fee. However, the fee had to be consistent with EU regulations. The Commission also found that interchange fees charged in the absence of a separate bilateral agreement between the bank that issued the card and the bank receiving the payment contribute to an excessive increase in card acceptance costs incurred by retailers. The Commission ordered, as a remedy, to withdraw interchange fees for cross-border transactions within six months. Otherwise, periodic penalty payments of 3,5% of MasterCard
47 Interchange fees, Visa Europe, http://www.visaeurope.com/en/about_us/what_we_do/fees_and_interchange/interchange_fees.aspx (September 2011). 48 The main assumptions of this model are as follows: (i) demand from consumers and retailers is constant since neither of these groups responds strategically to possible actions by the other, (ii) there is no variation in the benefits that merchants receive from accepting cards (iii) the existence of perfectly competitive banking industry.
34 Incorporated’s daily consolidated global turnover in the preceding business year will be imposed on MasterCard.49 On 1 March 2008, MasterCard Europe filed a request with the Court of Justice of the European Union for the annulment of the European Commission’s decision.50 MasterCard, unable to find an alternative to the existing fee that would not violate the above mentioned Community regulations, repealed the interchange fee for cross-border transactions with effect from 21 June 2008, thus complying with the Commission Decision of 19 December 2007.51 However, in October 2008 MasterCard increased the fees for the participation in the system (for issuing banks, for acquirers) and revoked the existing exemption from these commissions. Following the intervention by the Commission, MasterCard agreed to cancel the increases in the fees in July 2009. In addition, from July 2009, MasterCard undertook:
- to introduce new calculations for multilateral interchange fees on cross-border transactions so that the weighted average of these fees will be significantly reduced to 0.3% for consumer credit cards and to 0.2% for consumer debit cards,52
- to make modifications that will contribute to transparency and competition in the payment card market, including to offer to merchants so-called 'unblended' rates, i.e. varied rates that will be charged according to the type of card used,
- publish all interchange rates for cross-border and domestic transactions on its website.
The European Commission announced that it would closely monitor the implementation of the agreed changes in the MasterCard system.
On 8 July 2011, a hearing was held in the Court of the European Union with regard to MasterCard appeal against the decision of the European Commission of 2007. MasterCard Europe was represented by the President, Javier Perez, who pointed that among the most
49 Summary of Commission Decision of 19 December 2007 relating to a proceeding under Article 81 of the EC Treaty and Article 53 of the EEA Agreement (Case COMP/34.579 – MasterCard, Case COMP/36.518 – EuroCommerce, Case COMP/38.580 – Commercial Cards), European Commission, Official Journal of the European Union, 6.11.2009. 50 Antitrust: Commissioner Kroes notes MasterCard's decision to cut cross-border Multilateral Interchange Fees (MIFs) and to repeal recent scheme fee increases - frequently asked questions, MEMO/09/143, 01/04/2009, European Commission, http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/09/143&type=HTML (September 2011). 51 Antitrust: Commission notes MasterCard's decision to temporarily repeal its cross-border Multilateral Interchange Fees within the EEA, MEMO/08/397, European Commission, Brussels, 12 June 2008, http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/08/397&format=HTML&aged=1&langu age= EN&guiLanguage=en (September 2011). 52 For comparison, depending on the card, multilateral interchange fees for MasterCard cards ranged from 0.80% to 1.90% in 2007, while multilateral interchange fees on cross-border transactions ranged from over 0.40% to over 0.75% of the transaction value.
35 important points and arguments was that the future of electronic payments was at stake and that the European Commission was trying to fix something that was not broken. He also expressed his concerns that government intervention could threaten the ongoing development of the EU payments market and lead to a situation where consumers and merchants would end up without access to more convenient, more secure and more advanced payment options that would make consumers’ lives easier and retailers’ businesses more profitable. The President of MasterCard Europe also pointed out that since the Commission first began examining interchange fees, a lot has changed in the payments industry, as evidenced by: increased competition in the market, implementation of contactless and mobile payments, new entrants from other sectors of the economy, e.g. the telecommunications sectors. As a result, recent years witnessed major technological advances and a significant growth in electronic payment transactions and the acceptance of different kinds of payments. Referring directly to the interchange fee, he argued that it was the most transparent and efficient way to achieve the balance among all participants in the open four-party system and that MasterCard is focused on creating an advanced, well-functioning internal market for payments in Europe.53
The European Commission also developed a report on the retail banking sector in the EU countries which was published in January 2007.54 The report contains the Commission's position on the interchange fee applied in each EU country. The results of the Commission's inquiry indicate that the interchange fee is not an indispensable element of the operation of the card payment systems. After all, some national systems operate without this mechanism, which translates into lower fees charged to merchants. The results of the inquiry revealed significant variation of the weighted average interchange fee in Visa and MasterCard international systems for the credit card in domestic transactions in individual EU Member States. In 2004, the level of the highest fee (more than 1.5% of the transaction value) was 2.5 times higher than the weighted average of the lowest fees. In the case of Visa and MasterCard debit cards the highest fees were observed in some new EU Member States. Some observations may indicate that the level of the interchange fee in some Member States is determined by using banks’ the market power, which results from high and sustained profitability ratios of banks in relatively highly developed markets and the use of barriers to
53 ‘Don’t Try To Fix What Isn’t Broken’ Declares MasterCard Europe President, MasterCard, Waterloo, Belgium, 8 July 2011, http://newsroom.mastercard.com/press-releases/%e2%80%98don%e2%80%99t-try-to- fix-what-isn%e2%80%99t-broken%e2%80%99-declares-mastercard-europe-president/ (September 2011). 54 Report on the retail banking sector inquiry, European Commission, Directorate-General for Competition, Brussels, 2007.
36 entry by those banks.55
In the Commission’s opinion, interchange fees appear to increase profits generated by card issuers. According to the results of the inquiry, 62% of all banks surveyed would still make profits on credit card issuing even if they did not receive any revenues from the interchange fee. In 23 EU Member States, at least one bank participating in the survey was able to make a profit from issuing credit cards without charging interchange fees. The inquiry seems to partly undermine the explanations presented by the banking sector that the total system output would fall if card issuers were not subsidised through a transfer of revenues from acquirers. The Commission's aim in this inquiry was not, however, opting for a zero interchange fee in all systems. Nonetheless, in the light of the results obtained, it is justified to question the current level of interchange fees in certain countries.56
After the release of the report Ms Neelie Kroes, the EU Commissioner for Competition, presented the following conclusions regarding the application of interchange fees at the national level:57
- costs of interchange fees affect final prices of goods and services, paid by consumers,
- this cost element is not transparent and therefore cannot serve as an incentive to choose the most efficient means of payment,
- all consumers, including those who do not use payment cards, bear the costs of the interchange fee,
- the Commission does not call for the abolition of the interchange fee, however it intends to ensure that it is determined at a fair level through the development of competition and its transparency for market players.
- there is no economic evidence to claim that the reduction of the interchange fee will cause an increase in other fees for payment card holders. The operations of most card issuers will be profitable, even if the interchange fee is completely abolished.
55 Report on the retail banking sector inquiry, European Commission, Directorate-General for Competition, Brussels, 2007, p. 137. According to the Commission's inquiry, the issuing of credit cards is very profitable. On an EU-wide scale, credit card issuers posted a weighted average profit-to-cost ratio of 65% in 2004 while debit card issuers - a weighted average profit ratio of 47%. In most EU Member States, the weighted average profit ratios remained fairly stable over the period 2000 - 2004. 56 Sector Inquiry under Article 17 of Regulation (EC) No 1/2003 on retail banking (Final Report), C0M(2007) 33 final, Brussels, European Commission, 31.1.2007, http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=C0M:2007:0033:FIN:EN:PDF (September 2011). 57 N. Kroes, Introductory Remarks on Final Report of Retail Banking Sector Inquiry, Speech/07/50, Press conference, Brussels, 31 January 2007.
37 - lack of competition at the retail level, where the uniform interchange fee is charged (irrespective of the type of the card, issuer, system) is the reason for setting the fee at such a high level. The Commission criticises this practice, described as "blending".
- the data available to the Commission show that in some new EU member states the interchange fee is almost four times higher than in others countries. The Commission has serious concerns about the levels of multilateral interchange fees in those countries. The Commission did not receive convincing explanations of the reason for such large variations. In the Commission’s opinion, this results from lack of competition in the markets where the fees are the highest. A reduction of the interchange fee will be beneficial for consumers.
- The Commission welcomes the commitment to reduce interchange fee from Austria and Portugal and a commitment of Ireland to cut the joining fee.
In the communication the Commission jointly with the European Central Bank expressed concern that as a result of the replacement of national debit card schemes by Visa and MasterCard, costs of payment card usage will increase for market players and consumer and the implementation of the SEPA project will be threatened. Moreover, the Commission is determined to take appropriate action (under the anti-trust rules) if prices are raised.
3.5.2. Activities of the European Central Bank
The issue of the interchange fee is perceived by the European Central Bank from the angle of the SEPA project. The project is expected to result in a creation of a competitive, reliable and cost effective payment card market, while having regard to providers of the infrastructure and other services. The ECB expects that in addition to four-party schemes, three-party payment card schemes will also comply with the SEPA standards. In accordance with the views of the ECB, the principles for and the terms and conditions of acceptance, set for the same type of a payment card, may not differ due to geographical location. It should be emphasised that this is very important from the perspective of changing the present situation because according to research published by the Finnish central bank the geographical location is one of the most important factors affecting the level of the interchange fee.
In the ECB opinion, a payment card system compliant with SEPA should meet the following conditions:
38 - offer the same services to merchants and card holders throughout the euro area while different additional services should not reduce the common use of those services,
- have uniform interchange rates (if any) for cards of a particular brand throughout the euro area,
- define and publicly announce a medium- and long-term strategy compliant with SEPA objectives,
- make public interchange fee rates and the methodology of their calculation and submit them to competent authorities,
- be consistent with the future position of the European Commission on market practice of acquirers and merchants in order to enhance competitiveness,
- effectively separate card system management from other services related to card processing so as to prevent cross-subsidisation and other practices that would favour the provision of those services by the card system,
- participate in the creation of compromise-based standards and implement them in accordance with the set deadline,
- prevent the transfer of disaggregated personal data to countries that do not comply with the rules applicable in the area of the protection of these rights in the EU,
- implement a strategy to prevent fraud transactions, particularly in cross-border operations.
The ECB also proposes that the European Commission define as soon as possible rules for charging interchange fees throughout the euro area. Decisions of national and European institutions on interchange fees should be in the ECB opinion consistent and coherent with each other. In the opinion of the ECB the interchange fee which is paid by acquirers (and ultimately by merchants) to banks-card issuers, is an effective instrument for the promotion of cards among consumers in EU countries. However, the interchange fee can also be a barrier to competition because it reduces the possibility of negotiating the fee paid by merchants to acquirers. The current uncertainty as to the further conditions of charging interchange fees delays banks in making decisions on the implementation of the SEPA program and is an obstacle to finalising business plans. In the opinion of the ECB, the recent report of European Commission on retail banking sector gives a general impression that a possibility of prohibiting the interchange fee may be considered. The Eurosystem encourages
39 the European Commission to clarify its policy on interchange fees as soon as possible. If this policy is significantly different from the current practice, the ECB urges the Commission to establish a sufficiently long transitional period to avoid disruptions in the payment card market. Decisions of the European Commission and national competition authorities should be harmonised in the ECB opinion, in particular in respect of the establishment of a coherent policy in the euro area. This will contribute greatly to facilitating the development of new market initiatives.
The ECB also promotes all initiatives that lead to increased competition for Visa and MasterCard throughout the European Union. In particular, a creation of a new payment card system in Europe is mentioned which would be a major success factor in the implementation of the SEPA project for cards (opinions: Jean-Michel Godeffroy58 and Gertrude Tumpel- Gugerell).59 Currently, three initiatives are being implemented to consolidate and create a pan-European payment card scheme:60
- Euro Alliance of Payment Schemes (EAPS), a project linking national payment card systems from Italy, Germany, Spain, Portugal and the UK, as well as EUFISERV (inter-bank system of savings banks). The EAPS integrates many ATM network, which allows debit card withdrawals abroad.61
- Monnet, a project opened in 2008 by the largest French and German banks in order to implement a system based on transparent economic and pricing principles.62
- PayFair, an electronic payment processing system, supported by large European retail chains, which is not based on the interchange fee mechanism and is compatible with the SEPA and PSD principles and introduces a transparent model of fees (fixed rate per transaction).63
The most recent position on interchange fees on the payment card market is presented
58 New card schemes for Europe, Speech by Jean-Michel Godeffroy, Director General Payment Systems and Market Infrastructure, European Central Bank, Télécom-Paris, Paris, 26 October 2007, http://www.ecb.int/paym/sepa/pdf/telecom_jmg_071026.pdf. (September 2011) 59 The Paypers, ECB: New European cardscheme is "piece still missing in the SEPA puzzle", 11 September 2011 http://www.thepaypers.com/news/cards/ecb-new-european-card-scheme-is-piece-still-missing-in-the- sepa- puzzle-/739423-23 (September 2011). 60 Word Payments Report 2010, Capgemini, p. 28, http://www.capgemini.com/insights-and- resources/by- publication/world-payments-report-2010/ (September 2011). 61 Euro Alliance of Payment Schemes, http://www.card-alliance.eu/ (August 2011). 62 A New European Card: the Pan-European Project ‘Monnet’ for a European Card Solution, efinancelab, 2008. 63 PayFair, http://www.payfair.eu/ (August 2011).
40 by the ECB in the report of 2011 "Interchange fee in card payments " . The above report indicates, among other things, that:
- from an economic point of view, the existence of interchange fee in four-party models is justified;
- clarity of card schemes is needed so as to foster the creation and development of an advanced retail payments market. This also applies to the interchange fee on which knowledge has been so far limited and for this reason the ECB, similarly to other banks, monitors more closely and analyses the card market.
- a thorough empirical analysis of interchange fees is required to facilitate strategic decision-making by market actors regarding the development of a new payment organisation and new payment instruments;
overall, the Eurosystem's stance on interchange fees is neutral. This is an issue within the field of the competence of the European Commission, however the Eurosystem shares the view that in order for the SEPA project to be successful, cards must be issued, processed and used uniformly throughout the euro area and interchange fees (if any) should be set to promote overall economic efficiency in compliance with competition rules.
41 Chapter 4 Description of the interchange fee
The interchange fee is a highly complex issue. It occurs in the market of payment cards both in the case of cashless transactions (payments made with cards) and cash transactions (cash withdrawals from ATMs). This study focuses on the analysis of the interchange fee for cashless transactions.
4.1. Definition of the interchange fee
Interchange fee is a commission paid by the acquirer to the issuing bank on each cashless transaction executed with the use of a payment card.64 This fee is a characteristic element of four-party (open) schemes under which card issuing and transaction clearing may be performed by separate, independent entities, i.e. issuers and acquirers. There are also payment card schemes which operate without such fees. Interchange fees may be set by members of the payment card organisations (Visa) or by the organisations themselves (MasterCard) in the form of rules. It should be emphasised that the beneficiaries of the interchange fee system are banks issuing payment cards, while payment organisations stress that they do not directly achieve any revenues in this respect.65 It is also worth noting that the interchange fee is usually transferred in the opposite direction to the transfer of funds for goods or services. Every time a card payment is made, the issuing bank (acting on behalf of the card holder) is obligated to pay the acquirer (acting on behalf of the retailer) for goods or services. The interchange fee is transferred from the acquirer to the issuing bank. In this context, the interchange fee is a balancing mechanism in which the part of the costs incurred by the issuing bank is compensated by revenues generated by the party servicing the merchant. There are three types of the interchange fee within international payment card schemes: national, intra-regional and inter-regional. National interchange fees apply to
64 This is the most common direction of the transfer of this fee, although it may be the opposite; source: European Commission, Report on sector inquiry on retail banking, Directorate General for Competition, Brussels, 2007, p. 91. 65 (1) Interchange. What it is. How it work. And why it is fundamental to the Visa payments system, Visa, s. 16, http://www.visa.ca/en/aboutcan/mediacentre/interchange/pdf/interchange_brochure.pdf, (August 2011; (2) Interchange Myths and Facts, MasterCard Worldwide, p. 5, http://www.mastercard.com/us/merchant/pdf/021208MythsFacts.pdf, (August 2011).
