Lucrative fees to process card transactions are to be capped under a proposal by the European Union's executive arm aiming to draw a line under a decade-long battle with payment groups such as Visa Europe and MasterCard.
Under a draft European Commission plan, seen by the Financial Times, a ceiling would be introduced for charges on all consumer debit and credit card transactions, scaling back a multibillion-euro revenue stream for EU banks.
The measure stops short of a full ban on debit-card fees, a more far-reaching intervention envisaged in earlier drafts. Even so, the assault on fees will be a setback for the payments industry, which has warned it will raise banking fees for consumers rather than cut retail prices.
In addition, the draft plan requires payment card schemes and the entities that process transactions to be legally separated — a forced split that would remake the business model for the main payment groups.
Brussels' recourse to regulation, an issue on both sides of the Atlantic, marks the culmination of years of trench warfare between EU competition authorities and the payment providers, which resulted in pacts with Visa and MasterCard to limit cross-border transaction fees.
The commission proposes a 0.2 per cent ceiling on all consumer debit transactions and 0.2 per cent cap on credit card transactions, introduced after a two-year transition period where the ceiling applies only to cross-border fees.
According to Commission estimates, this will cut total EU debit card fees from around 4.8 billion euros to 2.5 billion euros (US$6.32 billion to $3.29 billion), and credit-card fees from €5.7 billion to €3.5 billion. "High [fees] paid by merchants result in higher final prices for goods and services, which are all paid by consumers," the proposal said.
The cap is broadly based on the proposed antitrust deals with Visa and MasterCard and aims to give "legal clarity" but it reaches deeper into domestic card markets, where fees can vary dramatically. Typical debit-card fees range from 0.1 per cent in Denmark to 1.6 per cent in Poland. Average credit-card rates in Germany stand at 1.8 per cent, compared to 0.5 per cent in France.
A fee cap will disappoint hawks within the commission who pushed for an outright ban on debit card fees and a wider scope for credit card measures, so that premium commercial cards are also covered.
An early commission impact assessment argues that relying on a cap is harder to enforce and risks forcing existing domestic payment schemes with low fees to raise their rates. It also argues that a ban would "address the threat of 'exporting' the [interchange fee] model to new, innovative payment services" such as mobile and online systems.
High [fees] paid by merchants result in higher final prices for goods and services, which are all paid by consumers.
Most consumers are unaware of the charges. The commission fears card schemes compete to attract issuing banks with better revenues, which drives fees up rather than down. At the same time consumers are encouraged to take cards with rebates, free insurance and air miles, which usually generate higher fees for banks.
By contrast, banks and payment groups attack a cap as heavy-handed. Card use would decline, cardholder fees would rise, loyalty benefits would be cut back and retailers would be unlikely to pass on savings, they warn.
In 2011, some 727 million payment cards were issued in the EU and the value of card transactions exceeded €1.9 trillion. Visa and MasterCard dominate the market, with 41.6 percent and 48.9 percent market share, respectively. Retailers across Europe pay banks around €13 billion a year to handle transactions, and 70 percent of this charge is accounted for by interchange fees between banks handling the process.
So-called three-party schemes, such as American Express, do not have explicit interchange fees. But the commission argues there are "implicit" charges and any such scheme using payment service providers to issue cards or handle retail business will be covered by the same cap.
Debate on the measure to separate payment groups is underway within the commission. Nonbank payment providers complained that bundling together the two sides of the business prevents new players entering the market.
"As the cost of processing is a significant part of the total cost of card acceptance, it is important for this part of the value chain to be opened to effective competition," the draft said. "On the basis of the separation of scheme and infrastructure, card schemes and processing entities should be independent in terms of legal form, organization and decision making process."
Additional reforms to business rules will apply to all forms of payment systems, including greater transparency on fees. A limit is proposed on the "honour all cards rules" that prevents retailers opting for cards with lower fees.
US efforts to clamp down on bank fees took a step forward on Tuesday when Richard Cordray won a vote paving the way for him to be confirmed as the first formal head of the Consumer Financial Protection Bureau.
Senate Republicans, many of whom see the new agency as an unwarranted interference in private markets, had held up his confirmation for two years.
The CFPB was created by the 2010 financial regulatory overhaul in the US, which also capped the debit-card fees charged to retailers by banks, wiping out billions of dollars of revenue across the industry.
Daniel Henry, chief financial officer of American Express, said last month that the new rules had "wiped out profitability in the debit space," dissuading banks from serving poorer customers and "causing more people to leave the banking system".
— Additional reporting by Tom Braithwaite in New York.