Study on the application of the Interchange Fee Regulation Final Report Prepared by Competition EUROPEAN COMMISSION Directorate-General for Competition E-mail: [email protected] European Commission B-1049 Brussels [Cataloguenumber] Study on the application of the Interchange Fee Regulation Final report Europe Direct is a service to help you find answers to your questions about the European Union. Freephone number (*): 00 800 6 7 8 9 10 11 (*) The information given is free, as are most calls (though some operators, phone boxes or hotels may charge you). LEGAL NOTICE The information and views set out in this report are those of the author(s) and do not necessarily reflect the official opinion of the Commission. The Commission does not guarantee the accuracy of the data included in this study. Neither the Commission nor any person acting on the Commission’s behalf may be held responsible for the use which may be made of the information contained therein. More information on the European Union is available on the Internet (http://www.europa.eu). Luxembourg: Publications Office of the European Union, 2020 Catalogue number: KD- 01-20-161-EN-N ISBN 978-92-76-17165-2 doi: 10.2763/137970 © European Union, 2020 Reproduction is authorised provided the source is acknowledged. The reproduction of the artistic material contained therein is prohibited. Authors: Ernst & Young Team Members: • Dr. Ferdinand Pavel (Germany, EY) • Andreas Kornowski (Germany, EY) • Dr. Lars Knuth (Germany, EY) • Chris Rücker (Germany, EY)– • Maria Bernstein (Germany, EY) • Laura-Maria Dukart (Germany, EY) • Christopher Bennien (Germany, EY) • Julius Valentin Girrbach (Germany, EY) • Sriram Attanti (India, EY) Copenhagen Economics Team Members: • Dr Adina Claici (Belgium, Copenhagen Economics) • Dr Asger Lunde (Denmark, Copenhagen Economics) • Dr Claus Kastberg Nielsen (Belgium, Copenhagen Economics) • Elisa Pau (Belgium, Copenhagen Economics) • Dr Federico De Michiel (Belgium, Copenhagen Economics) • Julie Runge Jørgensen (Denmark, Copenhagen Economics) • Mattias Almqvist (Sweden, Copenhagen Economics) • Sila Sahin (Denmark, Copenhagen Economics) • Victor Almqvist (Sweden, Copenhagen Economics) Study on the application of the Interchange Fee Regulation Table of contents ABSTRACT 12 EXECUTIVE SUMMARY ..................................................................................... 13 RECOMMENDATIONS ...................................................................................... 25 1 INTRODUCTION .............................................................................. 29 1.1 Background ........................................................................................ 29 1.2 Objectives of the Study and scope ........................................................ 30 2 APPROACH AND DATA COLLECTION .................................................. 31 2.1 Approach ........................................................................................... 31 2.2 Data collection.................................................................................... 32 3 PAYMENT SECTOR EVOLUTION ......................................................... 40 3.1 Development of card payments ............................................................ 41 3.2 Development of market structures ........................................................ 60 3.3 Key driving forces of card payments ...................................................... 72 4 FEE AND COST DEVELOPMENT ......................................................... 83 4.1 Interchange fees................................................................................. 86 4.2 Schemes: scheme fees ...................................................................... 101 4.3 Issuers: cardholder fees, issuing and card usage .................................. 130 4.4 Acquirers: merchant service charge .................................................... 142 4.5 Merchants: merchant acceptance ........................................................ 159 5 MERCHANTS´ PASS-THROUGH OF INTERCHANGE FEE REDUCTIONS ... 163 5.1 Collection of pass-through data .......................................................... 165 5.2 Merchant pass-through meta-study ..................................................... 169 5.3 Consumer savings from the IFR .......................................................... 172 5.4 Qualitative findings on merchant pass-through ..................................... 182 6 ASSESSMENT ACCORDING TO IFR ARTICLE 17(E)-(K)....................... 186 6.1 Identification and choice of card type and payment application at POS terminals ......................................................................................... 187 6.2 Co-badging and choice of payment brand or application ........................ 190 6.3 Effects of the exclusion of commercial cards ......................................... 198 6.4 Effects of special provisions for domestic debit card transactions ............ 205 6.5 Development of cross-border acquiring ................................................ 220 6.6 Application of rules for separation of schemes and processing ................ 226 6.7 Interchange fees for medium- and high-value debit card transactions ..... 232 DEFINITIONS ............................................................................... 237 SURVEY PROCESS ......................................................................... 242 PAYMENT SECTOR EVOLUTION ....................................................... 253 FEE AND COST DEVELOPMENT ....................................................... 274 Final Report page 1 Study on the application of the Interchange Fee Regulation Introduction to card schemes ............................................................................... 274 Database preparation ......................................................................................... 277 Statistical and econometric methodology ............................................................... 284 Supplementary results and robustness checks ....................................................... 287 MERCHANT PASS-THROUGH OF INTERCHANGE FEE REDUCTIONS: ESTIMATIONS AND METHODOLOGY DESCRIPTION............................ 301 Data sources ..................................................................................................... 301 Literature study ................................................................................................. 303 Compiling database ............................................................................................ 304 Regression model ............................................................................................... 307 Questions for merchant pass-through interviews .................................................... 310 REFERENCES ................................................................................ 312 SURVEY QUESTIONNAIRES ............................................................ 318 Final Report page 2 Study on the application of the Interchange Fee Regulation TABLE OF FIGURES FIGURE 1: OVERVIEW ON PROJECT APPROACH ............................................................................................................................. 31 FIGURE 2: MARKET COVERAGE OF THE IFR SURVEY FOR ISSUER AND ACQUIRER (IN % OF NUMBER OF CARD-BASED POS-TRANSACTIONS, 2017) ......................................................................................................................................................................... 36 FIGURE 3: MARKET COVERAGE OF THE IFR SURVEY FOR MERCHANTS (IN % OF TOTAL NUMBER OF POS-TRANSACTIONS) .......................... 37 FIGURE 4: PAYMENT CARDS PER CAPITA, 2014 AND 2018 ............................................................................................................ 42 FIGURE 5: NON-CASH PAYMENTS DEVELOPMENT IN THE EU, 2014-2018 ........................................................................................ 43 FIGURE 6: NUMBER OF CARD PAYMENTS IN EU-28, 2014 AND 2018 ............................................................................................. 44 FIGURE 7: CARD PAYMENT TRANSACTIONS PER CAPITA, 2014 AND 2018 ......................................................................................... 45 FIGURE 8: CARD PAYMENTS VALUE PER CAPITA, 2014 AND 2018 ................................................................................................... 45 FIGURE 9: CORRELATION OF CARD PAYMENTS AND GDP PER CAPITA, 2018 ...................................................................................... 47 FIGURE 10: GROWTH OF AVERAGE TRANSACTION VALUES OF CARD PAYMENTS, 2014-2018 ........................................................... 48 FIGURE 11: CROSS-BORDER PAYMENTS AS A SHARE OF TOTAL CARD PAYMENTS, 2014 AND 2018 ........................................................ 49 FIGURE 12: NUMBER OF ATM WITHDRAWALS PER CAPITA, 2014 AND 2018 ................................................................................... 51 FIGURE 13: CORRELATION OF ATM CASH WITHDRAWALS AND CARD PAYMENTS PER CAPITA, 2017 ....................................................... 52 FIGURE 14: VALUE OF ATM CASH WITHDRAWALS PER CAPITA, 2014 AND 2018 ............................................................................... 53 FIGURE 15: VALUE OF ATM CASH WITHDRAWALS AND GDP PER CAPITA IN MS, 2017 ...................................................................... 54 FIGURE 16: POS TERMINALS PER MILLION INHABITANTS,