42 transactions executed in the country where the card was issued. Intra-regional fees (also called cross-border fees) relate to transactions accepted outside the country of card issue but in the same geographical region. Inter-regional fees apply to transactions executed between Europe and Asia or the United States.
Rates of interchange fees vary widely and depend on, among other things: - the payment organisation, - type of the card used (debit card, charge card, credit card; consumer card or business card; card with a magnetic stripe or chip), - method of authorisation (for transactions using PIN, without using PIN), - environment in which the transaction was executed (physical presence of the card, card not present) - relationship between the merchant's country and the country of card issuance, - category of the merchant (wholesale, bill payments, public transport).
The structure of the interchange fee also varies. The fee may be defined as: - a percentage of the transaction value, - a constant value, regardless of the transaction value, - a two-component fee, i.e. a combination of the percentage rate and the fixed rate.
4.2. Outline of fees on the payment card market
The interchange fee is only one of the fees present in the business model of the four- party payment card scheme. This model is presented in diagram 2. In addition to interchange fee, the following fees can be distinguished: merchant service charges, card holder fees and system fees.
43 Diagram 2. Business model of the four-party payment card system Fees in a typical payment transaction Fees possible to occur within the whole system
Payment Payment organisation organisation System System System System fees fees fees fees
Interchange fee Interchange fee Issuer Acquirer Issuer Acquirer
Merchant Servive Charge Merchant Fees for issuing Rewards Service and/or POS terminal Charge using a card fees Telecommunica- tions fees
Customer / Customer / surcharge Merchant Merchant Card holder Card holder
Source: Own study based on Report on the retail banking sector inquiry, European Commission, 31 January 2007 r., p. 117.
Merchant Service Charge (MSC) is a fee charged by the acquirer from the retailer for each accepted transaction (executed with the card). It is usually calculated as a percentage commission on the transaction value.66 As a result, the merchant does not receive from the acquirer an amount equal to the price of goods/services or the amount it would receive, when accepting cash, because its amount due is reduced by the commission charged by the acquirer.67 It should be noted that the merchant service charge is usually taken into account when determining the price of goods or services by merchants. An essential element of the merchant service charge is the interchange fee and the remaining part of this charge is the margin of the acquirer and a fee paid by the merchant, referred to as Assessment Fee.68 Additionally, merchants are charged fees by acquirers for the lease and servicing of POS payment terminals and they also bear costs of authorising telecommunications connection with the acquirer's server. Due to costs of card acceptance charged to merchants by acquirers, merchants may raise prices of goods and services or introduce additional fees for customers making card payments (surcharge), if this is permitted by the rules of the organisation or the law. In turn, card holders do not bear any costs for cashless transactions made with the card,
66 The amount of merchant service charges, as opposed to interchange fees, is determined by negotiations (between the acquirer and the retailer). Thus, retailers, even if they operate in the same industry, may have different rates of merchant service charges. 67 Simultaneously, when accepting a card payment, the merchant does not bear the cost of cash handling. 68 The Assessment Fee is a component of the merchant service charge (consisting of three elements: interchange fee + assessment fee + acquirer's margin) and is transferred to payment organisations.
44 except when the merchant charges a surcharge. They may be charged only small fixed fees for the issuance or possession of the card, although - as noted in chapter 1 - they are often exempt from these fees and may be rewarded for a frequent use of cards to make payments.69 In addition, acquirers and card issuers are charged different types of fees for the participation in the system of payment cards, also called system fees. These fees constitute revenue of payment organisations. Therefore, the acquirer's margin is not equal to its remuneration because fees to payment organisations are paid from the margin. Based on the above analysis of the flow of fees in the four-party system (business model) it can be stated that the main beneficiaries of the system are: (1) issuing banks and (2) acquirers who, although they bear certain costs of participation in the system, receive remuneration for their activities, and in some cases (3) card holders (exemption from fees, refund of a portion of money spent). As a result, the group which carries the bulk of the financial burden in the four-party scheme are retailers who "support" the entire system. It should also be noted that significant revenue from the organisation and management of the four-party scheme is achieved by payment organisations which are however not classified as participants of the four-party scheme. According to the position of payment organisations, despite the existence of various kinds of fees, all participants of the four-party scheme, including merchants who achieve benefits when they make a decision to accept payment cards, are its beneficiaries.70 It is worth noting that the interchange fee is not present (it is not visible) in three-party schemes because the function of the card issuer and the acquirer is performed by one entity - the central institution. However, it is very interesting that merchant service charges in three- party schemes are usually higher than in four-party schemes, which may partly explain a limited scale of operation of three-party schemes.71
4.3. Justification for the introduction of interchange fee from the point of view of payment organisations
The application of interchange fees may serve achieving numerous tasks. Payment organisations indicate that the primary role of this fee is to determine the
69 The issuing bank may also charge the following fees to the customer: interest on the outstanding balance or fees for late repayment of the loan taken out under the credit card. 70 The benefits arising from the participation in payment card schemes are presented in more detail in chapter 1. 71 Competition and Efficient Usage of Payment Cards, Organisation for Economic Co-operation and Development, Competition Committee, 2006, p. 25.
45 balance between the issuing side and acquirers who service merchants. The specificity of the operation of the four-party model consists in the fact that most of the costs are incurred by issuers of payment cards (card promotion, production, issuance and support; certifications; adjustment of cards and banking systems to new technologies), while most of the revenue in the scheme is generated on the side servicing merchants (transaction processing and registration, lease and service of terminals). Therefore, it is necessary to compensate for this imbalance by passing funds from the acquirer who services the merchant to the issuer of the card used for executing the transaction. Without the interchange fee banks would not achieve sufficient income from just issuing cards, thus the efficiency of the entire system could be disrupted. In this context, the interchange fee constitutes an important balancing (compensating) mechanism allowing to maintain the balance between the above mentioned parties of the system. The interchange fee is also aimed at encouraging issuing banks to issue payment instruments with the logo of the system. It constitutes a tool allowing issuing banks to invest in new solutions and technologies in order to (a) increase the level of security and prevent fraud occurring in the system and (b) offer more efficient and convenient payment instruments, which encourages both new and existing customers to use products and services of the system. In view of these activities it may be concluded that issuing banks transfer, as it were, a portion of revenues from interchange fee to card holders. The interchange fee is also a tool allowing payment organisations to connect retailers and consumers around the world who want to execute transactions. In addition, it creates opportunities for the development of the entire system by accepting new participants, in accordance with the idea of the openness of this system.72 Therefore, it is a mechanism enabling to manage the global system which consists of thousands of financial institutions, millions of retailers and millions of consumers.73
4.4. Economic concepts concerning the payment card market
The literature points to several economic concepts explaining the functioning of the
72 In the opinion of MasterCard, payment card systems with a zero interchange fee are subsidised or operate, incurring losses; [source:] The role of interchange fees in providing secure, efficient and transparent card payments in Europe, p. 3, MasterCard Europe, http://www.mastercard.com/us/company/en/docs/IF_position.pdf (August 2011) 73 Interchange. What it is. How it work. And why it is fundamental to the Visa payments system, Visa, p. 15, http://www.visa.ca/en/aboutcan/mediacentre/interchange/pdf/interchange_brochure.pdf (August 2011).
46 payment card market. They include: network effect and the issue of two-sided markets. A characteristic phenomenon in the payment card market is the network effect whereby each new user of the system (customer or retailer) increases the value of the system for all system participants. Therefore, the value of a payment card for its holder is the greater the larger the network of its acceptance is. In the case of merchants, accession to the system also brings greater benefits with an increasing number of customers using cards . It should also be noted that the payment card market is a typical example of a two- sided market. Two-sided markets are markets that support two distinct user groups interacting with each other. The more users of the market are on one side, the greater benefits are achieved by the other side of the market.74 In addition, both sides of the market demonstrate a different elasticity of demand. In the case of the payment card market systems offer their products and services to two different groups of users, i.e. to (1) card holders and (2) retailers who enable their customers to make card payments. Both groups of system users constitute two different sides of the payment card market. In payment card schemes, prices (fees) are set taking into account demand from retailers and demand from card holders as well as maximisation of total revenue for system participants. The pricing structure covering both sides of the market is also one of the key elements of the two-sided market. It can have a significant impact on commercial success and stability of the system. Fees for system participants may take various structures. One of the sides may bear a significantly larger proportion of costs than the other side. The above mentioned imbalance in the allocation of costs and revenues in the card market may be caused by different price elasticities of both sides of the market. It may be assumed that retailers have lower price elasticity. They are less sensitive to the price of participation in the system (fees) than customers (card holders). The lower price elasticity of retailers in the card market may be due to the fact that in many industries such as: hotels, restaurants, petrol stations and supermarkets card acceptance has become a necessity. The difference between the price elasticity of merchants and card holders is a key element of the discussion on the level of the interchange fee. The issue of price elasticity of retailers and customers in the payment card market can constitute a very interesting area for scientific research, especially because it has not yet been thoroughly analysed.75
74 J.Ch. Rochet, J. Tirole, Two-sided Markets: An Overview, 2004, http://faculty.haas.berkeley.edu/hermalin/rochet_tirole.pdf (August 2011). 75 A. Börestam, H. Schmiedel, Interchange fees in card payments, Occasional Paper Series, No 131, European Central Bank, September 2011, p. 12.
47 One of the most interesting concepts related to the payment card market from an economic point of view, developed on the basis of the experience of the U.S. credit card market, is the reverse-Robin-Hood-cross subsidy hypothesis which assumes that when paying with cash, poorer consumers are forced to actually pay more, i.e. they pay the same price for the same products as richer consumers pay with credit cards because the higher price of a product which is the same for those paying with cash and cards, includes costs of credit card acceptance, so in fact the poor finance in the prices the above costs generated by the richer.76
76 More information can be found in, inter alia: S. Semeraro, The Reverse-Robin-Hood-Cross-Subsidy Hypothesis: Do Credit Card Systems Effectively Tax the Poor and Reward the Rich?, TJSJ Legal Studies Research Paper, No. 1265871, September 2008.
48 Chapter 5 Level of interchange fees and other fees charged in the Polish market
As mentioned earlier in this report, interchange fee rates vary widely and depend on many variables such as: the type of card used, the method of authorisation, the environment of the transaction, the relationship between the country of the merchant and the country of card issue or the category of the merchant. Payment organisations, pursuing their pricing policies, set interchange fees as: a percentage of the transaction value, a flat fee or a combination of these two rates. Therefore, in order to compare and determine the exact amount of these fees, especially in the case of two-component rates (rate expressed as % of the transaction value + the flat fee expressed in the currency), calculations were based on the average value of a cashless transaction in Poland. In the second quarter of 2011, the average value of a cashless transaction in Poland77 was PLN 97.70, while the average exchange rate in the National Bank of Poland in this period for the euro was PLN 3.9598 and for pound sterling PLN 4.4836. Basic rates of those fees for transactions in the EMV standard, consistent with the requirements of the SEPA project, were used for the analysis. Other selected types of transactions were also taken into consideration.
5.1. Rates of interchange fees in the Visa system
Interchange fees for Visa card transactions in Europe are set by representatives of banks associated in Visa Europe. Rates of both cross-border and domestic interchange fees are published on the Visa Europe website at: http://www.visaeurope.com/en/about_us/what_we_do/fees_and_interchange/interchange_fees.aspx
5.1.1. Cross-border fees
Rates for intra-regional interchange fees applicable in the Visa system in the European Economic Area are presented below.
77 Domestic transactions executed with the use of a card issued in Poland.
49 Table 1. Interchange reimbursement fees in cross-border transactions - Visa consumer cards Credit & Immediate Payment type deferred debit debit Contactless Low Value Payment 0.50% 0.15% + €0.025 EMV Chip 0.50% 0.15% + €0.015 Electronic Authorised (EA) 0.60% 0.17% + €0.015 Electronic Data Capture (EDC) 0.70% 0.19% + €0.015 Secure Electronic Commerce 0.50% 0.15% + €0.015 Card Not Present: CVV2 0.60% 0.16% + €0.015 Recurring Transaction 0.60% 0.15% + €0.015 Card Not Present (CNP) 0.70% 0.19% + €0.015 Standard / Non-Electronic 0.75% 0.19% + €0.015 Airline 0.75% n/a Source: Visa Europe (September 2011).
Table 2. Interchange reimbursement fees in cross-border transactions - Visa commercial cards Credit & Immediate Payment type deferred debit debit Business: EMV Chip 1.30% € 0.60 Business: Electronic Authorised (EA) 1.40% € 0.60 Business: Standard 1.45% € 0.60 Corporate / Purchasing: EMV Chip 1.35% n/a Corporate / Purchasing: Electronic 1.45% n/a Authorised (EA) Corporate / Purchasing: Standard 1.50% n/a Source: Visa Europe (September 2011).
Chart 9. Interchange reimbursement fees in cross-border EMV Chip transactions (%) - selected types of Visa cards 0 0,005 0,01 0,015 0,02 0,025 0,03
consumer debit card 0.21% consumer credit card 0.50% commercial debit card 2.43% commercial credit card 1.30%
Source: Own study based on Visa Europe (September 2011).
In the case of cross-border transactions only interchange rates for consumer debit cards (transactions such as: EMV Chip and contactless low value payment) are considerably lower in comparison with other categories, which is also consistent with arrangements concluded between the European Commission and Visa Europe in April 2010. Chart 9 presents interchange fees expressed as a percentage for the average value of a transaction
50 executed in Poland in the second quarter of 2011. Under these assumptions, the interchange fee represents 0.21% of the transaction value for consumer debit card payments, while the interchange fee for commercial debit cards would represent as much as 2.43%, which results from the flat fee of EUR 0.60 for this transaction value. It is worth noting that interchange fees for cross-border transactions are differentiated by type of card and transaction environment.
5.1.2. Domestic rates
Domestic Interchange Reimbursement Fees applicable in the EU countries for Visa cards were also analysed. Chart 10 presents interchange reimbursement fees for consumer EMV Chip transactions executed with the most popular debit cards in Poland.
Chart 10. Interchange reimbursement fees in % for EMV Chip transactions - Visa consumer debit cards
Finland 0.19% Sweden 0.21% Malta 0.21% Hungary 0.21% Belgium 0.21% the Netherlands 0.25% Luxembourg 0.25% Denmark 0.30% UK 0.37% Bulgaria 0.40% Ireland 0.41% Latvia 0.55% France 0.63% Italy 0.66% Slovakia 0.70% EU 0.72% Portugal 0.90% Lithuania 0.90% Romania 1.00% Estonia 1.00% Czech Republic 1.00% Austria 1.00% Greece 1.05% Slovenia 1.10% Spain 1.42% Cyprus 1.50% Germany 1.58% Poland 1.60%
0,00%0.00% 0.20%0,20% 0.40%0,40% 0,60%0.60% 0,80%0.80% 1,00%1.00% 1.20%1,20% 1.40%1,40% 1,60%1.60% 1,80%1.80%
Source: Own study based on Visa Europe (September 2011).
