Latest Study of Interchange Regulations Suggests Negative Outcome for Consumers

A new study commissioned by MasterCardrevealed that in Ireland alone consumers could end up paying €107($144) million in extra card fees if proposed interchange fee capson debit and credit card transactions go into effect across Europe.The study, carried out by economist Anthony Foley of Dublin CityUniversity, says that financial institutions in Ireland will makeup the loss in revenue by increasing annual fees. Foley estimatesthe increases will amount to additional annual charges cumulativelytotaling €89 ($119) million for credit card users and €18 ($24)million for debit card users. That is equal to approximately €42.50($57) and €4.60 ($6.2) extra for each credit and debit card inIreland.

Interchange regulation is not a new phenomenon, but its pace hasaccelerated globally in the past decade and even more in the lastfew years. By reducing or capping interchange fees, regulatoryauthorities are seeking to provide cost savings directly tomerchants and indirectly to consumers. The assumption is thatmerchants will pass the savings from lower interchange fees pass onto consumers by lowering prices.

Although this argument is sound in theory, in reality regulatoryintervention appears to have been counterproductive: Consumers havereceived no cost savings, and issuers have experienced asignificant decline in revenue. Nonetheless, the EuropeanCommission is pushing ahead with a plan that would cap interchangefees in Europe at 0.2 percent per debit card transaction and 0.3percent per credit card transaction.

Mercator Advisory Group’s recently released Research Report titledGlobal Regulatory Trends: InterchangeRegulation surveys global and European payment card trendsand recent international regulatory developments regardinginterchange fees. The report reviews both sides of the regulatorydebate. Discussing the effects of interchange regulation incountries where regulation has already been put into place, thereport cites data showing that despite the best intentions of theauthorities, regulatory intervention hurts the payments industry ona number of fronts.

The effects of the proposed caps on consumers, retailers, issuers,and other parties will be felt differently across Europe, given thevarying interchange rates today. It is increasingly clear, though,from studies like the one carried out in Ireland that rather thanbenefiting from interchange regulation as the regulatoryauthorities anticipated, consumers and other segments of thepayments industry are impacted negatively.

As the evidence against regulatory intervention mounts,legislators and regulators in jurisdictions around the world mayneed to reconsider their interchange reduction crusade. To datethey have shown no signs of shifting their policies, and thus thedebate around the merits and consequences of interchange regulationwill continue from country to country moving forward.

Follow Tristan on Twitter @THugoWebb.