Paying the price: A new regulatory framework for Cards, Internet and Mobile Payments in Europe

The European Commission presented on the 24th July 2013 its draft Legislative and Regulatory package for Cards, Internet and Mobile Payments. And it is a quite substantial and important project on which I am commenting below in an interesting, creative and provocative fashions - or at least I hope  as this is the intention!  As always, comments are very welcome!

Commissioners Barnier (Internal Market and Services) and Almunia (Competition) have joined forces to present together on Wednesday 24th July an extensive Legislative and Regulatory package that will impact in a large extent the payments industry in the European Economic Area, creating new threats and risks for incumbents and hopefully opening competitive opportunities for new entrants and innovation…

The package is organised around two key policy initiatives:

- A draft new Payments Services Directive (or PSD 2) reviewing the first PSD from 2007, to be adopted by the Council and the European Parliament;

- A draft Regulation to be adopted by the Council and the European Parliament on interchange fees for card-based payments transactions that is also containing a number of important other provisions and changes relating to separation of activities for card schemes, consumer rights, card schemes rules and functioning, etc.


1.     The New Payments Services Directive (PSD 2):

The revised Payment Services Directive brings a number of new substantial and important elements to the 2007 Directive but also keep key measures such as passporting, among which:

• The proposed Directive is closing what some believed were loopholes preventing a level playing field between those payments providers that had to apply for authorisations/registrations and those exempted from this obligation. It is closing some exemptions such as those applicable to limited networks and support to payments services provided by telecommunications/digital providers.

• The proposed Directive is therefore reviewing the definitions of payments services to adapt it to new digital and mobile services. The proposed Directive is also aiming at rendering more secure the use of low cost Internet payment services by including within its scope new so-called payment initiation services. They are services that operate between the merchant and the purchaser’s bank, allowing for cheap and efficient electronic payments without the use of a credit card. Service providers providing these services will now be subject to the same standards of regulation and supervision as all other payment institutions. At the same time, banks and all other payment service providers will need to step up the security of online transactions by including strong customer authentication for payments.

• The Commission aims at ensuring that consumers are better protected against fraud, possible abuses and payment incidents (e.g. in case of disputed and incorrectly executed payment transactions). In this spirit, the proposed Directive states that consumers would face only very limited losses – up to a maximum of 50 EUR (vs 150 EUR currently)- when unauthorised card payments are happening. Furthermore, the proposed Directive increases consumer rights when sending transfers and money remittances outside Europe or paying in non-EU currencies.

• The Commission hopes the new Directive will promote the emergence of new players and the development of innovative Mobile and Internet payments services and solutions in Europe, improving the EU global competitiveness in this sector.

• Member States will have two years after adoption of the Directive to comply with it.

2.     The proposed Regulation form the European Parliament and the Council on interchange fees:

The Regulation on Multilateral Interchange Fees (MIFs), combined with the revised PSD, will introduce maximum levels of MIFs for transactions based on consumer debit and credit cards and ban surcharges on these types of cards, imposed by some merchants for the payment by card, common notably for purchases of airline tickets. 

They create a regulated area (i.e. all card transactions that are widely used by consumers and therefore difficult to refuse by retailers, i.e. consumer debit and credit card, and card based payment transactions) and a non-regulated area (all payment card transactions and card based payment transactions based on those that fall outside the regulated area including so called commercial cards for businesses or cards issued by three party schemes such as American Express and Diners).

• The caps applicable to MIFs are set at 0.2% of the value of the transaction for debit cards and 0.3% for credit cards. These levels are similar to those imposed by the Commission and National Competition Authorities in Europe for a number of transactions with cards branded MasterCard, Visa and Cartes Bancaires, following Anti-Trust enforcement cases. The caps imposed by the Regulation must be implemented within 2 months of its publication.


• During a transition period of 22 months, caps on MIFs for debit and credit cards will apply to cross-border transactions only (i.e. when a consumer uses his card in another country, or when a retailer uses a bank in another country). Then, these caps will apply to all transactions including domestic transactions.


• For the cards that are not regulated and not subject to the caps, retailers will be able to surcharge for them or to refuse to accept them. In this way, the costs imposed by these more expensive cards can be passed directly on to those who benefit from them rather than being borne by all consumers.

The second part of the regulation is providing important changes regarding business rules of these card schemes that will be applicable to all categories of card transactions and card-based payment transactions based on those rules. The Commission aims at increasing transparency, increasing competition and opportunities for new players and stimulate innovation. As of the entry into force of the regulation:

• The application of the 'Honour All Cards Rule' will be limited. No discrimination will be allowed on the basis of the issuing bank or the provenance of the cardholder and between the cards carrying the same interchange fees level.

• Acquiring Payment Service Providers will provide at least monthly statements of fees to merchants, in which the fees paid by the merchant over the relevant month concerning each category of cards and each individual brand for when the acquirer provides acquiring services is specified.

• An organisational separation is mandated and must be in place between the schemes and the entities processing the transactions. It also prohibits territorial discrimination in processing rules whilst mandating technical interoperability of processing entities' systems.