51 It turns out that the value of these fees varies widely across the European Union. The highest rates among European countries for these fees are applied in the Polish market (1.6% of the transaction value). This value is more than two times higher in comparison with the arithmetic mean of the rates applicable in all EU countries (0.72%). A high level of fees was also recorded in Germany (1.58%), Cyprus (1.5%) and Spain (1.42%). The lowest level of fees is applied in Finland (0.19% - eight times lower than in Poland) and only slightly higher (0.21%) in Sweden and Belgium, as well as in Malta and Hungary, i.e. countries where rates for domestic debit transactions are set within the Visa Europe (based on cross-border rates). It is worth noting that the level of these fees is also relatively low in Bulgaria (0.4%, i.e. four times lower than in Poland), Latvia (0.55%) and Slovakia (0.7%). In other countries of Central and Eastern Europe: in Romania, Estonia and the Czech Republic this fee is also significantly lower (1%) than in Poland.
Chart 11. Interchange reimbursement fees in % for EMV Chip transactions - Visa consumer credit and charge cards
Bulgaria 0.40% Sweden 0.55% the Netherlands 0.55% Malta 0.55% Luxembourg 0.55% Italy 0.55% Ireland 0.55% Hungary 0.55% Finland 0.55% Belgium 0.55% France 0.63% Slovakia 0.70% Denmark 0.75% UK 0.77% EU 0.84% Latvia 0.85% Greece 0.85% Spain 0.88% Lithuania 0.90% Romania 1.00% Estonia 1.00% Czech Republic 1.00% Austria 1.00% Slovenia 1.10% Poland 1.45% Portugal 1.50% Cyprus 1.50% Germany 1.58%
0.00%0,00% 0.20%0,20% 0.40%0,40% 0.60%0,60% 0.80%0,80% 1,00%1.00% 1.20%1,20% 1.40%1,40% 1,60%1.60% 1,80%1.80%
Source: Own study based on Visa Europe (September 2011).
52 Significant differences in domestic interchange fees are also present for transactions executed with Visa consumer credit cards (Chart 11). The level of the fees in Poland (1.45%) in this category is also among the highest in the European Union. Slightly higher fees apply only in Germany (1.58%) and in Portugal and Cyprus (1.5%). The average value of interchange fees for the countries presented in the chart amounts to 0.84% and it is lower than the rate in Poland by 0.61 percentage point. It is also slightly higher than the fees for Visa debit cards (0.72%). The lowest level of interchange fees for Visa consumer credit cards applies in Bulgaria (0.4%). This level is also relatively low (0.55%) in nine countries: Finland, Sweden, the Netherlands, Belgium, Luxembourg, Ireland, Italy, Malta, Hungary. However, in several countries, the level of the fees is close to the average for the EU. Similarly, in the case of Visa commercial credit cards the level of interchange fees in Poland (1.6%) is one of the highest among EU countries (Chart 12).78 The lowest rate is observed in Bulgaria (0.4%), while the most common rate for these fees is 1.3% of the transaction value (9 countries).
Chart 12. Interchange reimbursement fees in % for EMV Chip transactions - Visa commercial credit cards
Bulgaria 0.40% Finland 0.75% Denmark 0.75% Austria 1.00% EU 1.24% Sweden 1.30% the Netherlands 1.30% Malta 1.30% Luxembourg 1.30% Italy 1.30% Ireland 1.30% Hungary 1.30% France 1.30% Belgium 1.30% UK 1.40% Greece 1.40% Portugal 1.50% Poland 1.60% Germany 1.75%
0,00%0.00% 0.50%0,50% 1.00%1,00% 1,50%1.50% 2,00%2.00%
Source: Own study based on Visa Europe (September 2011).
78 In the case of Visa commercial credit cards, rates for nine EU countries are missing: Cyprus, Czech Republic, Estonia, Latvia, Lithuania, Romania, Slovakia, Slovenia, Spain.
53 Under the Visa system, special categories of retailers are also defined for whom separate, usually lower rates of interchange fee are set. The most common categories of retailers include: airlines (separate rates in 24 countries in the range of 0.75%-1.5% of the transaction value), petrol stations (in 9 countries, rates in the range of: 0.45%-0.9% of the transaction value), supermarkets (in 6 countries, rates in the range of: 0.2%-1.2% of the transaction value). In Poland two special categories of rates have been introduced for Visa cards: bill payments and wholesale.
5.2. Rates of interchange fees in MasterCard system
In the case of transactions executed with MasterCard and Maestro cards in Europe, interchange rates are set arbitrarily by MasterCard Europe, a company which does not operate as an association of banks jointly determining rates of interchange fees any longer, but gathers issuers who are at the same time its shareholders and customers. Similarly to the Visa organisation, MasterCard publishes rates of interchange fees, both cross-border and domestic, on its website at the following addresses: (1) http://www.mastercard.com/us/company/en/whatwedo/interchange/Intra-EEA.html (2) http://www.mastercard.com/us/company/en/whatwedo/interchange/Country.html
5.2.1. Cross-border fees
MasterCard rates for cross-border interchange fees applicable in the European Economic Area (EEA) are presented in the tables below.
Table 3. Interchange fees for cross-border transactions - MasterCard consumer cards
MasterCard Consumer, MasterCard MasterCard Debit Fee Tier MasterCard Electronic, World World Signia MasterCard MasterCard Prepaid Consumer
P ayP as s 0 .1 8 % + 0 .0 3 € 0 .1 8 % + 0 .0 3 € 0 .1 8 % + 0 .0 3 € 0 .1 4 % + 0 .0 3 € C hip 0 .1 4 % + 0 .0 5 € 0 .9 3 % 1 .1 3 % 0 .1 0 % + 0 .0 5 € Enhanced Electronic 0 .1 6 % + 0 .0 5 € 0 .9 6 % 1 .1 6 % 0 .1 1 % + 0 .0 5 €
Merchant UCAF 0 .1 6 % + 0 .0 5 € 0 .9 8 % 1 .1 8 % 0 .1 1 % + 0 .0 5 € Full U C A F 0 .1 7 % + 0 .0 5 € 1 .0 0 % 1 .2 0 % 0 .1 2 % + 0 .0 5 € Bas e 0 .1 8 % + 0 .0 5 € 1 .0 2 % 1 .2 2 % 0 .1 3 % + 0 .0 5 € Source: MasterCard (September 2011).
54 Table 4. Interchange fees for cross-border transactions - MasterCard commercial cards
MasterCard BusinessCard, MasterCard MasterCard Electronic Corporate, BusinessCard, MasterCard MasterCard MasterCard Fee Tier MasterCard Prof essional Card, FleetCard Purchasing Card Electronic Corporate MasterCard Prepaid Commercial Chip 1.50% 1.25% 1.25% 1.25%
Enhanced Electronic 1.60% 1.35% 1.35% 1.35%
Merchant UCAF 1.60% 1.35% 1.35% 1.35% Full UCAF 1.75% 1.50% 1.50% 1.50% Base 1.90% 1.65% 1.65% 1.65%
Large Ticket Level 1 N.A. N.A. 1.00% + 20.00 € 1.00% + 20.00 €
Large Ticket Level 2 N.A. N.A. 0.75% + 45.00 € 0.75% + 45.00 € Incentive -0.30% -0.30% -0.30% -0.50€ Source: MasterCard (September 2011).
Table 5. Interchange fees for cross-border Maestro card transactions
Maestro, Maestro Maestro Prepaid Fee Tier Prepaid Consumer Commercial
Chip 0.10% + 0.05 € 0.40% + 0.05 € Chip - Late Presentment 0.12% + 0.05 € 0.75% + 0.05 € PIN-verified 0.11% + 0.05 € 0.50% + 0.05 € Signature verified 0.12% + 0.05 € 0.75% + 0.05 € Secure E-Commerce 0.13% + 0.05 € 1.05% + 0.05 € Mail Order/ Telephone 0.13% + 0.05 € 1.05% + 0.05 € order PayPass 0.14% + 0.03 € 0.45% + 0.03 € Source: MasterCard (September 2011).
In the MasterCard system interchange fees for cross-border transactions also vary and their lowest level refers to MasterCard and Maestro debit cards. In view of the fact that some rates of interchange fees consist of two components (percentage rate and flat fee), for the purpose of comparison the amounts of interchange fees are presented as a percentage for the average value of a transaction executed in Poland in the second quarter of 2011 (Chart 13), similarly to the comparison of interchange fees in the Visa system. For these assumptions, the interchange fee for MasterCard consumer card payments is 0.34% of the transaction value and for MasterCard and Maestro debit cards - 0.3%. The highest fees are set for MasterCard Corporate cards (1.5%).
55 Chart 13. MasterCard interchange fees for chip transactions executed with selected types of cards - in % 0 0,002 0,004 0,006 0,008 0,01 0,012 0,014 0,016
MasterCard Consumer 0.34% Debit MasterCard 0.30% Maestro 0.30% MasterCard Corporate 1.50%
Source: Own study based on MasterCard (September 2011).
5.2.2. Domestic fees
Domestic rates of interchange fees for MasterCard and Maestro cards applicable in the European Union countries were also analysed. MasterCard publishes tables with domestic Intra-Country Interchange Fees applicable only in some EU countries on its website. In the case of 8 countries (Austria, Bulgaria, Cyprus, Denmark, Portugal, Romania, Slovakia, and Spain) no fees are published. MasterCard has announced that intra-country fees for MasterCard and Maestro cards are set by local banks in these countries. Moreover, for the same reason in Finland, Germany and Lithuania no data are available on domestic fees for MasterCard cards and in Estonia - for Maestro cards.
Chart 14. Interchange fees for consumer Debit MasterCard cards
Finland 0.23% Sweden 0.36% UK 0.37% Ireland 0.41% Latvia 0.60% Greece 0.75% EU 0.77% Lithuania 0.85% Estonia 1.05% Czech Republic 1.10% Hungary 1.16% Poland 1.64%
0.00%0,00% 0.50%0,50% 1,00%1.00% 1.50%1,50% 2,00%2.00%
Source: Own study based on MasterCard (September 2011).
56 Chart 14 shows the rates for interchange fees applicable in 11 EU countries for consumer MasterCard debit cards. The highest rate is applied in Poland (1,64%) and it is more than 2 times higher than the average for the EU. The lowest fees are applicable in Finland (0.23%). Data on rates for interchange fees for Maestro cards are published for 17 EU countries. In the case of transactions executed with these cards (Chart 15), the highest fees apply in the UK (2,74% of the transaction value), followed by Poland. It should be noted that in the UK the rate with a fixed value of GBP 0.6 was set for Maestro cards. Therefore, the interchange fee expressed as a percentage will decrease together with an increase in the transaction value. At the transaction value of approximately PLN 172 the highest interchange fee for Maestro card transactions will apply in Poland.
Chart 15. Interchange fees for consumer Maestro cards
the Netherlands 0.14% Belgium 0.23% Ireland 0.28% Luxembourg 0.30% Latvia 0.50% Italy 0.55% Sweden 0.60% Slovenia 0.60% Malta 0.60% Lithuania 0.60% Greece 0.60% France 0.60% Finland 0.60% Hungary 0.68% EU 0.73% Czech Republic 1.10% Poland 1.64% UK 2.74%
0.00%0,00% 0.50%0,50% 1.00%1,00% 1,50%1.50% 2,00%2.00% 2.50%2,50% 3.00%3,00%
Source: Own study based on MasterCard (September 2011).
For MasterCard consumer cards (Chart 16) the highest interchange fees are also observed in Poland (1.5%). In 9 EU countries the level of these fees is at 0.8% of the transaction value, while the average for the EU is 0.89%.
57 Chart 16. Interchange fees for MasterCard Consumer cards - private customers
France 0.67% Italy 0.70% Latvia 0.73% UK 0.80% Sweden 0.80% Slovenia 0.80% the Netherlands 0.80% Malta 0.80% Luxembourg 0.80% Ireland 0.80% Estonia 0.80% Belgium 0.80% EU 0.89% Czech Republic 1.10% Hungary 1.16% Greece 1.20% Poland 1.50%
0.00%0,00% 0,20%0.20% 0.40%0,40% 0.60%0,60% 0.80%0,80% 1.00%1,00% 1.20%1,20% 1.40%1,40% 1.60%1,60%
Source: Own study based on MasterCard (September 2011).
Currently, the highest interchange fees for MasterCard corporate cards (Chart 17) apply in Poland (2%), while in most countries these fees reach the level of 1.5% of the transaction value.
Chart 17. Interchange fees for MasterCard Corporate cards
Greece 1.40% Latvia 1.43% Belgium 1.50% Czech Republic 1.50% France 1.50% the Netherlands 1.50% Ireland 1.50% Luxembourg 1.50% Malta 1.50% Slovenia 1.50% Sweden 1.50% UK 1.50% Italy 1.50% EU 1.54% Hungary 1.76% Poland 2.00%
0,00%0.00% 0.50%0,50% 1.00%1,00% 1.50%1,50% 2.00%2,00% 2.50%2,50%
Source: Own study based on MasterCard (September 2011).
58 It should be pointed out that there are types of cards in the Polish market for which the level of interchange fee is even higher than presented above. These are cards issued to private customers, such as: MasterCard World (2%), and MasterCard World Signia (2.2%). In the MasterCard system special categories of retailers and interchange fees assigned to them were established. The categories that were implemented in the largest number of countries (18) include mobile top-up at ATMs and bill payments. Petrol stations and supermarkets constitute separate categories of retailers r in 4 and 3 countries, respectively. It is worth noting that categories such as: Utilities & Transportation & Telecom; Wholesale, Post Office and Parking & Vending) exist only in Poland.
5.3. Comparison of interchange fees of Visa and MasterCard in the European market
The above analysis showed, in particular, that domestic rates of interchange fees in our country - both in the Visa and MasterCard system - are among the highest in the European Union. In addition, the level of fees in domestic transactions is usually much higher than in cross-border transactions. Another interesting observation is a noticeable difference between the fees for debit and credit cards in domestic transactions executed by individual clients. Three groups of countries with the following characteristics can be distinguished in the two systems: - debit card transactions are cheaper than credit card transactions,
- debit card transactions have the same level of the fee as credit card transactions, - debit card transactions are more expensive than credit card transactions. Charts 18 and 19 present debit card and credit card transactions in the Visa and MasterCard systems respectively.
59 Chart 18. Interchange fees for Visa consumer debit and credit cards
Immediate debit Credit & deferred debit
Finland Sweden Malta Hungary Belgium the Netherlands Luxembourg Denmark UK Ireland Latvia EU Portugal Bulgaria France Slovakia Lithuania Romania Estonia Czech Republic Austria Slovenia Cyprus Germany Italy Greece Spain Poland
0.00%0,00% 0.50%0,50% 1.00%1,00% 1,50%1.50% 2.00%2,00%
Source: Own study based on Visa (September 2011).
Chart 19. Interchange fees for MasterCard Consumer and Maestro consumer cards
Maestro MasterCard Consumer
the Netherlands Belgium Ireland Luxembourg Latvia Italy France Sweden Slovenia Malta Greece Hungary EU Czech Republic Poland UK
0.00%0,00% 0.50%0,50% 1.00%1,00% 1,50%1.50% 2,00%2.00% 2.50%2,50% 3.00%3,00%
Source: Own study based on MasterCard (September 2011).
60 Interchange fees for debit cards transactions are lower than for credit card transactions for 44% of countries in the Visa system and 80% of the countries in the MasterCard system. The second group (interchange fees for debit cards are the same for other types of cards) comprises 40% of the countries covered by the Visa system and only 7% of countries covered by the MasterCard system. The third group (interchange fees for debit cards are higher than for other cards) comprises 15% of the countries in the Visa system and 13% of the countries, including Poland, in the MasterCard system.
