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Topics: Interchange Fees
Organisations: Pan-Nordic Card Association

DEFINITION OF CREDIT AND DEBET CARDS

Article 17

Clumsy definitions by EC and EP will cause banks to delay posting transactions to accounts making card payments less consumer friendly and 0,10% more expensive for merchants.

Estimated costs*: Sweden:

EUR 50 million

UK:

EUR +100 million

EU:

EUR 500 million

FEE LEVELS

Articles 3 and 4

The proposed fee levels of 0,20% and 0,30% for debit and credit cards, and an upper cap of 7 cents per transaction will make all low value transactions unprofitable. For instance the Paris metro single fare is 1,70 Euro and the IC fee would be 0,0034 Euro for a debit card. The issuer would have to cover scheme fee, processing of the authorisation cost, clearing and settlement with acquirer and booking of the debit account. Most likely the issuer will demand a 10 cent fee from the cardholder and the usage of cash for low value payments will remain extensive to the loss of society and consumers. Swedish Central Bank calculations show that debit cards are more cost effective than cash. If people use more cash for low value payments the additional cost to society is 0.23 Euro per additional cash transaction in a cost effective society like Sweden. In Sweden alone the cost for society would be around 300 million Euro from turning the part of the card transac tions that are low value into cash. In Europe the impact would be at least 1,6 billion Euro.

Estimated costs*: Sweden:

EUR 300 million

UK:

EUR 600 million

France:

EUR 500 million

SEPARATION OF PAYMENT CARD SCHEME AND PROCESSING ENTITIES

Article 7 – item 13

The requirement for all processers’ cards to be interoperable with each other according to ISO and CEN standards will impact more than 2 000 banks issuing cards, and some 300 acquirers, 100 processors and around 20 card schemes. All these companies will have to build new transaction exchange interfaces even though most of the companies never exchange tran­ actions with each other. For instance, Swedish Swedbank’s issuing computer system does not interact with the BNP Paris Bas issuing computer, but must nevertheless use a standard ISO/CEN interface which is not in place today. A conservative estimation is that each entity needs to spend EUR 5 million in implementing these non­existing interfaces, and that ISO and CEN will have to invest at least EUR 100 million on developing these new standards.

Estimated costs*: Sweden:

about EUR 30 million

UK:

about EUR 70 million

France:

about EUR 60 million

Germany:

about EUR 200 million

CO-BADGING

Article 8

Since a large portion of cards to be used in the EU are global cards (like Visa or MasterCard) these schemes need to find a technical olution to meet the requirement from EU to co­exist on the same cards. This requirement will heavily increase the cost on EU issued cards payable by the card issuers and ultimately their customers. Each card in Europe will thus be more expensive.

Estimated costs*: Sweden:

EUR + 40 million

UK:

EUR 200 million

France:

EUR + 150 million

EU:

EUR + 1 000 million

HONOUR ALL CARDS RULE

Article 10 – item 25

The requirement to flag each card on product code will require all cards in Europe to be reissued, and all merchant terminals to be upgraded to be able to read the new cards. Cost on EU level is some EUR 2,5 billion for card issuance and some EUR 3 billion for the terminal replacement. The replacement will take more than four years to conclude since there is not enough industrial capacity in card and terminal manufacturing to do it at the proposed two week time table. Total cost will exceed EUR 5,5 billion in the EU or at EU level.

Estimated costs*: Sweden:

EUR 200 million

UK:

EUR 800 million

France:

EUR 700 million

SETTLEMENT, OUT OF COURT COMPLAINTS AND REDRESS PROCEDURES

Article 15

Consumers and small businesses will not have their cases tri ed in a court of law. Instead a panel will give the final verdict. This is customary for major companies disputes but the court of law principle is replaced for card payments. This is a major change requiring constitutional changes in many countries.

ENTRY INTO FORCE

Article 17

”This Regulation shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union. This Regulation shall be binding in its entirety and directly applicable in all Member States.” It is impossible to meet many of the requirements in such short notice from decision. It will require a five year phasing in period, hould the content remain as it is today.

Implementation phase Regulation proposal:

20 days

Realistic:

5 years

In total the required investments will be some EUR 12 billion

– who is going to cover that?

