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 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 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 lights 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 appears to be upgraded to meet the technical requirements of the IFR provisions, though there seem to be technical difficulties in identifying card types.

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.