5.4. Comparison of Visa and MasterCard interchange fees in the Polish market
The Polish market of payment cards is the most expensive in the European Union and it is difficult to find a justification for such high rates of the interchange fees. Payment organisations apply different structures for those rates in our market. In the case of consumer debit cards the Visa system applies a one-component fee rate expressed as a percentage, while in the MasterCard system the rate consists of two components and it additionally depends on the transaction value. There are two thresholds in terms of the amounts involved. When they are exceeded, the value of the components used for charging the fees changes. A detailed business model for Visa and MasterCard cards is presented below in table 6.
Table 6. Interchange fees for debit cards - Visa and MasterCard model
Payment Transaction amount Interchange fee organisation from to Visa - 1.6% PLN 0 PLN 20.00 0.50% + PLN 0.09 MasterCard PLN 20.01 PLN 40.00 0.80% + PLN 0.14 PLN 40.01 1.45% + PLN 0.19 Source: Own study based on Visa Europe and MasterCard (September 2011).
In addition, chart 20 shows the evolution of interchange fees depending on the transaction value.
61 Chart 20. Interchange fees for Visa and MasterCard debit cards - in % for amounts from PLN 1 to PLN 50
MasterCard VISA
10,00%10.00% 9,00%9.00% 8,00%8.00% 7,00%7.00% 6,00%6.00% 5,00%5.00% 4,00%4.00% 3,00%3.00% 2,00%2.00% 1,00%1.00% 0,00%0.00% 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49
Source: Own study based on Visa Europe and MasterCard (September 2011).
A detailed analysis showed that interchange fees in the MasterCard system are lower compared to Visa in the transaction value ranging from PLN 8 to PLN 40, however in the ranges of PLN 0 to PLN 8 and PLN 40 to PLN 125 they are higher. Examples of transaction values and interchange fees are presented below in table 7.
Table 7. Interchange fees for Visa and MasterCard debit cards depending on transaction value Transaction MasterCard Visa value
PLN 1 9.50% 1.60% PLN 5 2.30% 1.60% PLN 10 1.40% 1.60% PLN 15 1.10% 1.60% PLN 20 0.95% 1.60% PLN 21 1.47% 1.60% PLN 30 1.27% 1.60% PLN 40 1.15% 1.60% PLN 41 1.91% 1.60% PLN 50 1.83% 1.60% PLN 100 1.64% 1.60% PLN 125 1.60% 1.60% PLN 150 1.58% 1.60% Source: Own study based on Visa Europe and MasterCard (September 2011).
In the case of very low value transactions (e.g. PLN 5), interchange fees in the MasterCard system are significantly higher (2.3%) than in the Visa system (1.6%). In turn, significantly lower interchange fees in comparison with the competitor are offered by
62 MasterCard for transaction values of PLN 20 (MasterCard 0.95% - Visa 1.6%) and PLN 40 (MasterCard 1.15% -Visa 1.6%). It should also be noted that the lowest rate in the MasterCard system (0.95% but only for the transaction value of PLN 20) generally does not change the position of Poland in comparison with EU countries. This rate is only better than the rate applicable in the Czech Republic (1.1% for all transactions, regardless of the value). However, with the transaction value of PLN 41 the interchange fee in the MasterCard system is 1.91% and in the Visa system it is invariably 1.6% of the transaction value. The application of such a structure of the business model allows retailers, on one hand, to achieve financial savings in the case of specific purchase value, and on the other hand, it may lead to a significant increase in acceptance costs in the case of specific ranges of transaction values. The following amount ranges are particularly disadvantageous for retailers: (i) from PLN 0 to PLN 8, and (ii) from PLN 40 to PLN 125. The profitability of the MasterCard model depends on the specificity of the company's activities and price ranges for the most frequently purchased products or services. Another interesting issue is the growth rate of the payment card market in Poland. As indicated earlier in this report, the Polish market is a young market but it is quite large and has a high growth rate. Chart 21 presents the growth rate of the transaction value and banks revenue from interchange fees.
Chart 21. Growth rate of the transaction value in Poland and banks' revenue from interchange fees, 2005-2010.
Source: Own study based on NBP data and results of the survey.
An important observation is that the value of interchange fees has been increasing since 2007 faster than the payment card market in terms of the transaction value. Despite the
63 creation by the organisations of new categories of merchants with lower rates of interchange fees, the total value of the fees has been increasing rapidly in recent years.
5.5. Rates of merchant service charges in the Polish market
In order to obtain a more complete picture of the four-party payment card system, the National Bank of Poland conducted a survey among acquirers operating in the Polish market. The questionnaire for this survey was addressed to the following seven entities: Bank BPH S.A.; Bank Polska Kasa Opieki S.A.; eCard S.A.; EFG Eurobank Ergasias S.A., Branch in Poland; Elavon Financial Services Ltd. (Sp. z o.o.), Branch in Poland; eService S.A., First Data Polska S.A. The acquirers taking part in the survey had a share of over 99% in the Polish market of payment cards in terms of value and number of processed transactions. The analysis of the collected data showed that the level of merchant service charges in the Polish market is varied. It depends primarily on the industry (sector) in which the merchant operates. Acquirers vary merchant service charges also in relation to: the payment organisation, rates of interchange fees (e.g. micro-payments, low-value payments) and types of payment cards (debit cards, credit cards, charge cards). In several cases other approaches are also used, such as: flat fee for micro payments or the interchange fee plus model. The lowest commissions were observed for petrol stations and supermarkets, while the highest - for travel offices and the hotel and catering industry. It is also worth noting that e- commerce transactions demonstrate a slightly higher level of merchant service charges in comparison with transactions executed in POS. Table 8 presents the percentage range of the merchant service charge in transactions executed in POS in the Polish market between 2004 and 2011. The values presented do not include charges in e-commerce.
Table 8. Level of merchant service charges in Poland between 2004 and 2011 in POS terminal transactions - % ranges 2004 2006 2008 2010 2011
1.63% - 2.21% 1.53% - 1.87% 1.59% - 1.85% 1.56% - 1.93% 1.55% - 1.89%
Source: Own study based on a questionnaire survey of acquirers.
In 2004 the level of merchant service charges was slightly higher than in subsequent years. From 2006, the values of merchant service charge ranges have not changed considerably.
64 The results of the survey also allowed to determine the share of the interchange fee in the merchant service charge in the case of transactions processed by acquirers in Poland between 2008 and 2010 in POS (excluding Internet transactions), as presented in table 9.
Table 9. Share of the interchange fee in the merchant service charge in terminal transactions in Poland, 2008-2010 2008 2009 2010
79.0% 80.7% 84.9%
Source: Own study based on a questionnaire survey of acquirers.
It may be concluded on the basis of the data presented that in recent years the share of the interchange fee in the merchant service charge on the Polish market has been increasing. In 2008-2010, it increased by nearly 6 percentage points, from 79% to 84.9% of the merchant service charge. Taking into account the fact that in recent years merchant service charges have remained stable in the Polish market, it should be concluded that the average level of interchange fees has been increasing. The increasing share of the interchange fee in the merchant service charge also demonstrates a fierce competition among acquirers where these entities compete with each other for gaining new customers or retaining their customers, i.e. merchants accepting payment cards. As part of the questionnaire survey conducted among acquirers it was also pointed out that the introduction of other, additional rates of the merchant service charge for MasterCard cards is considered shortly in connection with the launch of the Innovation for Poland programme by MasterCard.
5.6. Other fees determining the level of the merchant service charge
The results of the questionnaire survey have confirmed that the interchange fee is the only fee paid by acquirers to issuing banks. However, acquirers pay a number of additional fees to payment organisations. In this regard, 3 groups of fees paid by acquirers to payment organisations are distinguished: - marketing fees, - processing fees (related to transaction processing), - licence fees
65 It should be noted that the list of additional fees incurred by acquirers includes many cost items (from several to a dozen types of fees, depending on the payment organisation and the acquirer). According to preliminary NBP estimates made on the basis of the questionnaire survey, those fees ranged from 0.08% to 0.16% of the transaction value. Additional fees are added by acquirers to the merchant service charge which consists of: interchange fee, additional fees and the acquirer's margin. The amount of additional fees in relation to interchange fees is approximately 10 times lower, but it is a noticeable value in the business based on low margins. In addition, the information provided by the Polish Trade and Distribution Organisation shows that increases in additional fees are planned in the coming months, which for retailers implies an increase of the already high costs of payment card acceptance. Therefore, it must be stressed that monitoring of the market of fees related to payment card acceptance in Poland should cover not only the level of interchange fees but also the value of all fees paid by acquirers to payment organisations. Otherwise, a situation may arise where the level of interchange fees is reduced with a simultaneous increase in additional fees, which consequently will not trigger the reduction of fees paid by acquirers and merchant service charges.
66 Chapter 6 Overview of interchange fee in Poland
6.1. Decision of the Office of Competition and Consumer Protection
The issue of the interchange fee in the Polish market was analysed in detail by government institutions in 2001. From 20 April 2001 antitrust proceedings were conducted before the Office of Competition and Consumer Protection (OCCP) regarding the interchange fees, pursuant to the application filed by the Polish Organisation of Trade and Distribution (POHiD). These proceedings related to the charge of the application of competition- restricting practices, consisting in concluding agreements on prices and joint determination of the interchange fee by banks associated in the Visa Poland Forum (later changed to: Visa Poland National Organisation) and the Europay/MasterCard Poland Forum. POHiD pointed to too high, in its opinion, costs incurred by merchants in connection with each accepted payment card transaction, which in their view implied a reduction in profit from the sale of goods or services. Several years ago, the amount of the commission paid by merchants for each card transaction in Poland ranged on average from 1.7% to as much as 4.5% of the transaction value, depending on the type of merchant (only the largest supermarket chains could count on the lowest commissions). The commission consisted of two components: a part payable to the acquirer (determined, as a result of fierce competition between acquirers operating in the market, at the level allowing in most cases only the reimbursement of expenses) and the interchange fee. The second part of the merchant service charge, determined jointly by banks associated in the Visa Poland Forum and Europay/MasterCard Poland Forum, posed a problem.79 The proceedings were conducted against 20 banks, Visa International, Visa Europe and MasterCard Europe organisations and the Polish Banks Association. The OCCP levelled against banks a charge of restricting competition by setting jointly the rates of the interchange fee in the VISA and the MasterCard system. A separate charge was levelled against banks, Visa Europe, Visa International, MasterCard Europe and the Polish Banks Association of coordinating activities in order to restrict third party access to the market. On 29 December 2006, the OCCP made a decision and announced it to the public. The decision: - recognised as competition- restricting the practice consisting in banks' participation in the agreement restricting competition in the market for acquiring services through the
79 MasterCard Member Banks Forum ceased to exist in 2008. Since then (2008) MasterCard has been taking decisions on the level of the interchange fee for its cards unilaterally, i.e. independently of banks..
67 joint setting of the interchange fee rates and banned the use of this practice, - did not establish that Visa and MasterCard organisations and the Polish Banks Association applied a competition restricting- practice, consisting in the coordination of activities aimed at restricting access for traders not being members of issuers' agreements to the market of acquiring services, - pecuniary penalties were imposed on 20 banks with the total value of PLN 164 million, - clause 1 of the decision (order to refrain from applying the practices in question) was made immediately enforceable.
Pursuant to Article 78 of the Act on Competition and Consumer Protection all banks with the status of party to the proceedings before the President of the OCCP (as well as MasterCard Europe) filed an appeal against the decision of the President and a complaint against the order of immediate enforceability. In its judgement of 12 November 2008, the Court for the Competition and Consumer Protection (CCCP), concluded that the agreements in question did not infringe the prohibition of anticompetitive agreements as the interchange fee is not related with the market for acquiring services, and therefore cannot restrict competition in that market. The President of the OCCP, refusing to accept the judgement of the CCCP, filed an appeal. On 22 April 2010, the Court of Appeal revoked the decision of the court of the first instance, thus sharing the arguments of the OCCP. In the opinion of the Court of Appeal the relevant market was properly defined by the President of the OCCP and the analysis of settlement mechanisms between the transactions parties showed that the prices for processing transactions were in principle determined by the agreement of banks rather than free competition. The Court also agreed with the arguments of the European Commission, contained in decisions regarding cross-border interchange fees in Visa and MasterCard systems, which were relied on by the President of the OCCP. The Court of Appeal referred the case back for consideration to the court of the first instance. The date of the hearing was set for 20 December 2011. In addition, it should be noted that in the opinion of the OCCP the argument that banks are allegedly not able to reduce interchange fees due to pending court proceedings is unfounded. If banks indeed feared the liability for actions inconsistent with competition law, they would give up the determination of the interchange fee. Consequently, in accordance with Visa rules, a cross-border fee rate would apply which is many times lower than currently
68 used domestic rates (see chapter 5). An example of adopting such a solution is the response of Hungarian banks to the initiation of proceedings by the Hungarian competition authority.
6.2. NBP Report on interchange fee in 2007
Following the decision of the President of the OCCP of 29 December 2006, the issue of interchange fees also became the subject of NBP interest in 2007. From the perspective of the National Bank of Poland whose role in the payment system is in accordance with Article 3 clause 2 of the Act on the National Bank of Poland of 29 August 1997, among other things, to organise cash settlements and ensure conditions necessary for the development of the banking system, it was very important to identify the impact of this decision and the appeal proceeding pending at that time with regard to the interchange fee on the payment card market and the development of cashless transactions in Poland. At the meeting of the Payment System Council held on 22 April 2007,,a discussion was initiated on the assessment of the effects of changing the principles for setting the interchange fee or reducing it on the functioning of the payment card market in Poland. During the meeting, representatives of the banking community expressed the opinion that the decision of the President of the OCCP could have a number of negative consequences for the development of the payment card market in Poland and its individual participants as well as card holders. During the discussion, a proposal was made to establish a task force dedicated to the subject of the interchange fee which was accepted by the Council. The Interchange Fee Task Force comprised representatives of the National Bank of Poland and the Polish Banks Association. The primary objective of the work of the Group was to be the development of a report containing a comprehensive analysis of the interchange fee. In accomplishing this objective, the NBP received a wide range of detailed data on interchange fees from card organisations and acquirers and representatives of the Group held a series of meetings with the participants of the payment card market in Poland, including with experts associated with acquirers, banks, OCCP, POHiD, MasterCard International and Visa Europe. As a result of receiving the above mentioned data and information as well as analyses and meetings held, the Report on Interchange Fee was prepared which was presented first (on 1 October 2007) to the Payment System Council (in a version not containing confidential information submitted by card organisations and acquirers) and subsequently (on 29 November 2007) to the Management Board of the NBP (full version). The report presented the issues related to the interchange fee in a comprehensive way,
69 in particular it presented the role and place of the interchange fee in the Polish payment card system. The first part of the report dealt with theoretical and international issues and included a description of the existing payment card systems from the perspective of the interchange fee, illustrated with examples from several EU countries, and also presented the views of the European Commission and the ECB on the interchange fee. The second part of the report was devoted to the domestic payment card market, in particular, it presented data (valid at that time) on the level of the interchange fee in Poland, ranging from 1.35% to 1.9% of the transaction value. Despite two reductions in the interchange fee in the previous two years, its level in Poland was regarded as one of the highest in the EU, which resulted from a comparison with relevant data for 2004, contained in a report of the European Commission from January 2007. A later part of the report presented the result of a discussion with OCCP experts pursuant to which the OCCP did not question the level of the interchange fee and the only questioned issue was the manner of setting it, and conclusions from meetings with banks, POHiD and VISA and MasterCard organisations. At the end of the report the following conclusions from the work of the Group were presented: - the issue of the interchange fee is complex and no easy solutions should be expected, - possible courses of action depend on internal factors, mainly on the results of the appeal proceedings of banks against the decision of the President of the OCCP, and on external factors, including in particular the decision of the European Commission in a the case involving MasterCard, and on the progress of the EU banking environment on implementing the SEPA Card Framework, - the interchange fee is an integral component of four-party payment card schemes and it would be difficult to imagine the functioning and further development of these schemes without this fee. Changing this scheme to another, i.e. three-party scheme or a scheme based on bilateral agreements, would be very difficult. Regardless of the above, the above mentioned solutions have several disadvantages, as clearly evidenced in the examples from other countries. - the assessment of the amount of the interchange fee applicable in Poland was not unambiguous. Taking into account the stage of the development of the Polish market, as compared to developed markets in the European Union, the Polish market fared very poorly in many aspects and was still in the early stage of development. This was true for both the number of payment cards and the universal use of payment cards in cashless transactions - these indicators per 1 inhabitant would position Poland in last places in the European Union. On the one hand, arguments were raised that a
70 reduction in the interchange fee could contribute to increased use of payment cards, and on the other hand, a feedback could occur and in the opinion of many experts only a further development of the market could lead to a reduction in the interchange fee rates.
