Brussels turns its sights on card fees

Editor’s Note:  Before European regulatory authorities enact new regulations setting price controls on interchange, they should learn from the US experience and recognize that: 1) price controls never protect consumers; and 2) a mandate that shifts card processing expenses from retailers to financial institutions will ultimately result in consumers picking up the tab.

From: Financial Times

By Alex Barker in Brussels

Brussels has launched a fresh assault on fees charged to process card transactions, arguing that new legislation may be needed to promote competition and reduce costs for consumers.

The European Commission has unveiled proposals for payments – by card, online and via mobile phones – that are designed to reshape a market they believe is fragmented, costly, averse to improving and serves consumers badly.

The most controversial proposal is a legislative solution to so-called interchange fees which are charged by banks to process credit and debit card payments. These have been the subject of regulatory trench warfare in Brussels for more than a decade and have involved competition inquiries and court cases.

Opening a consultation on new rules to “increase legal clarity” tacitly admits that Brussels’ previous attempts to curb interchange fees using existing competition law may have failed. The commission believes a big increase in the volume of card payments handled by groups such as Visa and Mastercard has not been translated into lower fees.

The US and Australia already have laws on such fees. The commission is examining whether new EU rules are needed to lower fee levels, to enforce transparency on charges – now largely hidden to consumers – or to open access to competitors.

Harmonising rules more closely has also been suggested for surcharging. Merchants would have to make clear the different charges associated with card transactions so that consumers would have more choice.

The payments industry is wary of more legislation on fees and transparency. It argues that intervening in a market that works relatively efficiently may end up backfiring by reducing investment in new technology and by increasing costs.

In 2007, European competition regulators decided that interchange fees on cross-border payments violated EU rules. In coming months, a legal ruling is expected from the European Court of Justice on an appeal by Mastercard against this decision.

After gathering views on whether new laws are necessary, European officials will decide later this year whether to make proposals towards the end of 2012 or in 2013.

Alongside the initiative on interchange fees, the commission is putting forward measures to promote competition in electronic payments. These measures could involve promoting more transparency, separating card schemes from payment processing, and providing stronger incentives for standardisation.

“Inefficient payments systems within the EU unduly raise transaction costs, undermine the global competitiveness of the European economy and limit its potential for growth,” said Joaquin Almunia, the EU competition commissioner.

One area of particular concern is payments by mobile phone. Europe has lagged the world in introducing this technology. Michel Barnier, the internal market commissioner, said that “the US, Japan and Korea are ahead of us and we want to catch up”. The proposals examine what security and data privacy is required around such transactions, as well as what level of harmonisation of standards and of inter-operability would be needed to foster a pan-European market for mobile and online payments.

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