The European Commission has been looking into interchange fees charged in payment card transactions as a form of anti-competitive agreements since the 1990s. In administrative proceedings it has so far only succeeded in decreasing fees charged for cross-border payments made by tourists visiting other EU member states. Such transactions make up approximately 5% of all payment card transactions. Interchange fees for domestic transactions were to be investigated by national competition authorities including the Czech Office for Protection of Economic Competition, however they have not been very active in this respect. Therefore, in the recent years EU has prepared and finally adopted Regulation No 2015/751, which limits these fees to 0.2% of the transaction value for debit cards and to 0.3% for credit cards (currently the typical rate for domestic transactions in the Czech Republic is 1%). Hence, merchants accepting card payments will be able to request banks to reduce the fees they charged by up to 0.8% per each transaction as of 9 December 2015, as the costs of the acquiring banks will drop by the same amount. Will they subsequently reflect this reduction upon the prices of goods and consumer services? And, in contrast, will the issuing banks not limit the benefits currently associated with payment cards?

For several decades interchange fees have been a basic tool for the banks to encourage the customers to use payment cards more often. Historically, in the VISA and MasterCad international payment card associations, the banks agreed that they would covertly transfer the fees to merchants who accept payment cards in their stores. They achieved this goal because under the rules of these associations the acquiring banks which have agreements with merchants are obligated to pay an interchange fee (currently typically 1% in the Czech Republic) from the value of each transaction to the relevant issuing bank whose card is used for the payment. This rule assumes the merchants’ lack of resistance to such a transfer of costs from one part of the bilateral market to the other. This is because most of them are afraid of losing their customers and income if they do not accept the cards. In addition, interchange fees pose the most significant cost item of fees charged by the acquiring banks to merchants (merchant service charges (MSCs)). Merchants in general compensate for these fees by increased consumer prices because until recently the VISA and MasterCard associations prohibited merchants from additional charges on payment card transactions. Although the Czech Republic currently does not prohibit surcharges for payment card transactions on the basis of Directive No 2007/64/EC on payment services, only a small percentage of merchants use this option. 

The European Commission (“Commission”) has been investigating interchange fees charged in payment card transactions as a form of anti-competitive agreements contravening Article 101 of the TFEU already since the 1990s. So far it has only succeeded, in administrative proceedings, to decrease the fees charged in cross-border payments made by tourists visiting other EU member states, i.e. approximately 5% of all card transactions. In 2001 the Commission first accepted VISA’s proposal to gradually decrease the cross-border interchange fees. From 2008 the Commission prohibited the MasterCard association from charging the cross-border interchange fees, but in 2009 it accepted MasterCard’s voluntary decrease, namely to 0.2% of the transaction value for debit cards and to 0.3% of the transaction value for credit cards. The value of VISA’s cross-border interchange fees was reduced to these levels following VISA’s commitments for debit cards in 2010 and for credit cards in 2014. In contrast, according to the Commission interchange fees for domestic transactions, which make almost 95% of the overall volume of all transactions, were to be investigated by the national competition authorities including the Czech Office for the Protection of Economic Competition. 

However, these authorities they have been making only little effort as they were mostly waiting for the EU courts in Luxembourg to uphold the Commission’s MasterCard decision prohibiting cross-border interchange fees (this occurred in 2011 when the decision was upheld by the first-instance court and in 2014 upon a confirmation by the second-instance court). As regards domestic fees, the only movement was caused by the VISA’s commitments from 2014 to charge banks or other financial institutions providing acquiring services to merchants from across the border within the EU the same fees for domestic payments as for cross-border payments, i.e. reduced to 0.2-0.3%. This undertaking entered into force as of 2015. Thus the acquiring business of domestic banks started to be threatened by competitors from other EU countries and, from the beginning of this year, mainly the largest retail chains could take advantage of this competition.