A general conclusion from the Group's work was that a four-party nature of payment card schemes in Poland should be maintained and an attempt should be made to find new ways of setting the interchange fee and its rate under the existing scheme. Despite the above mentioned uncertainties, according to the Interchange Fee Task Force, there was a potential for further reduction of the level of the interchange fee in Poland, in view of, among other things, its level in some EU countries. However, this would require a legal certainty and clear rules of the functioning to assure market participants which manner of setting the interchange fee is consistent with competition law. The authors of the report expressed the hope of finding a solution that would, on one hand, respect the decision of the OCCP and on the other hand, would allow to maintain the four-party nature of payment card schemes in Poland. At its meeting on 1 October 2007 the Payment System Council accepted the Report on the Interchange Fee and recommended it should be submitted to the NBP Management Board which examined and accepted it on 29 November 2007. The report was officially submitted to the OCCP on 10 December 2007.
6.3. Programme for the Development of Cashless Transactions in Poland in 2011-2013
The issue of the interchange fee was also included in Measure No. 10 of the draft Programme for the Development of Cashless Transactions in Poland in 2011-2013.80 This document was preceded by the draft Strategy for the development of cashless transaction in Poland for 2009-2013. The draft Strategy was developed in 2008-2009 at the initiative of the National Bank of Poland in cooperation with the Polish Banks Association, the banking sector and other entities operating in the payment card market, including Visa and MasterCard payment organisations as well as the Ministry of Finance. In 2008, the Strategy was the was on the agenda of the meeting of the Payment System Council and in January and February
80 Ministry of Finance, Programme for the Development of Cashless Transactions in Poland in 2010-2013 (draft), December 2010, p. 143-145, http://www.mofnet.gov.pl/_files_/instytucje_finansowe/uslugi_platnicze/program_rozwoju_obrotu_bezgoto wkowego_w_polsce_na_lata_2010-2013.pdf (September 2011).
71 2009 it was accepted by the Management Board of the Polish Banks Association and the Management Board of the National Bank of Poland, respectively and in March 2009 it was submitted to the Ministry of Finance. Based on the above mentioned strategy, the draft Programme for the Development of Cashless Transactions in Poland in 2010-2013 was developed. As part of Measure No. 10 of the Programme: Changing the structure of interchange fees for particular types of merchants and card payments and eventually adjusting those fees to the average EU level its purpose, description, roadmap and monitoring indicators were defined. The objective of the measure was set to be an optimal adjustment of the rates of the interchange fee to the structure and specificity of various groups of merchants and various types of card payments. The expected effect of this measure is an increase in the number of transactions at merchants, including those entities that had previously not been interested in accepting cards, as well as stimulation of the development of micropayments and low-value payments. In addition, commissions of acquirers and the fee for terminal lease should also change accordingly with the decrease of interchange fees. In the justification it was stated that the payment card market in Poland was at its development stage and the smaller number of cards and the number of transactions per capita in comparison with the EU average suggested that necessary measures should be undertaken, such as: a change to the structure of fees for certain types of merchants and modification of payments made with payment cards and a gradual adjustment of these fees to the level of the EU average. The roadmap specified that the change to the interchange fee structure (different rates depending on the transaction value, substitution of the percentage fee with an amount-based fee in certain operations) will be the responsibility of banks and payment organisations. However, the deadline for the introduction of these changes was not specified at that stage of arrangements. Nonetheless, it should be expected that this process should be completed by the end of 2013. Monitoring indicators are presented in table 10 below.
72 Table 10. Monitoring indicators No. Indicator Indicator base Expected Frequency of Data source value value of the indicator indicator in measurement the target year 1. Value of the Merchant 1.59%-5.00% cannot be once in 2-3 acquirers, Service Fee (MSF) for assessed years banks different types of merchants 2. Rate of interchange fees 0.95%-1.90%* EU average once in 2-3 Card for different types of years organisations, merchants and banks payments * The above range of the interchange fee applies to all merchants, the fee varies depending on the type of card, the technology used, method of transaction authorisation etc.
The draft Programme was submitted for deliberations in December 2010 by the Ministry to the Council of Ministers which requested its update and did not adopt the Programme at its meeting in January 2011 (the programme was to apply to the period of 2011-2012 instead of 2010-2013). The update was performed by June 2011, however, due to various factors, including other urgent ministerial and governmental work in connection with the Polish Presidency and the approaching expiration of the Parliament’s term in office aas well as the emergence of the problem of high interchange fees incurred by merchants in respect of cashless card payments during parliamentary debates on the act on payment services, the draft Programme was not presented again. The adoption of the programme by the Council of Ministers would give it the status of a government programme, which would allow for a more effective implementation of all measures under the programme. Some measures provided for in the Programme which do not depend on decisions of government institutions are, however, already being undertaken by the banking sector and the NBP. Among such measures are those in support of changing the structure of interchange fees and the reduction thereof. It should therefore be assumed that as a result of market activities, supported by the future government policy, the rate of interchange fees could and should be reduced in the coming years and, consequently, the costs of payment card acceptance in our country would also fall. It should also be noted that the demand to change the structure of interchange fees for different types of merchants and payments and adjust these fees to the average for the European Union, provided for in the Programme, was included in the document prepared and presented by the Polish Banks Association at a press conference on 21 September 2011,
73 which was entitled Position of the Polish Banks Association on the main directions supporting the economic development of the country,. The document had been developed as a set of key issues for the country and the society in connection with parliamentary elections in October 2011.81
6.4. Parliamentary work related to the Act on Payment Services
The interchange fee was also an important issue raised during the parliamentary work in 2011. It was the subject of a parliamentary question and the work of the Sejm and Senate committees dealing with the payment services act. Comments and suggestions to the act were motioned by large associations of merchants which, via the media and requests addressed to MPs, expressed their dissatisfaction with the high level of interchange fees in our country. On 20 April 2011, Member of Parliament, Paweł Poncyljusz, submitted a parliamentary question no. 22608 to the Minister of Finance regarding excessive fees for the usage of payment cards.82 In its question, the MP drew attention to a very disturbing phenomenon of inflated fees for the acceptance of card payments and stressed that the problem concerned entrepreneurs who were charged with costs at 1.5% of the transaction value for allowing customers to make card payments. Referring to the NBP data on the value of card transactions in Poland amounting to PLN 80 billion per year, the MP calculated that the annual revenues of banks from the interchange fee amounted to PLN 1.2 billion. He remarked that a portion of this amount could remain with entrepreneurs and indicated that interchange fees in Poland were the highest in Europe (compared to 1% in the Czech Republic and 0.4% in Bulgaria). He also added that according to payment organisations the level of rates of these fees resulted from market conditions, while in banks' opinion higher or lower fees could not be set until the 2006 OCCP proceedings were finalised. According to the MP, the matter could be resolved through the implementation of the EU directive on payment services, which Poland should have done as early as in 2009, but a relevant draft act had not been delivered yet by the Ministry of Finance. The MP stressed that all errors and omissions in this matter mostly affected entrepreneurs. Therefore, the MP addressed the following questions to the Minister of Finance: - was the Minister of Finance aware of the problem presented?
81 Position of the Polish Banks Association on the main directions supporting the economic development of the country, Polish Banks Association, http://www.zbp.pl (September 2011). 82 The Sejm of the Republic of Poland, Parliamentary question no. 22608, http://orka2.sejm.gov.pl/IZ6.nsf/main/31DE6CCA (September 2011).
74 - why had not the Ministry of Finance undertaken any action to implement the EU directive regulating the designated area? - did the Ministry of Finance have the instruments allowing to regulate the designated area? The Ministry of Finance replied to the MP on 6 September 2011. With regard to the awareness of the problem of interchange fee rates in Poland, the Ministry of Finance pointed out, among other things, that this issue was the subject of its special attention in connection with the consequences it produced for the operation of the entire trade and services market and in the light of the need to enhance cashless transactions. The issue of interchange fees on the Polish market had already been analysed by the Ministry of Finance during work on the payment services act and work on the development of the Report on the interchange fee prepared by the NBP and the Polish Banks Association in 2007, as part of the Strategy of the development of cashless transactions in Poland for 2009-2013, prepared by the NBP, the Ministry of Finance, the Polish Banks Association, the banking sector and other market operators, and as part of the draft Programme for the Development of Cashless Transactions in Poland in 2011-2013 which was created on the basis of the above mentioned Strategy. The Ministry pointed out that a detailed report comparing the rates in Poland with other EU countries was to be developed and presented by the NBP in October 2011. The Ministry expressed the opinion that any reduction in the interchange fee which constituted a major part of the merchant service charge should help reduce the cost of the activities of the merchant offering cashless payment method to its customers. Otherwise, the cost of using cashless payments would only change the beneficiary. According to the Ministry, the main purpose of the reduction of the interchange fee should be to reduce the cost of cashless transactions, which consequently should help stimulate the consumption, and therefore bring higher benefits to retailers in connection with the acceptance of payment cards. It was stressed in the answer that the cashless transactions market in Poland was still at its development stage and the development of the acceptance network and payment processing generated costs. Yet, the problem of the highest interchange fee in Poland among EU countries had been noted. The Ministry of Finance also commented on the progress of the said OCCP proceedings and the decision of December 2006 and indicated that the duration of the dispute and the number of appeals against the judgements show that these proceedings were extremely complex and the manner of banks' operations had not been determined yet by a court judgement. With regard to the questions contained in the parliamentary question which concerned the implementation of Directive 2007/64/EC and instruments for the regulation of the
75 interchange fee by the Ministry of Finance, the Ministry replied that the Directive did not introduce direct price regulation tools (including for the interchange fee) and did not relate in any way to the issue of its regulation by the authorities of the Member States. In addition, the issue of one of the options of the directive was stressed, namely the possibility of choosing by the Member States whether to permit or prohibit charging by entrepreneurs single fees to customers for a single card payment which allow the use of POS terminals, i.e. a surcharge. The purpose of the surcharge is to cover costs of the merchant service charge, which should lead to a reduction in overall product prices, since costs of the payment would be borne directly by the payer, while entrepreneurs may benefit from increased price competitiveness. In its reply the Ministry of Finance pointed to the fact that after the entry into force of the payment services act the regulator and supervisors of this market (Ministry of Finance, NBP, PFSA) would gain greater access to data on the operation of the previously unregulated market, which should create opportunities for more detailed analyses of the cost structure and actual prices of payment instruments. The Ministry also indicated that it was examining possible instruments which, in the light of the results of such an analysis, could be used by the regulator if the interchange fee was not reduced by the banking sector in the form of self- regulation. If a legislative tool had be used, it would be subject to arrangements, including with the OCCP, in order to achieve the best effect of both consumer and competition protection, while ensuring the development of cashless transactions.83 In turn, on 8 July 2011, four major business associations, namely: the Polish Organisation of Trade and Distribution together with the Polish Organisation of Oil Industry and Trade, the Polish Chamber of Liquid Fuels and the Chamber of Commerce of the Polish Hotel Industry sent a letter to the member of the Public Finance Committee at the Sejm of the Republic of Poland, Member of Parliament Sławomir Neumann, proposing to include the following two issues in the payment services act being the subject of the committee's work: - the right of surcharging, understood as charging additional fees or giving discounts for the use of specific payment instruments by the recipient (retail and service outlets, petrol stations, hotels, restaurants); i.e. charging fees only up to the amount of costs incurred by merchants for the benefit of payment organisations (the aim of recipients is not to earn income from fees but only to recover costs incurred); - introduction of a solution allowing to regulate the market in respect of: (i) the level of the interchange fee and (ii) solutions imposed arbitrarily on market participants by Visa and
83 The Sejm of the Republic of Poland, Parliamentary question no. 22608, http://orka2.sejm.gov.pl/IZ6.nsf/INTop/22608?0penDocument (September 2011).
76 MasterCard international payment systems; in this context it was proposed the Polish Financial Supervision Authority be granted powers to control decisions made by the above mentioned systems with regard to restricting competition and introducing economically unjustified charges.
Arguments in favour of introducing the right of surcharging included: - higher effectiveness when negotiating with the bank the level of charges for accepting cards, - possibility of overcoming the barrier to the promotion of card payments, i.e. high costs of acceptance in Poland, - possibility of preventing a high inflationary pressure which occurs when there is no incentive to lower transaction costs (therefore, retailers are forced to include the costs that are not related to direct operations in the price of goods or services), - possibility of liberalisation of the payment services sector by allowing customers (who know the transaction costs) to select the payment instrument at the time of the transaction, - introduction of this charge by many other countries within the framework of national options permitted by the Directive, - weakening of the monopolistic position of the international payment organisations.
The following arguments were, in the opinion of the authors, in favour of granting the powers indicated in the proposal to the Polish Financial Supervision Authority: - fees applicable in Poland are among the highest in Europe, and this situation has persisted for nearly 20 years, - the market has no influence on arbitrary decisions of payment systems, despite the decision of the President of the OCCP (prohibiting the use of those charges) and the pending proceedings, - it is impossible to correct decisions of the card systems concerning interchange fees because these decisions are made arbitrarily, are not negotiable and are determined by way of cartel agreements or using the market position gained, - regulation of activities of entities with a dominant market position is practised in the energy and telecommunications market, - the proposed regulation is consistent with the purpose of the transposed Directive, i.e. liberalisation of the payment services market and increasing competition on this market (it will therefore allow the regulation of agreements restricting the competition, i.e. arbitrary
77 fixing of interchange fees by payment organisations). The letter also stressed that the proposed amendments to the act were designed to enable Polish entrepreneurs to compete on the EU market under the same terms as entrepreneurs established in other Member States. The letter also included a ready proposal for the articles of the payment services actl (articles 38, 102, 105, 118, 119, 120). On 26 July 2011 a meeting of the Senate's Budget and Public Finance Committee was held which dealt with the draft payment services act. Representatives of the NBP were also invited to the meeting. In addition, a day before the above mentioned meeting the NBP sent a letter to the Chairman of the Budget and Public Finance Committee of the Senate of the Republic of Poland, Kazimierz Kleina, in which it negatively evaluated the proposals of large merchant associations for the introduction of amendments to the above mentioned act, in particular the inclusion in the act of the principle that entities accepting card payments cannot be restricted by providers in terms of a surcharge imposed on consumers for card usage. These proposals had already been unsuccessfully motioned by the above mentioned associations in the earlier stages of work on the act, i.e. at the stage of public consultation, as well as at the stage of the Sejm work when they were analysed by the Ministry of Finance and the NBP. The government - with a favourable opinion of the NBP - concluded that the most desirable situation was for the legislative acts to interfere into contractual relationships between the entities on the payment services market as little as possible (especially if such interference would adversely affect the position of consumers). In the government's draft of the act, the issue of charging fees was left to market solutions (maintaining the current legal order – applying such fees would not be prohibited but, at the same time, applying them would not be treated as a requirement), i.e. it would be negotiated between acquirers and merchants who may specify in the agreements whether such fees will or will not be imposed on consumers. According to the NBP, the proposal to introduce an unconditional possibility for merchants to impose surcharges on consumers was a wrong solution for several reasons: 1. The proposal of the association seeks to recover expenses incurred by merchants (interchange) at the expense of consumers (surcharge), and therefore change the mechanism of fee distribution functioning currently in Poland and in almost all markets worldwide. Therefore, the proposal does not refer to the basic reason addressed in the letter submitted by the authors, i.e. the high level of the interchange fee in Poland but concerns the issue of retaining this fee, albeit in a different form and incurred by another group of the four-party card model.