•  The Commission is imposing what is called co-badging and choice of application.It means that the issuer of the payment instrument decides whether the payment application can reside on the same card or wallet. The choice of payment application used remains with the consumer and cannot be prescribed in advance by the issuer through automatic mechanisms on the instrument or the equipment at the point of sale. 

•  The Commission is also mandating un-blending meaning that acquiring banks shall offer and charge payees individually for different categories and different brands of payment cards and not impose a single price. They must also provide the relevant information on the amounts applicable for the each different category and brand.

• The Commission is limiting so-called “Steering rules” and payment schemes and payment service providers schemes will from now on be forbidden to prevent retailers from steering consumers towards the use of specific payment instruments they (the retailers) prefer. This will be applicable in conjunction with rules on rebates and surcharges established under the Payment Services Directive and the Consumer Rights Directive. 

•  Finally, the Commission is mandating that Payment schemes and Payment Service Providers schemes cannot prevent retailers anymore from informing consumers about interchange fees and merchant service charges.

Member States will have to determine penalties in case of breaches in the compliance with the Regulation and notify the Commission.  

A Review clause is inserted into the Regulation and states that 4 years after its entry into force, the Commission will review the efficiency and implementation of the text and if needed proposed relevant changes, e.g. possibly purely and simply the ban of Multilateral Interchange Fees.

The Regulation will enter into force 20 days after its publication following its definitive adoption and will be directly applicable across all EEA Member States without the need for any National transposition measures in the Member States.

3.     Some preliminary comments:

a)    MasterCard’s and Visa positions and actions on the package:

It must be noted first that the press conference jointly held by Commissioners Barnier and Almunia was quite unusual in the tone used in particular by Commissioner Barnier who has expressed his angriness and frustrations toward MasterCard’s lobbying against the package but also ad hominem against himself directly.

Commissioner talked about a campaign based on lies, manipulations and biased and false information, all terms that are frankly quite unusual in such events. On the other hand, he praised Visa which although not necessarily agreeing more on the package did play a regular game and fairly discussed with the Commission…. Ouch! Seems like if it was a quite bruising process...

b)    Rationale for action, focus on the Multilateral Interchange Fees and what will be the impacts on consumers?

Internal Market and Services Commissioner Michel Barnier said that, at the present time, the EU payments market is still very fragmented and expensive with a cost he estimated at more than 1% of EU GDP or €130 billion a year.

The general attention was very much focused on the capping of Multilateral Interchange Fees and most of the campaign against the proposed Regulation was concentrated on that. In the UK, the project seemed to become – as usual with all things EU related…- a quite emotional and intense debate which was not the case in most other Member States… 

As a remainder, although not all the industry is taking the project very seriously – wrongly in my modest opinion -, Her Majesty’s Treasury stated clearly in a public consultation published in March and closed in June 2013 that it intended to subject the payments industry to mandatory economic regulation controlled by an independent economic regulator. It is therefore almost certain that mandated regulation on MIFs be deemed to come at a certain point, whether the EU was acting or not. 

It is also interesting to note that British Banks have been the most vocal (backed strongly by MasterCard) in lobbying against these changes that will mark the end of “Free Cards” in the UK according to them, although the levels of MIFs in the UK whilst a little bit higher than the one imposed by the Regulation should not create such a differential. 

I would think that maybe the Banking industry and in particular in the UK, should take the time to seriously think about whether it is currently in such an healthy shape that it could cope without grave consequences with facing another massive consumer row, losing a bit more of their trust without taking the risk of steering consumers toward new entrants on an increasingly competitive market where regulation is also going to force major new dynamics for instance through bank accounts portability and switching… I believe that the banking industry should really reflects on numbers recently published showing that around 2 million customers in the UK have already left one of the big banks to look for alternative banking arrangements due to a series of highly publicised consumer issues since the inception of the Financial crisis (e.g. LIBOR rigging, mis-sellings, PPI scandals, etc.) despite the hassles that it could create to them…

As a general rule – and also a personal inclination-, I would think that avoiding discontenting any further your customers, showing them that you are a loyal and trustworthy provider that is on their side, investing instead into new, innovative products and solutions to create new revenue streams and meet your customers’ needs, such as mobile payments, would be a far better and sustainable option than recovering costs by creating new high fees across the industry. ... Option that in any event could well be immediately subject to complaints to or owned investigations by Competition authorities.... 

Well, I don’t know, I am just saying really…

Coming back to the capping of MIFs, although it is obviously an important new development, its impacts will be felt differently according to the market situations of each country in the EEA and by consumers alike. In some countries like Germany or Poland, MIFs are still at an extremely high level sometimes reaching 1.8% per transaction. In other countries like Denmark, MIFs are not implemented at all. In other countries (France, UK) they are slightly higher than the proposed cap but the differential is not that high.

