The payment industry, in particular interchange fees, has long been the subject of significant scrutiny and regulatory intervention in Hungary. An interchange fee is a fee that is typically paid by a merchant's bank (the acquiring bank) to a customer's bank (issuing bank) for the acceptance of card-based transactions. In practice, depending on the parties' negotiating power, it may be incorporated into the service fee charged by the acquiring bank to the merchant, and the price paid by customers to the merchant.
Following the footsteps of the European Commission, the HCA took an active role in scrutinizing interchange fees, launching anti-trust proceedings against Hungarian banks and card schemes for setting national interchange fees multilaterally and later against card schemes for setting fees unilaterally. Eventually, the Hungarian Parliament jumped into the fray as well, capping national interchange fees in Hungary by law.
Supporters of interchange fee regulation claim that such regulation lowers consumer prices and fosters a vibrant payment market through lowering merchant service fees. Critics contend that interchange fee regulation compromises card schemes' ability to facilitate technological jumps (such as the migration from magnetic stripes to chips and contactless technology) and that it may not actually lower consumer prices or merchant service fees to any significant degree. For that to happen, acquiring banks would have to pass on the savings they realize from lower interchange fees to merchants, who would then have to pass it on to the customer, for which competition between acquirers is essential. Further, innovative new payment solutions also exercise competitive pressure.
The HCA launched its sector inquiry into card acceptance on 20 January 2017 in order to obtain information and analyse the market trends. Following information requests to stakeholders, the HCA has issued its preliminary report on its findings and recommendations. In the public consultation, the HCA is seeking comments and feedback on the draft report until 14 June 2019.
The draft report
According to the draft report, the Hungarian Central Bank requested in 2015 that the HCA - which has been on the forefront of the fight to lower interchange fees - look into the effect that interchange fee regulation had on merchant service fees, since it seemed to the Central Bank that there may be a significant difference in the extent to which lower interchange fee costs were passed on to larger and smaller merchants.
The main conclusions of the report are the following: The Hungarian card acceptance market remains oligopolistic and dominated by OTP Bank. The POS terminal installation programme of the Ministry of Finance encouraged the entry of several new providers, but the report is sceptical about their chances of remaining on the market in the long term. These new entrants increased competition, and overall, a distortion of competition is unlikely as the pricing of larger acquiring banks is not higher than that of smaller competitors. Overall, merchant service fees decreased as a result of capping interchange fees, the 50% decrease of the interchange component over the last five years was only mitigated by the increase of some elements of the fee. The report confirms that the decrease of the overall fee amount was felt by different merchant categories to a different extent.
The smallest merchants bear the largest fee burden, likely due to (the lack of) economies of scale. The acquiring banks apparently realize a loss on these merchants. The mid-sized merchant category's relatively high fees cannot be fully explained by lack of economies of scale - instead, they likely result from lack of negotiating power and lack of merchant awareness. The lower fees of the largest merchants could be attributable to the fact that the acquiring banks provide them other services as well and the banks are, therefore, incentivized to retain these merchants as customers - overall, they are the most profitable customers of the banks. The report concludes that in view of the above, the differences in interchange fees are not the result of competitive distortions.
Fees based on the number of transactions (rather than transaction value) increased and such fees - which tend to penalize smaller transactions - can affect card acceptance negatively according to the draft report. Few acquirers opt for these fees, but their total market share is not insignificant. Some others apply such fees only if average transaction value is low.
It is typically merchants with the lowest turnover who refuse to accept cards. They usually blamed lack of interest from customers, high fees, delay in receiving payment and the fact that card use is unfavourable for the merchant in case of small-value transactions. Most merchants think that the costs of cash acceptance are lower than that of card acceptance, although merchants with higher turnover considered the costs similar.
The number of merchants - especially small merchants - who accept cards has increased by 76% between 2013 and early 2018. The report identifies State support and contactless technology as two of the factors that helped to increase card usage in Hungary, which is now nearing the EU average. Nevertheless, the number of merchants who accept cards and the number of card-based transactions are still too low, particularly in certain parts of the country, in spite of the fact that, as the draft report expressly acknowledges, the cost of cash payments exceeds that of card payments for the country.
In order to increase card acceptance in Hungary, therefore, the HCA makes the following recommendations to the legislator:
- extend the POS terminal installation programme to mid-sized merchants who already have POS terminals;
- incentivize card use through tax policy;
- create the possibility of online contracts between merchants and acquirers.
The report also makes recommendations to other stakeholders:
- card schemes and acquiring banks should restructure fees to avoid placing undue burden on small merchants and their acquiring banks;
- the Ministry of Finance, the Hungarian Central Bank and the card schemes should work to increase merchant awareness and card use by consumers;
- acquiring banks who pursue a passive sales strategy should switch to an active one;
- acquiring banks should credit merchants' accounts faster after card-based payment.