Mercator Blog

Latest Study of Interchange Regulations Suggests Negative Outcome for Consumers
Date: December 2, 2013
Research Team
A new study commissioned by MasterCard revealed that in Ireland alone consumers could end up paying €107 ($144) million in extra card fees if proposed interchange fee caps on debit and credit card transactions go into effect across Europe. The study, carried out by economist Anthony Foley of Dublin City University, says that financial institutions in Ireland will make up the loss in revenue by increasing annual fees. Foley estimates the increases will amount to additional annual charges cumulatively totaling €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 in Ireland.

Interchange regulation is not a new phenomenon, but its pace has accelerated globally in the past decade and even more in the last few years. By reducing or capping interchange fees, regulatory authorities are seeking to provide cost savings directly to merchants and indirectly to consumers. The assumption is that merchants will pass the savings from lower interchange fees pass on to consumers by lowering prices.

Although this argument is sound in theory, in reality regulatory intervention appears to have been counterproductive: Consumers have received no cost savings, and issuers have experienced a significant decline in revenue. Nonetheless, the European Commission is pushing ahead with a plan that would cap interchange fees in Europe at 0.2 percent per debit card transaction and 0.3 percent per credit card transaction.

Mercator Advisory Group’s recently released Research Report titled Global Regulatory Trends: Interchange Regulation surveys global and European payment card trends and recent international regulatory developments regarding interchange fees. The report reviews both sides of the regulatory debate. Discussing the effects of interchange regulation in countries where regulation has already been put into place, the report cites data showing that despite the best intentions of the authorities, regulatory intervention hurts the payments industry on a number of fronts.

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

As the evidence against regulatory intervention mounts, legislators and regulators in jurisdictions around the world may need to reconsider their interchange reduction crusade. To date they have shown no signs of shifting their policies, and thus the debate around the merits and consequences of interchange regulation will continue from country to country moving forward.

Follow Tristan on Twitter @THugoWebb.