78 2. The proposal of the authors is a solution that interferes too far into the sphere of mutual market relations. The basic reason for motioning the proposal by its initiators (the high level of interchange fees) may be eliminated in the near term as a result of the activities of the market itself, supported by Government policy (rather than statutory regulation), in particular owing to the Programme for the Development of Cashless Transactions in 2011-2013. As part of the work on this Programme representatives of Visa and MasterCard payment organisations approved the provisions on activities related to the interchange fee, including a reduction in interchange fees in Poland to the EU average level. 3. The introduction of a surcharge may - according to the associations - increase the number of outlets where cards are accepted. However, the introduction of charges for the use of the card can effectively discourage card holders to use this payment instrument, and this can cause a decrease in the number of acceptance points and therefore the effect may the opposite of what was intended. 4. The payment services act is not the right place for regulating the phenomena indicated by the associations of merchants, such as the lack of fair competition in the internal market. Relevant laws prohibiting anti-competitive practices are already in place and are being enforced (OCCP proceedings on interchange fees). To conclude, the NBP stressed that the acceptance by the Senate of the Republic of Poland of merchant associations’ demands would contribute to constraining the growth of cashless transactions in Poland and could give rise to negative public opinions. As a result of actions undertaken, among others, by the NBP, proposals of large merchant associations for the introduction of surcharges and powers for the PFSA to regulate the dominant payment service providers or agreements between payment service providers on the payment card market were not included by the Senate into the draft act concerned. In response to the position taken by the NBP, on 3 August 2011, the Chairman of the Budget and Public Finance Committee at the Senate of the Republic of Poland, Kazimierz Kleina, sent a letter to the President of the NBP, Marek Belka, asking to submit information to the members of the Committee on measures taken by the NBP with respect to interchange fees and surcharges. He also noted that the rate of the interchange fee and the introduction of surcharges were widely discussed during the debate on the act on payment services. On 11 August 2011, First Deputy of the President of the NBP, Piotr Wiesiołek, in response to the letter from the Chairman of the Budget and Public Finance Committee at the Senate of the Republic of Poland, Kazimierz Kleina, pointed out that the NBP did not have
79 the legal capacity to interfere in the level of fees charged by acquirers, banks and payment organisations. In this area the NBP may act indirectly, by performing the function of the so- called catalyst for change. NBP is making efforts to influence the directions of the payment system development and the operation of market players through cooperation and discussion with the banking sector, including at the forum of the Payment System Council and the Coalition for Cashless Transactions and Micropayment as well as through research and analytical, educational and promotional activities. The issue of interchange fees has long been of interest to the NBP. The first major document was the Report on the Interchange Fee developed in 2007 by experts from the Payment Systems Department of the NBP and the Polish Banks Association. The above report, which was accepted by the Payment System Council in October 2007, examines in detail the principles for the functioning of the interchange fee in Poland and other countries, and presents the role of this fee in the Polish system of payment cards. The letter also informed of work conducted by the NBP in 2011 on the next report on the interchange fee where rates of interchange fees in individual EU countries will be compared. This study will be presented to the Payment System Council in October 2011 and in the opinion of the NBP will represent a valuable contribution to the discussion conducted with payment organisations and card issuing banks on re-examining the rate of interchange fees applicable in the Polish market. Attention was also drawn to the inclusion of the issue of interchange fees (as part of measure no. 10) into the draft Programme for the Development of Cashless Transactions in Poland in 2011-2013, the content of which was accepted by actors operating in the market for payment services, including payment organisations.
6.5. Activities of the Payment System Council at the NBP and establishment of the Interchange Fee Task Force
In accordance with previous announcements (see section 6.4), on 3 October 2011 at a meeting of the Payment System Council a report prepared by the Payment Systems Department of the NBP entitled Analysis of the functioning of interchange fee in cashless transactions in the Polish market, version 1.0 was presented. Based on the submitted material, the Council decided to establish an Interchange Fee Task Force (IFTF) which would comprise representatives of all interested parties, including merchants, issuers of payment cards, card organisations, acquirers, consumers and government institutions. On the basis of the above mentioned document and the provisions of the Programme for the Development of
80 Cashless Transactions and taking into consideration the essential role to be played by the interchange fee, i.e. setting the balance between the issuing side and the accepting side, the IFTF was obligated to analyse the possibility of changing the structure and rate of the interchange fee in Poland. The coordination of Task Force's work was entrusted to the National Bank of Poland. At the same time, the Payment System Council stated that it expected that: - The results of IFTF work will be prepared and presented at a Council's meeting in March 2012, after which - card organisations will prepare a schedule of activities aimed at achieving the expected structure and rate of the interchange fee and that it will be presented at a Council's meeting in June 2012. Therefore, the Payment System Council expressed its expectation that although the proposals for changes in the structure and level of the interchange fee, including the pace and level of changes in the fee rate in the coming years, conditions for introducing these changes and indicators of monitoring the changes, should be developed by the IFTF, they should, in addition to being presented to the Council, also be presented to competent decision-makers in respect of the possibility of making such changes, i.e. to relevant structures and bodies in Visa and MasterCard organisations. By the end of 2011 two meetings of the Task Force were held: on 21 November 2011 and on 14 December 2011.
81 Chapter 7 Examples of countries which introduced changes to the level or manner of setting the interchange fee
The problem of the interchange fee level was the subject of discussions as well as regulatory actions or decisions of relevant bodies in many countries around the world. Given the limited possibility to describe all the cases in full, this study presents in more detail only four most characteristic and widely commented examples of countries where such activities were conducted, including two EU countries (Hungary and Spain) and two non-EU countries (Australia and United States).
7.1. Hungary
The Hungarian Competition Authority initiated proceedings in 2008 in connection with a high level of the interchange fee against banks and payment organisations.84 Due to the opening of these proceedings Hungarian banks decided that they did not want to hold responsibility for the multilateral setting of this fee and that cross-border rates will be applied by default instead of the previously existing rates,. The decision contributed to a significant reduction in the fee for Visa cards, from about 1.4% of the transaction value to EUR 0.28 for debit transactions and to 0.7% of the transaction value for credit card transactions. The above rates for both types of cards were subsequently reduced as a result of decisions made by the Management Board of Visa Europe in March 2009, and then in February 2011 fees for debit card were further reduced to 0.2% following the entry into force of the second agreement concluded between Visa Europe and the European Commission.85 In 2009, interchange fees for Maestro and MasterCard cards were also significantly reduced.86 However, it should be noted that according to the data collected by the NBP, in September 2010, interchange fee rates were higher for MasterCard cards than for Visa cards. While effects of these changes should be assessed only after a few years from their introduction, when analysing statistics on the growth rate of the number of POS terminals in Hungary compared to other selected EU countries and the EU average, it can be concluded that the acceptance network in Hungary is developing much better than the EU average,
84 A. Turján, É. Divéki, É. Keszy-Harmath, G. Kóczán, K. Takács, Nothing is free: A survey of the social cost of the main payment instruments in Hungary, Magyar Nemzeti Bank Occasional Papers 93., 2011. 85 Data provided by Visa Europe. 86 Data provided by Mastercard Europe.
82 however slightly worse than in Finland, for instance, where the level of interchange fees is one of the lowest in Europe. A decline in the growth rate in 2010 was observed not only in Hungary but also in Finland, in Bulgaria and Poland which has the highest level of interchange fees in the UE, and on the average in the EU.
Table 11. Growth rate of the number of POS terminals in Hungary compared to other selected EU countries, 2006-2010. Country Variable 2006 2007 2008 2009 2010 2006-2010 Number of POS terminals 45,840 54,580 60,780 70,960 78,440 Hungary Growth rate 19.1% 11.4% 16.7% 10.5% 71.1% Number of POS terminals 31,640 48,900 53,990 59,450 60,760 Bulgaria Growth rate 54.6% 10.4% 10.1% 2.2% 92.0% Number of POS terminals 105,000 135,000 153,000 176,000 201,000 Finland Growth rate 28.6% 13.3% 15.0% 14.2% 91.4% Number of POS terminals 176,480 186,610 212,340 230,580 251,830 Poland Growth rate 5.7% 13.8% 8.6% 9.2% 42.7% Number of POS terminals 7,090,760 7,644,830 8,222,290 8,550,420 8,806,430 EU Growth rate 7.8% 7.6% 4.0% 3.0% 24.2% Source: Own study based on the Statistical Data Warehouse, ECB, December 2011.
It should also be noted that the interchange fee is one of the components of costs of payment card acceptance incurred by merchants. In addition to the costs of the lease or purchase of terminals, the merchant service charge plays a major role for retailers. The level of merchant service charges offered in the Hungarian market is quite high and it varies depending on the acquirer in the range from 1.5% to 2% of the transaction value.87 Although these are rates of the preliminary offer, it appears likely that they do not deviate significantly from the actual, finally agreed level between the acquirer and the merchant. It should be noted, however that in comparison with the Polish market, the difference between the level of the interchange fee and the level of the merchant service charge in Hungary is several times higher, which may be a factor causing a slower than expected growth of the acceptance network in Hungary. In addition, the reduction in the interchange fee could produce more visible results if both payment organisations reduced rates to a similar level. In this way a potential migration of banks to products with a higher interchange fee rate, i.e. from the Visa system to MasterCard, could be avoided. It is also worth noting that according to the data of the Hungarian Central Bank there are currently approximately 59 thousand payment card acceptance points (66 thousand POS
87 Data obtained from Visa Europe.
83 terminals) in Hungary, while the number of all retail outlets is estimated at 235 thousand. This implies that the level of saturation of the acceptance network in Hungary is around 25%. It can therefore be concluded that this level is close to the Polish market and has a large development potential (a significant market area to be developed, particularly outside Budapest which according to AT Kearney estimates represents more than 1/3 of the total base of installed POS terminals in Hungary).
7.2. Spain
Disputes over interchange fees have lasted in Spain for many years. In 1999 an agreement was reached (between banks, associations of card issuers, retailers and representatives of the government), under which associations of payment card issuers agreed to gradually reduce the interchange fee by 0.125% per year to the level of 2% in 2007. In the meantime, associations of payment card schemes were obligated to submit an application to the Court of Competition Protection for obtaining an individual permission to apply their existing rules of setting the interchange fee. After long-lasting consideration, in June 2005 the Court of Competition Protection in Spain issued a decision which refused or revoked individual permissions for payment card systems and established specific conditions which had to be satisfied by these systems in order to obtain a permission to apply the interchange fee: - the level of the interchange fee must be different for credit card transactions and debit card transactions, in accordance with the costs associated with these transactions, - the interchange fee for debit cards should be fixed in accordance with the authorisation and transaction processing costs which include costs of the payment process from the moment of authorisation to the final payment. In addition, these costs should be expressed as a fixed amount for each transaction. - the interchange fee for credit cards should be fixed in accordance with the authorisation and transaction processing costs which include costs of the payment process from the moment of authorisation to the final payment. These costs should be expressed as a fixed amount for each transaction. In addition, the fee should take into account the fraud component which is affected by the risk of the use of a credit card in a fraud transaction. - the level of the interchange fee must vary depending on whether the transaction is made via POS terminals, phone or the Internet,
84 - any changes in setting the principles and the level of interchange fees must be approved by the Court of Consumer Protection, - the level of interchange fees must be made public to banks and retail outlets.
This decision was appealed to the Spanish court, however the interested parties, i.e. national payment card schemes, retailers, banks and the Ministry of Commerce immediately started negotiations in order to reach an agreement. The agreement was reached in December 2005. It refined the provisions of the Court's decision and agreed, among other things:88 - a schedule for a gradual, annual reduction in fee rates in a period of three years from 2006 to 2008 (transitional period) and a simultaneously resuming discussions on the methods of determining the level of interchange fees, - starting from 2009, rates of the interchange fee will be set on the basis of a cost analysis which should be performed by each of the systems by the end of July 2008 and submitted to the national Competition Authority. If the Competition Authority does not approve a particular methodology applied, the transitional period may be extended until 2010. - commitment to gradually reduce these rates to the level of fees applied in other countries of the European Union, - establishment of a Task Force consisting of representatives of the interested parties, in order to monitor the implementation of the provisions contained in the agreement and to promote card usage.
A schedule of the agreed reduction in interchange fee rates taking into account the type of card and the turnover achieved by retailers as part of payment card acceptance is presented in table 12.
Table 12. Maximum rates of interchange fees in the payment card market in Spain as set as in the 2005 agreement Turnover 2006 2007 2008 2009-2010 Euro (€) Credit Debit Credit Debit Credit Debit Credit Debit (%) (€) (%) (€) (%) (€) (%) (€) 0 – 100 million 1.40 0.53 1.30 0.47 1.10 0.40 0.79 0.35 100 – 500 million 1.05 0.36 0.84 0.29 0.63 0.25 0.53 0.21 500 million + 0.66 0.27 0.66 0.25 0.54 0.21 0.45 0.18
Source: Materials provided by Visa Europe (November 2011).
88 S. Carbo-Valverde, s. Chakravorti, F. Rodriguez Fernandez, Regulating two-sided markets, an empirical investigation, ECB Working Paper Series, European Central Bank, 2009, No. 1137, p. 18.
85 The transitional period was extended until the end of 2010 because the Competition Authority had not approved cost studies submitted by the interested parties.89 At the end of the transitional period, the Competition Authority issued a statement that the systems were permitted to freely set the level of interchange fees provided that it complied with the EU and Spanish competition law.
It should also be noted that the Spanish Competition Authority pointed to an important fact that the establishment of a transitional period allowed banks to adjust to the new rules, while avoiding rapid changes that could be harmful to both card holders and the system itself. The results of research conducted on the basis of, among other things, Spanish experience by the authors of the publication entitled: Regulating two-sided markets, an empirical investigation, published under the auspices of the European Central Bank, are worth noting. They show that the reduction in interchange fees in Spain resulted in a significant increase in acceptance and use of payment cards in this country. According to the authors, this effect may be particularly strong in countries where card acceptance is very low. These results also show that in such markets a reduction in the level of the interchange fee to a certain level contributes to increased card usage owing to which banks' revenues are not reduced.90
7.3. Australia
One of the first countries to note the issue of the interchange fee was Australia. In 1999, the Australian central bank - Reserve Bank of Australia (RBA) and the Australian Competition and Consumer Commission (ACCC) jointly analysed competition in the payment card market in Australia. The analyses related to the credit card market and led to the conclusion that some of the principles applied in this market hinder the proper and effective functioning of this payment instrument. The objections raised related to, among other things, joint setting of the interchange fee, the prohibition for retailers to charge additional fees to customers who make credit card payments ("no surcharge" rule) and restrictions on access to payment card schemes participation for non-credit institutions. In March 2001, the ACCC formally asked the central bank to prepare a reform programme relating to the payment card system with regard to MasterCard, VISA and Bankcard cards. Following the process of analyses and consultations, in August 2002 RBA
89 Materials provided by Visa Europe (November 2011). 90 S. Carbo-Valverde, s. Chakravorti, F. Rodriguez Fernandez, Regulating two-sided markets, an empirical investigation, ECB Working Paper Series, European Central Bank, 2009, No. 1137, p. 15- 16, 27-28, 34-35.