EuroCommerce estimates the global costs of interchange fees for retailers to reach €25 Billion per year. It is obviously a very substantial figure and it is clear that it could significantly impact the overall competitiveness of the retail sector (including growth and job creation). But the gamble the Commission is taking and possibly one of the weakest links in its project is to bet that retailers will necessarily pass the cost reductions they are enjoying to the consumers, leading to important price reductions.

Beyond the prohibition imposed on retailers to impose any additional surcharges for the use of cards subject to interchange fees capping (which could be felt very quickly by consumers)I am afraid that it is not at all certain that retailers will effectively pass the decrease to consumers. 

Experiences in other economic sectors (e.g. VAT for the catering and restaurant sector in France in 2007 and 2008) or in the same area of debit/credit cards MIFs capping(Australia, USA, Spain) are not necessarily entirely convincing nor conclusive and in any event are hotly contested, leading to fierce battles between the different interested parties (e.g. card schemes and Banks, Retailers and the European Commission). The Banking industry and card schemes have several times criticised the Commission for listening more to retailers and their industry groups‘ argumentations’ and to be biased by their influence….

Therefore a question needs to be raised at this stage: Should the Commission design some specific instruments to ensure that cost reductions are passed to the consumers by the retailers and increased competition is yielding positive changes for them? It will remain an open debate in the coming years. And maybe, when the times for review of the Regulation comes in 4 years from now, if retailers have not been effectively passing any benefits to consumers, then the debate could resume in earnest. It must be stated however to be fair that consumer groups in the EU have generally fully supported and welcomed the proposals from the Commission. 

c)    Besides MIFs capping, the other provisions from the proposed Regulation and the new Payments Services Directive could be even more fundamental

As I have just said, most of the focus and attention have been dedicated in the past month on the issue of Interchange Fees capping. However, I believe that the other provisions of the Regulation and also the new Payments Services Directive are extremely crucial and even more impactful, in particular for competition and innovation.

By the way, it is highly interesting that once again, in order to bring major structural and regulatory changes in sensitive sectors, the European Commission has decided to use a Regulation to impose forcefully an harmonised set of rules at the European level, without any tempering or fidgeting from the Member States after adoption, sometimes under influences from whole  industry sectors....

The use of Regulation that was in the past relatively limited and specific to some sectors (e.g. Common Agricultural Policy, Research, Competition Law based exemptions for distribution networks, financial instruments) is becoming much more often a political weapon that the Commission is using on highly polemic areas such as roaming, data protection and now Cards, Internet and Mobile Payments, limiting the interventions from opposing parties to the adoption process. 

However, as demonstrated by the Regulation creating a new Data Protection and Privacy regime, the use of this instrument can also lead to protracted adoption processes and serious delays... The balance of benefits vs. inconveniences needs to be weighted very carefully....

The separation between card schemes and processing functions could support the emergence of new digital and mobile providers. The changes in rules schemes and increased transparency and un-blending could also support a wide range of new providers and smart price/terms comparators and communities. The requirements for co-badging and the choice for users to use whichever payments applications he prefers are also extremely important.

The alignment of the rules imposed to all PSPs, closing some existing loophole and exemptions although understandable to create a level playing field and harmonise the levels of security and protection for consumers could also hit smaller new providers such as mobile PSPs. In effect, new players could be subjected to new more onerous compliance obligations than it was the case up to now. However, if it is always a possibility that the European Parliament is amending these provisions by introducing for instance specific rules for start-ups or thresholds for application, I believe that consumer protection and security concerns are making these rules all but unavoidable.

d)    Conclusion:

The legislative package presented by the European Commission yesterday is a very significant initiative that could contribute to give new impetus to a market already affected by major technological and competitive disruptions. This package is clearly intended to attempt to foster competition and innovation.

The Commission has not yet presented its Communication on the Single European Payments Area’s strategy and Governance nor communicated yet to open standardisation mandates for Mobile Payments on the model of the GSM Standard for instance. 

However, the strong reference made by Commissioner Almunia to how his Directorate General for Competition decisively acted in 2011-2012 against the proposed adoption of an industry standard (read proprietary) for Mobile Payments by the European Payments Council that would have locked the market to the benefit of the ERC members (read the banks and card schemes) hints at further initiatives that would open it to technology and mobile providers and possibly to standardisation efforts.

But the proposed package is also highly political. It is all but crafted to show to European citizens and consumers that the EU is working hard in furthering their interests, particularly at times of particularly grave economic woes. 

As an echo to other initiatives such as Vice President Kroes Single Digital Market initiative and the renewed battle to completely eliminate roaming charges as soon as possible, the Commission is desperate to have a number of high profile initiatives adopted and implemented before the next EU Parliament elections in June 2014….It is an ambitious agenda and objective that Commissioner Barnier is both determined and confident he will reach, stating that  it is a goal both the Council and even more the European Parliament are keen to fulfil.

8 months is a short time…Lobbies on all sides of the stage are going to step up their games and although 2014 is not an impossible target to reach, it is not absurd to think that the adoption of the package could be significantly longer than what the Commission is hoping for….


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