*Internal analysis by Visa Sweden/Europay Sweden – Swedish Card Handling Banks

Financial Impact of Interchange Fee Regulation

1. Commercial cards must be out of scope of interchange fee caps –

Amendment 19 to be deleted

Commission have for good reasons

excluded commercial cards from the interchange fee caps, although commercial cards are in scope for the Regulation in general. Especially it should be noted that the abolition of HACR also apply to commercial cards, so that no merchant will be forced to accept commercial cards of a brand for which they accept consumer cards. • In its Explanatory Memorandum to the IF regulation, EC equates commercial cards and three­party system cards when defining cards out of scope for the caps. It is obvious that the EC sees the connection between these; although it is true that three­party schemes have low market shares in the card market in general, this is not true in the pecific commercial card market. The inclusion of commercial cards will facilitate a further un­ levelling of the playing field between three party chemes like American Express and four party ystems, like Visa and MasterCard. As such three party schemes would grow their already substantial hare of the commercial card market; merchants in sectors where commercial cards are highly used will end up paying higher fees. • Commercial cards are not credit cards, but usually charge (deferred debit cards). Interchange fees are the major income for commercial card issuing and the possibilities to compensate with other income streams (e.g. interest) are slim. Commercial card issuing is much more expensive per transaction, as there are lower volumes (less economies of scale) and provides much more complex services to both employers and merchants in sectors where commercial cards are frequently used. • The risk is that employers/employees and merchants turns to alternative solutions like cash and invoicing, with higher costs to merchants, employers and society at large as a consequence. • EC have chosen to set caps to 0.2% and 0.3% for consumer debit and consumer credit, respectively, with reference to the commitments made by Visa and MasterCard to these levels for cross­border transactions. As commercial cards are out of scope for these commitments the EC do not

have the same precedence to refer to in regards to commercial cards. IF any cap should be set on commercial card interchange fees, the level for that hould be separate and the rationale for the level investigated separately, as the circumstances in the market is so different.¨

Vote against amendment 19 – for the original Commission text to remain!

2. Level playing field for all acquirers in Europe = Interchange fee to be decided by the residence of the card and the merchant – not by the residence of banks –

Amendment 36 to be deleted

A domestic transaction – e.g. a UK

issued card at a UK merchant – should have the ame rules for setting interchange fees, regardless of whether the merchant decides to bank with a UK bank or with a foreign bank (the latter known as cross­border acquiring) • EC initial regulation proposal gives a transition period of 22 months for the caps in which cross­border acquirers are given an advantage as the caps would be in force 22 months earlier for cross­border acquirers than for domestic acquirers, giving the former a head start. But the EC proposal does not say that cross­border acquirers can chose any country’s interchange fee levels. • ECON proposal wisely takes away different implementation times for cross­border and domestic acquiring. But introduces something even worse: For cross­border acquiring the interchange fee applicable should be that of the country of the acquirer. • The ECON proposal will create “Acquiring Channel Islands” in Europe, small countries could decide to attract Europe’s all major acquirers by lowering the domestic interchange fee for that country, which interchange fee these acquirers could then apply to all transactions they acquire, even those that are purely domestic transactions in other countries. This will effectively wipe out smaller domestic acquirers and concentrate the acquiring market into a few very large acquirers situated in one or a few countries – i.e. lowering competition level in the market.

The interchange fee levels in

different countries are decided by the different circumstances for issuing cards in each market: cost of labour, infrastructure, level of card penetration and usage in the market (economies of scale), cost of payment guarantee (risk levels), etc. There is no rationale for why the interchange fee level should be decided by the acquirer’s country. Vote against amendment 36!

3. Interchange fee cap for debit cards – the lowest of 7 cents or 0.2% - should be the highest of –

Amendment 30, latter part, to be deleted.

The EC cap of 0.2% introduces a

problem for low value transactions, as issuers cannot cover direct costs for these transactions. This could lead to the introduction of fees for consumers on low value transactions and it will ubstantially reduce the rational for innovation in the field of replacing cash for low value transactions (contactless etc.) • EC and others have argued that issuers will be compensated in the other end, by higher income on high value transactions. Even though this is not entirely the true for all customers and products, it is now entirely taken away by the ECON proposal. As there will be no compensating income on even medium value transactions, the pressure on compensating the cost for low value transactions through other means will become even higher. •

For environments where innovation is

till high, such as e­commerce, average transaction amounts often tend to be higher. A percentage interchange fee incentivises costly innovation in such environments. The 7 cent fee cap would effectively take away all incentives for major innovation in debit cards, making the differences between services offered to credit card holders and debit card holders larger. Vote against Amendment 30! (or, if possible, only the insertion of the text “the lower amount of 7 eurocents or” and let other changes to article 3 – paragraph 1 remain as proposed by ECON).

ERRORS IN ECON REPORT THAT SHOULD BE ADJUSTED AT LEAST BACK TO EC ORIGINAL PROPOSAL

SAME RULES MUST APPLY FOR ALL PARTICIPANTS – ISSUES REGARDING TPPs

No prohibition of legal contracts between the account servicing PSP and the TPP

A TPP is a normal company on the market to make profit. There is no level playing field or sound competition in a market if a TPP should be able to use another entity’s processing services without an agreement with an actual sub contractor of the service provided by the TPP.

A TPP is always a PSP

The legal relationship and distribution of rights and obligations between account ervicing PSPs and TPPs should be applied with regard to that fact. As a TPP legally is a PSP the TPPs hould be directly liable before payers for any unauthorised or incorrectly executed payment transaction caused by a payment order transmitted by them – as any other PSP. As the proposal is now it leads to an extension of the business possibilities for TPPs at the cost of extended business risks for account servicing payment service providers.

Access to accounts for TPPs is ok, but not through sharing of credentials

As stated by the ECB in its opinion dated 5th February: “It is a core principle of IT security that credentials used to authenticate the payment service user are not shared with any third party”. The involved stakeholders must find a workable and safe solution with customer ability to feel trust as a steering principle.

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