86 published standards for the interchange fee and the no-surcharge rule which must be met by the above mentioned schemes. Initially, the manner and legitimacy of introducing these regulations were challenged by VISA and MasterCard, however the appeal of these organisations was rejected in September 2003 by the Australian Federal Court. As a result of these actions, the reform of credit card schemes began as of 1 January 2003. It was based on three main principles: - ensuring an objective, transparent and cost-based methodology for setting interchange fees (payment organisations were obligated to set and publish new rates of the interchange fee by 31 October 2003), - abolishing the existing ban on applying a surcharge by retailers to customers who pay with credit cards (from 1 January 2003), - abolishing restrictions and allowing the issue of payment cards and conducting the activities of an acquirer to all entities, provided they meet the requirements set by the Australian Prudential Regulation Authority (APRA). The requirements were published in February 2004. The introduction of the new standards reduced the average level of the interchange fee for credit cards from 0.95% to 0.55% of the transaction value.
Table 13. Level of the interchange fee for credit cards in Australia (% of the transaction value) Description Before the After the reform reform Bankcard MasterCard VISA Standard transactions 1.2% 0.49% 0.62% 0.60% Electronic transactions 0.80% 0.49% 0.46% 0.44% Source: Reserve Bank of Australia.
The reduction in the level of interchange fees resulted in a reduction of commissions paid by retailers to acquirers from the average of 1.41% to 0.99% of the transaction value. It was estimated that the reduction in fees would lower the Consumer Price Index by approximately 0.1 to 0.2 percentage points. At the same time it was pointed out, however that this change would be difficult to observe since this ratio may increase by an average of approximately 2.5% per year. The results of this reform are monitored and discussed all over the world as a classic case study. The first assessment of the effects of this reform indicated that retailers achieved
87 great benefits as the reduction in the interchange fee level lowered the cost of payment card acceptance and increased their revenues. However, analyses and opinions criticising the effects of the reform also started to appear. For instance, Capco Institute, a consulting firm, disputed the effects of the above mentioned reform. It argued, among other things, that contrary to the intentions of the central bank, the effects of this reform could affect card holders because it allowed retailers to impose additional charges on them in the case of credit card transactions. However, until now few retailers have decided to introduce fees for card transactions fearing they may lose customers paying with cards. The companies that introduced such fees include companies with a dominant market position. Moreover, according to Capco Institute, card issuers, seeking solutions to reduce their own costs, started to reduce some of the additional benefits and programmes previously offered to card holders, such as insurance, loyalty programmes etc. Card issuers also started to migrate from the four-party card scheme which became less profitable for them to local three-party schemes (where the issuer is at the same time an acquirer), which were not covered by the reform. To summarise, in the opinion of Capco Institute consumers not only did not benefit from the reduction in prices of goods and services in retail stores, but they lost a number of additional benefits previously attached to the card. Currently, a payment card is a more expensive instrument for consumers due to, among other things, higher fees for using the card and the possibility to charge a surcharge by retailers to customers paying with a credit card.91 Recent analyses of the effects of the interchange fee reduction in the Australian market suggest that credit card users pay higher fees to issuers than debit card users. On the other hand, the cost of credit card acceptance decreased and that of debit cards slightly increased. In addition, according to a survey conducted in 2010, 40% of large and 20% of smaller merchants charge a surcharge on card transactions. The average rate of this charge was 1.7% of the transaction value for Visa and MasterCard cards and 2.7% of the transaction value for Amex and DinersClub cards. According to preliminary estimates of the central bank, the net cost of credit and debit cards is almost identical for card holders, taking into account systems of rewards associated with credit cards, provided that card holders duly repay debt. The regulation allowed retailers to save costs of USD 1 billion per year.92 In addition, the analysis of statistical indicators for the payment card market in
91 F. Burelli, Capco Institute on European Commission decision on InterChange, Capco Institute, 2007. 92 M. Bullock, A Guide to the Card Payments System Reforms, Bulletin, Reserve Bank of Australia, September http://www.rba.gov.aU/publications/bulletin/2010/sep/7.html#f (December 2011).
88 Australia shows that this market is growing rapidly, as shown in table 14.
Table 14. Payment card market in Australia - selected statistical data Indicator 2006 2007 2008 2009 2010 Number of card payment transactions per capita total 125.4 134.8 146.5 157.5 172.8 debit cards 64.5 71.2 80.7 90.2 102.5 credit cards 60.9 63.6 65.8 67.3 70.3 Value of card transactions (in USD) per capita 9,221 11,249 12,46 12,253 15,09 Number of POS terminals in thousands 570,4 628,8 669,46 697,8 707,63 Source: Own study based on: Bank for International Settlements, Committee on Payment and Settlement Systems, Statistics on payment, clearing and settlement systems in the CPSS countries, Figures for 2010, September 2011, Preliminary release, p. 413-461, http://www.bis.org/publ/cpss98.pdf (December 2011).
In the analysed period (2006-2010), both the number of transactions executed with each type of cards per capita, the value of card transactions per capita and the number of POS terminals grew quite rapidly. Therefore, it can be concluded that the regulation of the level of interchange fees affected the market positively rather than negatively.
7.4. United States
The issue of the interchange fee is also an element of extensive analyses and discussions in the United States. The Durbin amendment, which forms part of the Restoring American Financial Stability Act of 2001 (referred to as: the Dodd-Frank Act) has been in force since 1 October 2011. This Act was passed as a result of the financial crisis and sought to protect American consumers from financial industry abuse. The U.S. President Barack Obama signed it on 21 July 2010. The amendment authorises the Federal Reserve Bank to regulate the payment card market in respect of fees for transactions made with payment cards. The author of the amendment is Senator Richard Durbin who concluded that the level of the interchange fee is not based on actual expenses incurred by banks and payment organisations on the development and functioning of the payment system, but instead is determined top-down by these institutions in order to achieve high profits. Such action was therefore treated as an illegal price fixing arrangement. The rate of the interchange fee for each debit card transaction was set at no more than 21 cents + 0.05% of the transaction value. In addition, issuers who develop and implement fraud preventing procedures may receive additionally no more than 1 cent on each
89 transaction. The total maximum value of the interchange fee for the issuer cannot exceed 22 cents + 0.05% of the value of a debit card transaction.93 The amendment does not apply to issuers who have assets of less than USD 10 billion. It is worth noting that the regulation does not apply to credit cards. In the U.S. the number of credit cards issued is much higher than the number of debit cards (in 2009: 1.1 billion cards, i.e. 3.694 cards per capita and 278.8 million, i.e. 0.91 cards per capita, respectively). In 2009, the value of debit card transactions and credit card transactions amounted to USD 1.4 trillion and USD 1.9 trillion, respectively, although in terms of the number of transactions the number of debit card transactions prevailed. In 2009, there were 125.3 debit card transactions per capita and 72.7 credit card transactions per capita, while in 2006, these rates were only 87.1 for debit cards and 74.8 for credit cards.95 It can therefore be expected that revenues of issuers from this business will decrease. The response of banks to these changes was immediate. Bank of America announced its decision followed by several other banks that announced their plans to increase monthly fees for the debit card usage from USD 5 to USD 10. Shortly after the decision of Bank of America its customers began a protest. One of the Bank's customers posted information on one of the social networks in which she did not agree to the increase in fees. This protest gained an overwhelming support from Internet users who joined the protest. Under the pressure of this initiative Bank of America withdrew from the previously made decision and other banks abandoned their intentions. Another recent initiative of customers dissatisfied with the activities of banks is a "Bank Transfer Day" which promotes the resignation from bank's services in favour of alternative banking services offered by credit unions. As a consequence of the social initiatives commercial banks such as Bank of America, JP Morgan Chase and Citibank have lost thousands of customers who closed their bank accounts. Credit unions operating in the U.S. gained more customers during one month than during the whole of the previous year, i.e. 650 thousand customers who invested funds with the total value of USD 4.5 billion.96 It may be argued that the scale of the protest would not have been so large if it had not been for the manifestations of outraged Americans as part of the Occupy Wall Street movement which was
93 Board of Governors of the Federal Reserve System, Press Release, Release Date: June 29, 2011. http://www.federalreserve.gov/newsevents/press/bcreg/20110629a.htm (December 2011). 94 In recent years there has been a significant decrease in the number of credit cards in the U.S. In 2006, there were still as many as 4.41 cards on average per 1 inhabitant of this country. 95 Bank for International Settlements, Committee on Payment and Settlement Systems, Statistics on payment, clearing and settlement systems in the CPSS countries, Figures for 2010, September 2011, Preliminary release, p. 413-461, http://www.bis.org/publ/cpss98.pdf (December 2011). 96 J. Kitowska, M. Lewkowicz, Ucieczka z banku, Gazeta Finansowa, December 2011, p. 71-73,
90 an expression of public discontent against the abuse by banks of their position and causing a global financial crisis by these institutions of public confidence. At the same time, it turned out that many merchants instead of passing to consumers, as previously declared, quite large savings from the reduction in the interchange fee in the form of lower prices, increased or maintained prices in the first two months after the introduction of the Durbin amendment, thus increasing their profits.97 When presenting the above examples of countries which changed the level or method of setting the interchange fee, it should also be added that one of the major differences between EU and non-European countries was the role of the central bank in these actions. While in Australia and the U.S. the central bank performed an important regulatory and decision-making role due to a wider scope of statutory responsibilities of the central bank, in Hungary and Spain and other EU countries the central bank's role in the described actions was much less active. This stems from the fact that under the provisions of the European law the interchange fee issue is an element of competition law and falls within the competence of the European Commission and national competition and consumer protection authorities.
97 Retailers and banks step up war of words over interchange fee cuts, Finextra, 9 December 2011.
91 Chapter 8 Scenarios for the development of the payment card market in Poland in the context of reduced interchange fee rates
8.1. Forecast for the growth in the value of cashless transactions in Poland
An important aspect from the perspective of the assessment of the payment card market in Poland is not only an analysis of statistical data for previous periods but also a forecast for the future development of this market. In the context of the interchange fee issue, the value of cashless transactions is of particular importance. Based on the graphical evaluation of the time series of cashless transaction values made in Poland in successive quarters from the third quarter of 2003 to the second quarter of 2011, the following components can be distinguished in the chart: trend, seasonal variations and random fluctuations. In practice, many methods are used for forecasting phenomena with a periodic component. In this case the method using trend models with seasonal variation will be applied. The method consists in estimating parameters of the analytical trend function separately for individual phases of the cycle. The forecast is obtained by extrapolating the estimated trend function separately for each phase. It should be noted that the trend lines found are the tool of statistical analysis (in this case) of the increase in the analysed phenomenon. Therefore, the application of this method requires a clear formulation of the assumption that the factors affecting the analysed phenomenon will not change over the forecast period.
Table 15. Forecasts of the value of cashless transactions executed in Poland and values of ex ante evaluation of prediction errors
Quarter Forecast for 2012 Ex ante evaluation of Ex ante evaluation of relative mean prediction error prediction error 1 y P 23 172 550 134 P P 2012,1 S2012,1 707 993 380 v2012,1 0,0306
2 y P 26 196 891 686 P P 2012,2 S2012,2 815 682 107 v2012,2 0,0311
3 y P 26 581 376 560 P P 2012,3 S2012,3 1 187 670 035 v2012,3 0,0447
4 y P 28 246 144 701 P P 2012,4 S2012,4 892 774 389 v2012,4 0,0316 Quarter Forecast for 2013 Ex ante evaluation of Ex ante evaluation of relative mean prediction error prediction error 1 y P 25 550 947 424 P P 2013,1 S2013,1 758 626 766 v2013,1 0,0297
92 2 y P 28 860 559 394 P P 2013,2 S2013,2 874 017 042 v2013,2 0,0303
3 y P 29 239 514 216 P P 2013,3 S2013,3 1 276 310 863 v2013,3 0,0437
4 y P 30 894 904 780 P P 2013,4 S2013,4 959 405 910 v2013,4 0,0311 Quarter Forecast for 2014 Ex ante evaluation of Ex ante evaluation of relative mean prediction error prediction error 1 y P 27 929 344 714 P P 2014,1 S2014,1 815 246 284 v2014,1 0,0292
2 y P 31 524 227 102 P P 2014,2 S2014,2 939 248 623 v2014,2 0,0298
3 y P 31 897 651 872 P P 2014,3 S2014,3 1 372 508 754 v2014,3 0,0430
4 y P 33 543 664 859 P P 2014,4 S2014,4 1 031 718 093 v2014,4 0,0308 Quarter Forecast for 2015 Ex ante evaluation of Ex ante evaluation of relative mean prediction error prediction error 1 y P 30 307 742 004 P P 2015,1 S2015,1 876 692 892 v2015,1 0,0289
2 y P 34 187 894 810 P P 2015,2 S2015,2 1 010 041 514 v2015,2 0,0295
3 y P 34 555 789 528 P P 2015,3 S2015,3 1 474 785 642 v2015,3 0,0427
4 y P 36 192 424 938 P P 2015,4 S2015,4 1 108 599 873 v2015,4 0,0306 Quarter Forecast for 2016 Ex ante evaluation of Ex ante evaluation of relative mean prediction error prediction error 1 32 686 139 294 942 022 472 0,0288
2 36 851 562 518 1 085 307 994 0,0295
3 37 213 927 184 1 581 962 911 0,0425
4 38 841 185 017 1 189 165 281 0,0306 Source: Own study based on calculations in a Microsoft Excel spreadsheet and Gretl econometrics package.
As shown in table 15, the relative ex ante prediction errors range from 2.88% to 4.63%. A graphical representation of the obtained forecasts is presented in chart 22. The blue colour marks the values of cashless transactions executed in Poland in the period from the third quarter of 2003 to the second quarter of 2011, while the red marks mark their predicted values for the subsequent quarters in 2011-2016.
93
Chart 22. Value of cashless transactions (PLN million) executed in Poland in 2003Q3 - 2011Q2 and forecasts for the subsequent quarters in 2011-2016 45 000
40 000
35 000
30 000
25 000
20 000
15 000
10 000
5 000
0
2003 Q3 2004 Q2 2005 Q1 2005 Q4 2006 Q3 2007 Q2 2008 Q1 2008 Q4 2009 Q3 2010 Q2 2011 Q1 2011 Q4 2012 Q3 2013 Q2 2014 Q1 2014 Q4 2015 Q3 2016 Q2 Source: Own study based on NBP data.
The obtained forecasts show that with the current growth trend of the analysed phenomenon the value of cashless transactions executed in Poland in the last quarter of 2016 may even exceed PLN 38 billion.
8.2. Example of a simulation of banks' income when the level of interchange fees is reduced
Based on NBP statistics and the related forecasts, a comparison of values of cashless transactions executed with payment cards in Poland in 2004-2016 (Chart 23) was prepared. In 2004, the total value of such transactions in Poland amounted to PLN 23.6 billion and in 2010 this figure reached nearly PLN 84 billion. In turn, the predicted value of card payments in 2016 totals as much as PLN 145.6 billion, i.e. PLN 60 billion more than in 2010. It should also be noted that since the date of the OCCP decision (end of 2006) the payment card market in Poland grew in terms of cashless transaction value more than twofold and from 2016, assuming that current trends are maintained, it may increase up to 3.5 times.
94 Chart 23. Value of cashless transactions (PLN billions) executed in Poland in 2004-2010 and the related forecasts for 2011-2016
160,0 145,6 140,0 135,2 124,9 120,0 114,5 104,2 100,0 95,1 83,9 80,0 72,6 63,1 60,0 51,3 39,5 40,0 30,6 23,6 20,0
0,0
Source: Own study based on NBP data.
