Are you losing sleep over interchange fee changes?

It's more than likely the Issuers with tight margins (such as Prepaid Issuers) who are going to be losing sleep if there is continued pressure to reduce interchange fees - and result in reducing their interchange fee income.  This is also likely to be a catalyst to the elimination of “free banking” currently enjoyed in the UK – moving towards an Issuer transaction-fee based approach similar to that seen in other countries such as the United States.

Does anyone really think Visa & Mastercard will just reduce the interchange fees. Unlikely, scheme fees and/or some new dreamed up fees will no doubt increase to at least make up the loss and status quo will be resumed. But of course the EU will still claim victory, Visa and Mastercard will claim they complied and the press might run articles about how shoppers should be paying less. It will be a PR victory for the EU only. But is keeping things the same so bad? If we really want competition in payments then why would any newcomers challenge the two scheme's dominant position for such low margins. They would find it harder to get retailer adoption if their costs were higher for the new method. So if the EU does achieve a straight reduction, will it have actually reduced or eliminate any competition and perversely strengthen Visa and Mastercard's stranglehold on the retail payments business?

Not sure I agree with you, Gareth.

First, for most retailers in Europe, merchant service charges (MSC) are set as "blended interchange + acquirer margin", so any reduction in interchange is not going to put pressure on the acquier margin - it's just going to reduce the resulting MSC for merchants.

Second, I don't believe that this change will suddenly enable cross-border acquirers to offer significantly lower MSCs to merchants in certain markets - lower than those that they are currently offering. Actually, due to the fact that the interchange is getting capped at a lower lever and the MSC is getting smaller, the margin for competition is getting squeezed even further. And by the way, most large acquirers in Europe have been optimising fees for clients by routing to other countries for a number of years - it's not as bad as you picture it :)

Finally, I think it's the issuers who should be losing sleep as they are going to wave goodbye to a significant proportion of their interchange revenue - and I agree with another comment that banks are likely to try to offset this loss by making consumers pay for bank accounts.

Thank you for your views, I will respond to each of these comments separately.

To the first comment, you are correct that the Issuer revenue impact will become more challenging and Issuers will need to find alternative ways in generating income and this could focus on current services that are provided free of charge.

To the second comment, the expectation is that interchange rates will be reduced and legally binding commitments from Visa Europe point to that fact. I expect the EU Commission will closely monitor the level fees as part of the Trustees role in ensuring that the income received covering all types of scheme revenue does not exceed the threshold set. There is a danger that merchant pricing becomes commoditised and therefore the business case from alternative providers does become more challenging when compared with card payments.

Finally, to Andrei Charniauski, the proposed pricing method that acquirers will need to offer will be interchange + Scheme Fee + Acquirer margin. The acquirer margin will be split out going forward as it typically includes schemes fees and other related costs. Acquirer margins will now be the area that will be in focus as all parties pay the same interchange rates, scheme fees (is a pass through cost) and the margin will be negotiated. As the acquirer margin is negotiated this will be in the spotlight and be compared with other offers.