Study on the application of the Interchange Fee Regulation
Study on the application of the Interchange Fee Regulation
Card schemes, e.g. Mastercard and Visa, set interchange fees that are paid by merchants’ acquirers to card issuers every time a card-based transaction takes place and are ultimately passed on to consumers. The EU-wide Interchange Fee Regulation (IFR), adopted between 2015 and 2016, reformed the European card payment sector by introducing a cap on interchange fees for consumer card payment transactions as well as several provisions aimed at enhancing market transparency, competition, and the functioning of the EU single market. Our newest report for the European Commission, in collaboration with EY, provides a comprehensive evaluation of the effects of the IFR in the period 2015-17. The study will inform the review process of the IFR that will take place in 2020 and may lead to a revision of the IFR with new legislative proposals that will affect card schemes, acquirers, issuers, merchants and, ultimately, consumers in the EU.
To enable the assessment, we collected comprehensive qualitative and quantitative market information for the period 2015-17 from public and private stakeholders in all EU Member States (MS) as well as earlier and later data, where available and appropriate. As part of the assessment, we conducted econometric analyses to establish the presence of causal effects between the introduction of the interchange fee caps and the issuing and usage of payment cards as well as the development of other, non-regulated, fees, e.g. scheme fees. In addition, we conducted a meta-analysis on a large number of existing European economic studies and built a statistical model to estimate the share of potential savings in merchants’ payment costs that were passed on to consumers in the form of lower consumer prices – the merchants’ pass-through rate.
Our study estimates a decline in annual interchange fees of around EUR 2.7 billion between 2015-2017 in the EU. Issuers have lost revenue of EUR 2,950 million per year. Acquirers, instead, have gained revenue of EUR 1,200 million coming from lower interchange fees. Part of these savings have been passed on to merchants, which reduced their costs of accepting card payments in the range of EUR 1.2 billion per year. This has in turn led to higher acceptance of card payments. Based on our estimated pass-through rate of 66-72%, the IFR caps can save European consumers almost EUR 900 million every year.
We find that part of the potential benefits to consumers are eroded by increases in acquirers’ margins and other fees, e.g. scheme fees. Schemes have gained revenue of EUR 550 million per year coming from larger issuer and acquirer scheme fees, mostly for international schemes. However, based on the data collected, we do not find statistical evidence of card schemes substituting lower interchange fees with higher, non-regulated, scheme fees. Further, we do not find systematic evidence that issuers reacted to the decline in interchange fee payments by increasing real consumer banking fees or by making changes in issuing of cards between 2015-17.
The study sheds light also on the effects in the period 2015-17 of other provisions of the IFR aimed at enhancing market transparency, competition, and the functioning of the EU single market:
The majority of installed POS terminals appear to be upgraded to meet the technical requirements of the IFR provisions, though there seem to be technical difficulties in identifying card types.
Consumers do not use the option to choose their preferred payment brand or application when using co-badged cards as they lack awareness and incentives.
In terms of number of cards in circulation, commercial cards =, which are excluded from the regulation, have a stable and limited market share in the EU, around 3%.
There is some evidence of higher merchant acceptance of cards and of higher growth in use of debit cards for domestic transactions in MS that applied a different cap or cap structure for interchange fees which entails lower interchange fee revenues.
Overall, the prevalence of cross-border acquiring appears to have increased during the period under study, mostly for consumer debit and commercial card transactions.
Since the implementation of the IFR, international schemes have created functionally independent processing entities.
Finally, the report also shows that the IFR has facilitated entry into and competition on several payment markets, most notably on the acquiring market, but consumers and merchants do not seem yet to have reaped the full potential of the benefits.
This study is commissioned by the European Commission.
Read the full report below.
In brief
The Interchange Fee Regulation cut annual interchange fees across the EU-28 by around EUR 2,680 million between 2015 and 2017, though rising scheme fees and acquiring margins absorbed part of the benefit.
EUR 2,680 m Annual decline in total interchange fees across the EU-28 from 2015 to 2017. Smaller than the EUR 6 billion the Commission's 2013 impact assessment projected, partly because that study used a higher benchmark year.
EUR 1,200 m Annual reduction in merchant service charges, evidence that acquirers passed part of their savings on to merchants.
EUR 550 mDanish jobs supported by exports, close to half of all private sector employment.
66-72 per cent Estimated long-run pass-through rate for cost decreases from merchants to consumers, from a model built on 23 empirical studies covering 164 estimates.
EUR 1,930 m Potential annual consumer cost savings across the EU-28 in the longer run, assuming full pass-through from acquirer to merchant, or around EUR 864 million at the lower bound.
Prepared for the European Commission, Directorate-General for Competition. Produced by Ernst & Young with Copenhagen Economics. Copenhagen Economics team: Dr Adina Claici, Dr Asger Lunde, Dr Claus Kastberg Nielsen, Elisa Pau, Dr Federico De Michiel, Julie Runge Jørgensen, Mattias Almqvist, Sila Sahin and Victor Almqvist. Published March 2020. Data focused on 2015 to 2017. EU-28.
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About this analysis
The study evaluates the effects of the Interchange Fee Regulation as required by Article 17 of the Regulation itself. It draws on the IFR Survey, a collection of quantitative and qualitative market data gathered from public and private stakeholders across all EU Member States, alongside ECB data. Consumer price effects are estimated through a statistical pass-through model built from a meta-study of 23 empirical studies covering seven merchant sectors in 20 European countries, applied to Germany, Denmark, Greece, Italy and Poland, and tested against interviews with pricing managers at nine large merchants.
The study does not cover the IFR's Honour All Cards and Steering Rules, Articles 10(1) and 11. Analysis focuses on 2015 to 2017, with earlier and later data used where available. The authors note that the small per-transaction size of the interchange fee change makes direct statistical estimation of pass-through to consumer prices unreliable, which is why the modelling approach was adopted. Pass-through figures assume no fee changes beyond those recorded in the IFR Survey for the period.