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.