Based on the transaction value, the value of income generated by banks issuing payment cards in Poland between 2004 and 2016 was estimated under two scenarios: (1) assuming the level of fees to remain at 1.5%, and (2) taking into account the proposal for changes in the level of the interchange fee, as presented in charts 24 and 25 respectively.98 The analysis also assumed that other factors will not change. The analysis of the estimated income of banks from the interchange fee achieved after 2006 showed that in 2007-2016 the issuers of payment cards may achieve, provided that the interchange fee remains at 1.5% (Chart 24), a total income of PLN 14.9 billion, in particular this income is estimated in 2011 at PLN 1.4 billion and in 2016 at PLN 2.2 billion. The financial surplus, defined as income earned above the level of 2006 income (reference point - the decision of the OCCP of December 2006), is estimated at 8.9 billion, i.e. income earned in each subsequent year (from the beginning of 2007 until the end of 2016) above PLN 590 million (area above the blue dashed line). It is also worth noting that the increase in this income, starting from 2007 until the end of 2016, i.e. shortly after the announcement of the decision of the OCCP, may increase by 270% (from PLN 0.59 billion to PLN 2.18 billion).
98 The analysis serves only as an example and shows the dependence of banks' income on the level of the interchange fee. A development of appropriate scenarios of changes in the level and structure of the interchange fee is the task of the Interchange Fee Task Force (see section 6.5).
95 Chart 24. Estimated income of banks (PLN billions) from interchange fees in Poland in 2004-2016 assuming the interchange fee is left at 1.5%
2,50 2,18 2,03 2,00 1,87 1,72 1,56 1,50 1,43 1,26 270% 1,09 0,95 1,00 0,77 0,59 PLN 8,9 bn 0,46 0,35 0,50
0,00 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: Own study based on NBP data.
In the second scenario (Chart 25) the average level of interchange fees of 1.5% for 2004-2011 was assumed for estimating the income (as an example of an assumption), and 1.3% in 2012, 1.1% in 2013, 0.9% in 2014, 0.8% in 2015 and 0.7 % in 2016 (figures at the bottom of chart 25).
Chart 25. Estimated income of banks (PLN billions) from interchange fees in Poland in 2004-2016, assuming a gradual reduction in the average fee level 1,60 1,43 1,40 1,35 1,26 1,26 1,20 1,12 1,08 1,09 1,02 1,00 0,95 0,77 73% 0,80 0,59 PLN 5,4 bn 0,60 0,46 0,35 0,40
0,20
0,00 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
IF rate 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.3% 1.1% 0.9% 0.8% 0.7% Source: Own study based on NBP data.
96 The above analysis, which serves only as an example, showed that along with a gradual reduction in interchange fees to the current EU level (0.7% - 0.8% depending on the organisation or type of card), banks' annual income from interchange fees: - would increase nearly 2 times from the announcement of the OCCP decision to the end of the analysed period, i.e. from PLN 0.59 billion in 2006 to PLN 1.02 billion in 2016 and would reach the level similar to that generated in 2009, - would decrease by nearly 20% in comparison with 2010, i.e. from PLN 1.26 billion to PLN 1.02 billion, respectively. In addition, the analysis of this scenario shows that the total income of banks in the period of 2007-2016, even with the proposed steady reduction of rates from 1.5% to 0.7% of the transaction value, may reach PLN 11.3 billion and the financial surplus (as defined above, under the first scenario) - approximately PLN 5.4 billion (the area above the blue line). However, it should be further noted that the estimated increase in the value of cashless card transactions presented in chart 23 has been prepared as an extrapolation of current trends, i.e. without taking into account a likely surge along with the implementation of measures laid down in the Programme for the development of cashless transactions in Poland in 2011-2013, and without accounting for the positive impact of the reduction in the interchange fee on the growth of the acceptance network, the increase in the number of persons using banking services and thus an additional increase in the value of cashless card transactions. It can therefore be expected that along with the reduction of interchange fees in Poland the payment card market will grow faster than in recent years and the total value of transactions will be higher than forecast, which will also have a positive impact on the size of banks' income from the interchange fee.
8.3. Interchange fee reduction - scenario analysis
In order to determine the possible directions of the development of the payment card market in Poland a scenario analysis was performed. The fundamental problem raised as part of this analysis concerns the reduction in the level of interchange fees for cashless transactions on the Polish market or no reduction.
Scenario no. 1 - No reduction in the level of interchange fees in Poland
If the level of interchange fees in Poland is not reduced, there will be strong pressure on introducing a surcharge in our country (as a national option as part of the implementation
97 of the Payment Services Directive) owing to which retailers would be able to offset costs related to payment card acceptance. Activities aimed at introducing the surcharge were already undertaken by large associations of Polish merchants, in particular during the parliamentary debates on the act on payment services in 2011. However, they were not approved at that stage, after, among other things, the intervention of the National Bank of Poland which considered it detrimental to the development of cashless transactions in Poland and concluded that the problem of interchange fees could be solved in Poland through market activities and not through regulations. However, the introduction of the surcharge option into the Polish legal system in the near future cannot be completely ruled out given the increased efforts of organisations associating thousands of merchants. Making the application of surcharges possible may cause negative effects for the development of the payment card market in Poland. Charging additional fees to customers by merchants could effectively discourage card users from making payments, who will use cash more often. In turn, a decrease in the usage of cards by to pay for purchases will provide a strong argument for retailers to abandon the services of acquirers. Such a combination of developments in the market will contribute to a decrease in the number and value of cashless transactions in Poland, which, in turn will contribute to the reduction in income: (i) for banks from interchange fees, and (ii) for payment organisations from fees charged to acquirers and issuing banks. Currently it is difficult to estimate the scale of financial losses, however it may be expected to be significant. Efforts undertaken for many years to stimulate the development of cashless transactions in Poland (in particular the development of the payment card market) may be wasted in a very short period of time. It should be stressed here that constraining the development of a particular market, by e.g. a wrongly conducted pricing policy, seems a much easier process than restoring the growth path in the market. According to the declarations of merchant associations, if the option for retailers to charge a surcharge to customers using payment cards to make purchases is not implemented in the Polish law, other activities on the part of retailers aimed at reducing card acceptance costs should be expected,. The results of the analyses show a slowdown in the growth of the number of merchants and outlets equipped with POS terminals. In the absence of any improvement in financial conditions for merchants, a further slowdown in the growth of the acceptance network, or even a halt in its development, should be expected. Moreover, not only will potential merchants not decide to accept cards but also the existing merchants will give up using POS terminals. This will have a negative impact on the income of banks issuing
98 cards and payment organisations. Merchants clearly emphasise that the main reason for high card acceptance fees is the interchange fee. Therefore, they are openly looking for solutions, other than the surcharge, which will allow them to reduce the costs of card acceptance. One of the examples of this situation is the fact that merchants are investigating the possibility of processing transactions executed in our country with cards issued in Poland as cross-border transactions - through a foreign head office of the retailer operating in Poland. Other alternatives analysed by merchants may include: (1) the possibility of accepting cards only of organisations with a lower level of the interchange fee, (2) limiting merchant loyalty programs only to customers paying by cash, (3) temporary suspension of payment card acceptance, (4) permanent withdrawal from payment card acceptance. The lack of a solution competitive to Visa and MasterCard systems is also indicated as one of the reasons for the current situation. The creation of a payment system with a more favourable business model for retailers than the current payment card systems could foster the development of retail payments market. However, the problem that should be analysed is whether wide interest of retailers in a new payment system is actually able to encourage commercial banks to assume the function of issuers of such instrument, if the business model is less favourable for banks than under the current payment card systems. An important aspect of the reduction in the level of interchange fee in Poland is the commitment by payment organisations and issuing banks to act accordingly under the Programme for the Development of Cashless Transactions in Poland. In the opinion of the NBP, activities aimed at achieving this goal should be undertaken regardless of the formal adoption of the Programme by the Government. The National Bank of Poland will make every effort to avoid compromising the development of cashless transactions in Poland. However, if it concludes that an inflated interchange fee in Poland poses a risk to further development of the payment card market, it will not stop regulatory initiatives in this area while analysing them in detail and assessing whether or not they are clearly disadvantageous for the consumer and for further development of cashless transactions.
Scenario 2 - Reduction in the level of the interchange fee in Poland to the average level of the fee applicable in the EU countries
It should be expected that in the case of a significant reduction in the interchange fee in Poland, the development of the payment card market in Poland will be maintained.
99 Therefore, it may even be expected that this market will grow faster than before. The number and value of transactions will increase significantly enough for the income from the interchange fee to also be considerable, despite a reduction in its rates. However, banks issuing payment cards will not suffer losses, but will achieve a slightly lower income, depending on the scale of the reduction. For instance assuming a reduction in the interchange fee proposed in the example in section 9.2 in the period of 2012 - 2016, this income would not be lower than the income earned in the previous three years, i.e. 2008, 2009 and 2010.99 Retailers will certainly generate financial benefits but these changes may also benefit consumers who should pay for goods and services less than in the case the level of fees was not reduced. A reduction in the level of interchange fees may prompt some issuers to consider a decision to introduce fees for customers, such as for the possession or usage of a card, or giving up the existing price promotions. Taking into account the fact that most customers are very sensitive to changes in prices that are adverse for them, one would expect a mass resignation from banking cards by customers, and also from other banking services, including the possession of any account or - if the US scenario were to be repeated - a mass migration from banks to co-operative savings and loan associations (SKOK). This will affect negatively not only banks' income from interchange fees but also income earned from the provision of other services such as maintaining accounts, lending or raising such sources of capital in the form of bank term deposits. Therefore, banks' strategy should consist in not charging additional fees to customers for card usage so as not to compromise the development of the payment card market and not to motivate customers to leave the bank at all or migrate to another entity. It should also be noted that the level of interchange fees should be reduced while keeping the same level of other cost items that determine the amount of merchant fees. The level of interchange fees Poland is the highest in Europe. The Polish payment card market has sufficiently large potential to allow banks to earn higher than before income when the average EU level in the number of cashless card transactions is achieved. The reduction in the interchange fees may thus accelerate the achievement of average EU levels of indicators of payment card market development by Poland.
99 In the opinion of one of the card organisations, not shared by the authors of this study, a reduction in interchange fee rates and a decrease in banks' income may not only lead to an increase or introduction of new charges for customers by banks, but may also result in a significant reduction in investments in card products, which will, in turn, lead to a halt in the development of cashless transactions.
100 Conclusions
Poland is a country where despite intensive measures undertaken in recent years to develop cashless transactions, the level of cash payments is still relatively high. The share of notes and coins in circulation in the M1 money supply, i.e. in cash in circulation, including on demand funds in bank accounts is still higher almost by half than in the euro area countries. As far as numerous indicators concerning various categories related to cashless turnover per number of inhabitants are concerned, Poland still ranks at the bottom of rankings in the European Union. A high share of cash transactions and high costs related to the organisation of this turnover are not beneficial for the banking sector and cause certain consequences for the entire economy.
One of the payment instruments which could replace notes and coins primarily as regards payments at retail and service outlets is a payment card. The development of the payment card market, often measured by the number and value of transactions executed with payment cards, requires, however not only an increase in the number of cards itself and their dissemination among consumers and economic actors, but also a development of the acceptance network, measured by the number of retail and service outlets and the number of POS terminals.
The analysis of the growth of the above indicators for Poland may lead to the conclusion that while the number of payment cards and the number and value of cashless card transactions has grown at a fairly high rate in recent years, the growth of the acceptance network has not followed the same trend. The number of cashless transactions grew rapidly mainly in the last seven years - from 2004 to 2010 the number of cashless transactions increased more than 4 times from PLN 198 million to PLN 844 million. Similarly, the value of cashless transactions grew fast - in 2010 the value of cashless transactions amounted to PLN 90 billion and it was more than 3.5 times bigger than in 2004 (PLN 25 billion). In turn, the number of payment cards increased in 2000-2010, almost three times, from 11.3 million to 32 million. On the other hand, the growth of the acceptance network in Poland was relatively low in comparison with the above growth rates. For example, the number of merchants increased from 69 thousand in 2004 to 104 thousand in 2010, i.e. it was higher only by 50%, and the number of retail and service outlets equipped with POS terminals in the same period increased by only 58% (up from 119 thousand to 188 thousand). It should be added that taking into account the size of the entire market for retail and service entities operating in
101 Poland (according to experts, the entire market may be in the range from 500 thousand to as many as 1 million outlets), the number of retail and service outlets accepting cards represents only between 19 - 38% of all retail and service outlets, which implies that the resulting saturation of the Polish market in terms of payment cards is very low and thus constitutes, in the opinion of the Payment Systems Department, a barrier to further development of the payment card market and the possibility of increasing the number of persons using banking services.
If the situation does not improve significantly in the coming years, in the form of an abrupt growth in the network of new acceptance outlets in locations where this network is underdeveloped, we may soon observe a gradual depletion of the potential of further fast growth of cashless card transactions, both in terms of the number and the value. This will be largely a result of saturation with transactions of card holders. Given the above data, it seems very likely that such high rises are achieved through increased activity of customers who already use payment cards. Therefore, in order to prevent a decrease in the value of turnover related to cashless payment, it is necessary for banks to acquire new customers, i.e. the number of persons using banking services should increase and the network of entities accepting card payments should grow, especially in the regions where it was not developed so far, i.e. villages and small towns of up to 50 thousand inhabitants.
One of the obstacles indicated by retail and service outlets accepting payment cards and potential merchants is the level of fees charged by acquirers in which interchange fees set by payment card organisations or banks associated in them constitute the main part (sometimes representing up to 85% of the fee charged to card acceptance outlets). Currently, as shown in the presented material, these rates are often the highest in Europe.
Since this barrier had already been identified, the issues were included in the Programme for the development of cash payments in 2011-2013 as measure no. 10 of Changing the structure of interchange fees for particular types of merchants and card payments and adjusting the fees to the average EU level. The above mentioned measure defines the purpose, description, implementation schedule and monitoring indicators. The objective of the measure was set to be an optimal adjustment of the interchange fee rates to the structure and specificity of various groups of merchants and various types of card payments. The expected effect of this measure was to be an increase in the number of transactions at merchants, including entities that were not previously interested in accepting cards, as well as a stimulation of the development of micropayments and low-value
102 payments. The justification stated that the payment card market in Poland was at its development stage and the smaller number of cards and transactions per capita in comparison with the EU average suggests that necessary measures should be undertaken, such as: a change to the structure of fees for certain types of merchants and payments made with payment cards as well as a gradual adjustment of these fees, estimated for the purposes of the Programme at 0.95%-1.90%, to eventually reach the level of the EU average.
Taking into account the results of the analysis contained in this document and due to the fact that the date of the adoption of the Programme by the Government of the Republic of Poland has been postponed, we believe that given the need for an abrupt development of cashless transactions in Poland in the coming years and the need for further expansion of the acceptance network for payments cards, it is necessary to undertake activities aimed at implementing tasks provided for in this document, including measure no. 10, regardless of the date it is approved by the Government.
The Payment Systems Department of the National Bank of Poland believes that such activities will be worked out in 2012 by the Interchange Fee Task Force at the Payment System Council, a consultative and advisory body to the Management Board of the NBP, which comprises all major stakeholders of the four-party card scheme (see section 6.5) and subsequently appropriate decisions will be made by competent bodies of card organisations operating in Poland.
103
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Document developed by: Krzysztof Maciejewski, PhD Research and Analysis Division Payment Systems Department
in cooperation with Adam Tochmański Renata Pawlicka Robert Klepacz Agata Gorczycka
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