But a revolution on the market for payment cards, including domestic payment card transactions, was only caused by Regulation of the European Parliament and of the Council (EU) 2015/751 of 29 April 2015 on interchange fees for card-based transactions. From 9 December 2015 for cards of “four-party payment card schemes”, i.e. VISA/V-PAY and MasterCard/Maestro in the Czech Republic, interchange fees even for domestic transactions will be reduced to 0.2% for debit cards and 0.3% for credit cards. It is also evident from the regulation that this limitation can no longer be evaded by banks either concluding bilateral agreements between each other, by transferring the burden of scheme fees at the VISA and MasterCard association level to the acquirers, or by transferring the acquiring service to third countries outside the EU. In addition, the member states must adopt deterring sanctions for breach of the regulation and, therefore, in the Czech Republic an amendment to Act no. 284/2009 Sb., on payment services can be expected. Most likely it is not even possible to rely on a mass shift to the “three-party payment card systems”, in which banks are not significantly involved, especially to the Diners Club and American Express cards, as if these companies involve banks or other agents in the distribution at the issuing or acquiring service level, the limits ensuing from the regulation will apply to them as well (from 9 December 2018 regardless of whether their market share exceeds 3% or not).

Nevertheless, the fee caps do not apply to “commercial VISA or MasterCard payment cards”, which are issued to entrepreneurs or public administration bodies and the use of which the regulation restricts to commercial and/or service expenses. However, with these unregulated cards the regulation now sets out an option for merchants to refuse accepting these cards as long as they state, on the signage at the store entrance doors and cash registers, that they do not accept them. A new payment service directive which has been issued concurrently with the regulation (but has not been adopted so far) should maintain the option of charging additional fees for card-based payments only for unregulated cards. It should now prohibit surcharges for the use of consumer cards as due to their price regulation this mechanism loses its justification. In addition, the limits of the regulation do not apply to any card-based transactions where the merchant or payer comes from a non-EU state, but the Commission currently conducts administrative proceedings concerning interchange fees borne by merchants in the EU for payments made with cards from non-EU countries.

From 9 June 2016, the regulation should also enable “co-badging”, which is the issuing of cards combining services such as those of VISA and MasterCard. However, this provision primarily aims at indirectly promoting the Commission-declared interest in creating a third large internationally accepted payment system other than the VISA - MasterCard duopoly. 

In conclusion, from 9 December 2015 the Regulation will give merchants accepting card payments the option to decrease the fees charged by banks for the transactions by up to 0.8% as the acquiring banks’ costs will decrease by the same amount as a consequence of the regulation. However a question remains of whether these merchants will subsequently reflect this reduction upon the prices of their goods or consumer services. Nevertheless the actual drop in the level of fees to be paid by merchants (together with the acceleration of payment at counters facilitated by contactless payment cards) could convince some of the merchants who have been hesitating so far to accept cards and the consumers could use terminals even at places where they have missed them so far. On the other hand, in response to the reduction of the interchange fees the issuing banks may start charging fees  for issuing cards to consumers or charge no fees only in case of an increased use of cards. Another question is whether the benefits associated with credit cards will be restricted as well, as credit card business profits from relatively high interest charged to users who fail to repay the credit during the interest-free period (free-funding period) rather than from the interchange fees (some banks for instance return to consumers up to 2% of the amount paid with the use of a credit card, which  is double the amount of the current interchange fees). 

The Commission should evaluate the effects of the regulation in a complex report in which it should possibly propose a new legislation before 9 June 2019, i.e. within four years. Already now the Commission has results of an extensive market research on which it will probably follow up at a later phase. Despite the new regulation it cannot be ruled out that the competition authorities in the EU will continue the existing or start new antitrust proceedings concerning the interchange fees charged in the past although owing to the regulation this sanction is no longer a priority. In addition, it cannot be ruled out that as regards the excessive interchange fees, the current actions for damages will continue and will now be increasingly initiated by the merchants, regardless of whether the competition authorities take steps to identify potential administrative offences against competition law.

Petr Kadlec, partner (between 2007 and 2010 he worked at the Directorate - General for Competition of the European Commission in Brussels)